Mergers In the Banking Industry


Banks, and other economic institutions, resorted to mergers to take in considerable growth and expansion objectives. Mergers have helped them become accustomed to the rapidly changing conditions in the industry both internally and externally. The last ten years have witnessed an intensive increase in mergers internationally (Berger, 1999). For example, the United States of America alone witnessed over four thousand mergers among domestic banking institutions during the 1980’s. Mergers in the past and presently have not been limited to domestic financial institutions but have also extended to those of other continents, cross-border.

The cross border mergers are estimated to have been more than 600 in the last five years with a value of approximately US$ 34 billion (Cummings, 1994). Over the past quarter century, during the 1980–2003 period the number of banking organizations decreased from about 16,000 to about 8,000 and mergers of healthy institutions were by far the most important cause of that consolidation. In that phase, the share of industry assets owned by the ten largest commercial banking organizations (ranked by assets) had an increment from 22 %to 46 %, and the share of industry deposits held by the ten largest (ranked by deposits) rose from 19 % to 41 % (Berger, 1999).

The increase of mergers in the financial industry is attributed to various factors of concern. These factors have had effect to the industry not only in USA but to the whole world.

One of the major factors is the increasing global competition and an urgent need to trim down expenditures towards feasibility and stability. This is greatly fuelled with the changes witnessed by the world economy since beginning of the 1980’s due to the continued decline in the rates of economic growth, particularly in the main industrial states, and the state of affairs resulting from technological advances and innovations in monetary and financial instruments (Glasgall, 1991). The surfacing of large scale financial institutions as a consequence of the appearance of large economic blocks in Europe, America and Asia due to the gradual easing of geographic restrictions on banks is also another prime factor.

Another factor is the emergence of international economic crises such as the Third World debts, global recession and increment in evasion cases in world banks, encouraging some of them towards mergers to develop or improve their financial situations (Dunnan, 1988). The last factor is the latest supervisory techniques and instruments introduced to manage the continued developments in international banking systems and financial and monetary markets, particularly in capital sufficiency and credit concentrations coupled with development in information technology. The purpose has been to enhance the capital base of banking and financial institutions, strengthen equality in competition internationally, and to distribute credit risks over a larger number of customers. The consolidation has enabled financial institutions increase their size and reach of their operations by making acquisitions outside their markets, including in other countries (Cummings, 1994).

Structure and Industry Description

The greatest mergers in USA include the BankAmerica–Security Pacific merger in 1992 which clearly dominates the list in terms of the sizes of the acquirer, the target, and the combined firm. Even compared with some of the very large mergers of the 1950s and 1960s, which included Bank of the Manhattan Co.–Chase National Bank and Manufacturers Trust Co.–Hanover Bank, the recent mergers, particularly those in 1991 and 1992, stand out (Berger, 1999). The proposed merger of Chase Manhattan and Chemical Banking, which was announced on August 28, 1995, will surpass all of the others, including several other exceptionally large bank mergers announced during 1995.

The purchase of a commercial bank by another commercial bank accounted for 2,571 mergers, or almost 75 percent of the 3,517 deals, during the period1994 to 2003. In total, commercial banks made 3,035 acquisitions during the period (Cummings, 1994).

The American bank being one of the largest mergers in the industry was formed by a consolidation of seven firms with different company shares. These firms are; Rawdon, Wright, Hatch & Edson (23.9% share), Toppan, Carpenter & Co (22% share), Danforth, Perkins & Co. (21% share), Bald, Cousland & Co. (13% share), Jocelyne, Drapper, Welsh & Co. (8.4% share), Wellstood, Hay & Whiting (8.2 % share) and John E. Gavit (2% share). The company utilized the best engravers in America to make its bank notes and securities. It thereby had the best and most durable notes (Dunnan, 1988).

Glasgall (1991) points out that the consolidation of these banks enabled them access greater markets and thereby having a bigger market share than any individual firm could manage singly. This made acquisition and spread of modern technology to avail service delivery and combat competition easy, thereby assuring it increased revenue and better marketing power to the public. Some banks joined in the merger at their hard economic times and survived collapse since they were able to acquire operating capital from the other members in the merger. Therefore, financial benefit for the individual firms and desires to access global market was the initial driving forces to joining the merger.

Other several mergers exist in the sector with varying sizes. An example is by looking at the bank mergers in relation to the size of the entire banking industry (Bae, 1994). By this measure, the 1955 mergers of Chase National Bank with Bank of the Manhattan Co. and of National City Bank of New York with First National Bank of New York, respectively equaling 3.6 percent and 3.4 percent of industry assets, were more significant than several of the recent large mergers.

