Bank Merger Essay Research Paper I

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Bank Merger Essay, Research Paper I. Introduction Mergers have long been a practice that businessmen have utilized as a way to improve, expand and consolidate their firms. They have come in waves starting as early as the 1800’s (Brigham 1080). The bank merger wave, which started in 1980, continues and each new merger is bigger than the last (Dymski XV). Should this merger activity be a cause for concern? Many laws have been passed to regulate and ensure competition within the market. But, there has been a big turnaround in the last twenty years. Bank deregulation made it much easier for banks to merge and form monopolies (Dymski 41). This deregulation has stimulated more than 7,000 bank mergers since 1980 (Meyer 1). Fears about both the pace and the scale of bank mergers,

and their effect on bank customers have been arising. Big businesses, referred to as “Bignesses,” are viewed by CEO’s and executives as a good thing, while many object, feeling that big businesses form monopolistic power (Balassa 10) Although bank mergers are highly beneficial to merging corporations and their CEOs, these large businesses have proven to have many negative effects by trending towards monopoly. II. What is a merger? A merger occurs when two or more companies combine to form one, where the buying firm absorbs all the asset and liabilities of the selling firm(s) (Scott 232). Economists classify mergers in to four groups: horizontal, vertical, congeneric, and conglomerate. A horizontal merger is one in which firms in the same line of business join. A vertical

merger is when a firm combines with one of its customers or dealers. A congeneric merger involves related enterprises that do not have a producer-supplier relationship. A conglomerate is when companies that are totally unrelated merge together (Brigham 1080). During the mid sixties horizontal mergers were very difficult to execute, because of anti-trust laws. This was when the conglomerate boom came about. Companies believed that joining two separate companies with the earning power of $2 million each could easily produce earnings of $5 million (Malkiel 61). III. Why merge? There are six primary reasons why companies merge. The first reason is synergy, which is known as the two plus two effect (Malkiel 61). This is the primary motive for most mergers, increasing the value of the

combined enterprise. The second reason, tax consideration, has motivated a number of mergers. In this case companies in a high tax bracket could buy a company with large tax losses, then turn these losses into immediate tax savings ( Brigham 1076-77). According to John Parsons, merging for this reason and only this reason is considered illegal, because it is premeditated just to eliminate taxes and has no real business purpose. Another reason for mergers is that in some cases the cost of replacing assets for a company is higher than its market value. For example, in the 1980’s the cost of doing exploratory drilling was higher than the cost of acquiring reserves by purchasing another oil company. Another rationale for merging is diversification. Managers contend that

“diversification helps stabilize a firm’s earning stream and thus benefits its owners” (Brigham 1078). Managers’ personal incentives has also been found as a reason for many mergers. In this case power is the driving force. The belief that more power is attached to owning a larger corporation drives businessmen to mergers. Though no manager will admit to their ego being a reason for merging, egos do seem to be a big reason for merger activity (Brigham 1079). Breakup value, another reason why companies merge, is the most unethical. In this case a takeover specialist acquires a company for the sole purpose of selling it off in pieces to make a profit. The specialist acquires a firm that has a breakup value higher than its market value in order to make a hefty profit