Bank Mergers Essay Research Paper Often times

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Bank Mergers Essay, Research Paper Often times bank mergers take place because there are too many banks, too many branches, and too many competitors. A merger is when two companies combine to form a larger more powerful firm. Many economist have opposing view points on the role that mergers play in the economy. In the past five years many mergers have occurred in the banking industry for example; Chase Manhattan and Chemical Bank, BankAmerica and NationsBank, and Banc One and First Chicago. These are only a few of the hundreds of mergers that have taken place in the past five years. Although consolidation can make the banking industry more productive, merging and reducing expenses give only a short lived boost to earnings. In the long run we will end up with bigger banks

facing the same problem, fewer and fewer people who need them. Like any other industry in today’s society the banking industry is changing. Some economist even say its becoming extinct. Bank rivals are pressing from all directions. Commercial Loans that was once an exclusive banking industry has been invaded by companies such as GE Capital and Merrill Lynch. “Over the past five years loan activity at GE Capital already one of the countries biggest lenders has climbed 11%, while the banking industry loan growth has crept along at a 3% annual rate. Or look at Merrill Lynch. Over the past year, it has originated $4.2 billion in commercial loans, equal to roughly one third of KeyCorp’s total commercial loan portfolio at the end of 1994.”1 Even the consumer-loan franchise is

being captured. Credit cards for instance, have been a long time profitable business for banks. That industry as well has been taken over by companies such as First USA. “Since 1991, First USA, a credit card company no more than ten years old , has prospected furiously, raising its card receivables 650%, to $15 billion, during a period when growth in overall card debt grew just 36%. Since 1991, NationsBank, despite its incessant acquiring has increased total credit card receivables just 16%.”2 Larger mergers create larger assets for the company, but bankers are left in the dark with what to do with those assets. Auto dealer are prone to handle auto loans, credit cards are received through the mail, and better deals on mortgages can be provided by mortgage brokers. Lets not

forget PC banking. There are online services that will search the Internet to get the best price on a CD, credit cards, consumer loans, and mortgages. Banks are beginning to find themselves competing with software companies. 1998 was by far the biggest year for takeovers. Eight of the ten biggest deals of all time happened in 1998. This mega merger year has been stock driven. “Near the peak of the last merger wave, in 1988, stock accounted for 7% of the value of deals. This year it was 67%, by far the highest level in the past decade, according to JP Morgan.”3 Banking accounted for one-quarter of total deal values. Mergers have supported bank stocks significantly. In banking it seems as though bigger is better, why invest in a small company when it is going to be acquired by

a larger company. These mergers have assembled vast companies. Although stock prices are relatively high, investors see it as contributing strong currency to those companies to make larger acquisitions with. The question is are the stockholders making a profit off of these mergers or are the only people coming out of these deals wealthy the one who are making the deals. “Megamergers may not be healthy for shareholders. Mark Sirower, a professor at NYU’s Stern School, tracked the stocks of 100 big companies that made major acquisitions between 1994 and 1997. On average, a year after the deal announcement, the acquires’s stock trailed the S&P 500 by 8.6%. Not only did 60 stocks under perform the market, but 32 of these posted negative returns, with prices below their