Benefits of Consolidation in the Banking Industry

The major benefit accrued from this consolidation is the reduction of charges to costumers due to the stiff competition facing the industry thus making them offer better rates. This has been made possible since the mega-banks enjoy high economies of scale and therefore are capable of offering relatively low rates compared to other small banks. The small banks are left to try strengthening their costumer relation system to maintain their clients since they cannot out do the mergers in the monetary competition posed (Cummings, 1994). The shareholders of the mergers are also assured more benefits due to the greater income associated with the mergers and therefore are even enticed to invest more into the business.

The consolidation enables a greater market share and firms are able to expand to international market and exploit them appropriately (Bae, 1994). Additionally, the consolidation process has brought in more competition, thus resulting in delivery of innovative financial products with more efficiency and more variety. This includes availability of specialized electronic systems which could be otherwise exorbitant to be acquired by single banks.

Negative Effects of Bank Consolidation, Banking Customers, and the Social Dimension

The effect of the merger in the banking industry depends majorly on consumers’ income, wealth levels, and location (Dymski, 1999). For one thing, upscale retail banking, is bifurcating the retail banking customer base. Those with high incomes and substantial wealth have more options than ever for conducting their banking business. They are the pampered winners in the global financial game. But those with lower incomes and lesser amounts of wealth are likely to be adversely affected by the elimination of banks that make “character” loans and focus on “customer relations” over time instead of point-in-time fees. A new group of nimble niche banks has emerged and succeeded, initially, precisely by offering broad-based, culturally sensitive, inclusive banking services. Maybe these banks can survive as uniquely responsive entities (Dunnan, 1988).

Mergers can also marginalize financial activities. The mega-firms seeking to dominate mega-markets are centralizing in just a handful of locations. The global expansion of megabanks into every corner of the globe is having a further effect, one that is of special significance for developing nations. The opening of national banking markets to global financial competitors fundamentally threatens the stability of local national banks (Bae, 1994).

In the U.S. case, cross subsidies that have permitted broad-based participation in household financial saving, and that have provided formal-sector credit to a wide range of firms will be jeopardized, and even disappear. Then banks may play the role of reinforcing the lines of social and economic segmentation, rather than that of vehicles for economic opportunity.

In fact, in the United States, although many banks are merging, 92 percent of insured banks are still classified as small community banks. (Cunningham, 1994) However, small banks do feel the competitive pressure of larger banks. While larger banks can afford to invest in technology and offer services more convenient to the customer, smaller banks usually do not have the resources to fund such improvements. This could cause small banks to lose customers who prefer the additional services offered by merged banks (Bae, 1994). As a result, to maintain their market share, small banks may have to focus on personalized service. In other words, small banks must capitalize on all opportunities to establish new long-term customer relationships. Even more than in the past, small firms could fill this niche. The results may be different across the United States because the banking concentration index does not capture sufficiently the structure of the banking industry (Hansen, 2000).

In particular, what matters in determining the amount of credit available to small firms is not the number of banks but, rather, the number of branches they have. The number of branches, and their distribution across a state, determines how capillary the credit system is and what knowledge banks have of local business conditions (Dunnan, 1988). In other words, the number of local branches determines if the conditions for the establishment of long term bank-customer relationships exist. Although the concentration index may be high, a large number of branches generate a high degree of competition. Under those circumstances, banks cannot extract monopolistic rents. On the contrary, the high likelihood of customer switching forces them into sheltering firms that would, otherwise, suffer from a rationing problem (Bae, 1994).


Merger activity in the U.S. banking industry is expected to remain heavy for the coming years. More mergers of equal banks are a distinct possibility. This study examines if a merger with equal banks is a viable alternative to improve bank’s performance and strengthen its market position. In essence, mergers of equals in the banking industry, not the acquisition of banks, are perceived as cheaper; the buyer takes on no new debt, and there’s a good chance that buyer’s per share earnings are not diluted. The combined entity of two complementary banks brought together with minimal up-front costs means that earnings can get an immediate boost. On the other hand, many chief executives are wary of engaging in a transaction that would leave them out of a job. Similarly, two competing banks with different cultures are probably wary of merging. Hence, it is not unusual to see that many analysts remain skeptical of the benefits of merger of equals, primarily because mergers of 116 equals typically do not provide a quick return to shareholders.

Additionally, this merger emphasizes revenue enhancements rather than the traditional cost reductions as the primary basis for merging. Revenue enhancements are not predictable and take longer to reflect results. Cost reductions are predictable, quantifiable, and are recognized quicker. Further supporting their skepticism, only three of the eight mega-mergers of equal banks examined in this study showed strong financial and stock performance over the 3- year period following the merger, relative to their peer groups of banks, and hence are considered as a success. While the performance of the merged entities of equal banks on average is comparable to that of the selected large national banks, it is found to be inferior to that of the selected super-regional banks in many aspects of financial measures. These results suggest that not all the mega-mergers of equals are perceived by the market to have the benefit of creating a large scale bank, and hence future mega-merger applications between banks should be executed more carefully.