Bank Mergers: All You Need To Know The Motive, Impact And Significance

The bank merger is an operation in which two or more banks dissolve and transfer their assets and liabilities to another entity to create a new entity.

The bank merger is the answer that bank agents give to certain circumstances and strategies to get entities of greater importance. In the bank merger, two or more entities that until then were independent unify their structures and transfer their assets and liabilities to achieve a higher-level entity that allows them to save on costs and achieve objectives that until now could not.

In a changing world, the reasons for a banking merger can be several, although they all go the same direction: create new entities to reach economies of scale.

The mergers are intended to strengthen financial structures but to favour the user. Speaking of merger, it should be taken into account that this occurs when two or more companies, previously independent in a single organization. This merger is usually produced by the search for economies of scale or monopolistic advantages; in the case of economies of scale they are an expression of the process of horizontal or vertical integration between independent companies, which seek greater efficiency in their production processes; In the second case, it can be considered as a deeper and more organic form of market control than cartel formation.

One of the purposes of merging two or more banking entities is to try to reduce their operating expenses and personnel expenses. Expand your business potential without additional technical efforts, each time it will have an expanded portfolio of services obtained from the conjunction of the instruments of both entities. When merging seeks to maintain the portfolio of customers and in turn try to capture them, strengthening in the merger; With this we can say that before a banking institution to get more customers had to take years after years, instead with the merger, you can improve this aspect to attract those interested to invest in the products and services offered by banking institutions.

Economic blocks have been consolidated. This reality highlights the decisive role of competitive advantages for survival and growth; a new strategic dimension has begun to operate, that of alliances and multiple associations. While global competition raises the standards of quality, innovation, productivity and value for the consumer, the scope of the companies that operate individually is restricted.

As a way to face changes in the environment, a lot of organizations look for alternatives that allow them to integrate and improve their competitiveness in these expanded markets. Mergers allow access to more resources than a single company can own or acquire, considerably expand its capacity to create new products, reduce costs, incorporate new technologies, penetrate other markets, displace competitors, and reach the necessary dimension to compete in a market, whether national or international, among other advantages.

Among the Characteristics of the Banking Merger, the Highlights are

– Improves the quality of the banking service.

– Lower transformation costs.

– Increased customer acquisition in financial institutions.

– Strength and prestige in the financial market.

– Competitiveness in the financial market.

Motive

Mergers of banks are carried out to reduce costs in the banking market since with them, and it is possible to maintain customers but reduce offices and operating costs. The reduction of costs is derived from being able to operate with greater size, since the mergers usually come from small and medium-sized banks that have become anchored and cannot grow more by themselves, creating entities that can compete with the larger ones.

The mergers are also derived from the problems in the financial sector and the weakness with which the banks face the crises, being rescued in many cases and forced by the banking authorities to merge with healthy banks before liquidating them. In spite of this, mergers usually have associated costs such as job losses, elimination of business lines and restrictions of some kind.

Types of Bank Merger

Bank mergers can be of various types based on the level of integration achieved between banks immersed in the merger:

Total Merger: the banks that are part of the merger process group all assets and liabilities by dissolving their legal personality and creating a third entity that will be the depositary of all the foregoing. From this moment on, the created entity will be the only one that operates with its name.

Cold Fusion: in this case the entities are integrated for common objectives and strategies, a single central structure and board of directors but in which each merged company retains its name, culture and part of its autonomy. This form of the merger is a partial integration and is considered the first step towards total integration.

Transfer of Assets: there is a possibility that several entities transfer part of their assets or resources to establish a third entity and operate with it. In this case, companies that provide resources do not disappear or integrate, but instead transfer a small part of their capital to establish an entity. This occurs when an action cluster is created in the sector, for a specific purpose or because they decide to transfer their toxic assets and clean their balance sheets (creation of a bad bank).

Impact 

During the last years, we have experienced a process of bank reorganization that has caused the disappearance of many entities (especially savings banks) from the market. Even so, voices within the financial sector ensure that there may be more mergers in the future, which could begin to be visualized when a stable government is set up.

Mergers, for those individuals and companies that decide to go to an entity to request financing, have negative and positive aspects. We will develop them below.

Significance

The positive aspects of mergers between financial entities are the following:

Greater Capital Capture: the larger the entity is, the more easily it will have to raise capital and thus gain solidity and strengthen its resources.

Easier to Finance: within the interbank market, entities lend money to each other. The larger ones, in theory, must be less complicated to finance to develop their activity.

Improvement in Services: the new entity will integrate into its operation the best aspects of each of the entities that integrate it so that it will be more profitable.

Bank Merger List 2019

  • Punjab National Bank (acquirer) will now take over the United Bank of India and Oriental Bank of Commerce.
  • Union Bank of India (acquirer) will take over the Andhra Bank and Corporation Bank.
  • Syndicate Bank will be merged with Canara Bank (acquirer).
  • The merger of Allahabad Bank has been announced in Indian Bank.
  • Indian Overseas Bank, Bank of India, Central bank of India, UCO Bank, Bank of Maharashtra and Punjab & Sind Bank will continue to function as before.

After this three-way merger, the combined entity will have deposits and advances of Rs.8.75 lakh crore and Rs.6.25 lakh crore respectively. Not only this, but the merger also helps BOB to increase its reach in the western, southern and northeastern regions of India, such as Maharashtra, Karnataka, Gujrat, Kerala, Tamil Nadu and Andhra Pradesh. Well, if you believe in the experts, the new Baroda Bank will improve the customer base, market reach, operational efficiency and the ability to offer a wider range of products and services to customers.

Bank Merger List 2018

  • Bhartiya Mahila Bank(BMB) in State bank of India
  • State Bank of Bikaner and Jaipur (SBBJ) in State bank of India
  • State Bank of Hyderabad (SBH) in State bank of India
  • State Bank of Mysore (SBM) in State bank of India
  • State Bank of Patiala (SBP) in State bank of India
  • State Bank of Travancore (SBT) in State bank of India

The Merger Plan must contain the following:

  • Schedule of execution of the merger plan, indicating clearly and precisely the stages and lapses in which it will be fulfilled and the person responsible for its execution.
  • Financial, economic fundamentals of the merger.
  • Analysis of the impact of the merger in the legal, financial, accounting and legal areas.
  • Diagnosis and programs in the areas of technology, human resources, administration, and operations.
  • Fusion pro forma financial statements.
  • Shareholding structure that you will have in the financial entity resulting from the merger once this process has been carried out.
  • The balances of active and passive operations and income and expenses that will have the 20 main direct or indirect shareholders with the entity resulting from the merger.
  • Relationship of links or links of any kind including, the Relationship of consanguinity or affinity between shareholders.
  • Copy of the draft bylaws of the entity resulting from the merger, among others.

Final Objective of the Mergers –

When a company acquires another or when two companies merge, the final objective is that both companies jointly valued, take a higher value than they would have if they operated completely independently. When this occurs, it is said that a synergistic effect has occurred. This concept was developed by systems theory and presupposes that the collective benefits derived from the union of forces are greater than those of the separate existence of the two companies. There may be synergies in marketing, finance, operations, and human resources.

– The success of any merger depends to a high degree on the process followed; there is no single process that guarantees it in all cases, that is, it recognizes the importance of not facing a merger without having planned and coordinated the activities necessary to carry it out.

– Bank mergers can be very beneficial for the national financial system, as long as they are part of a state-oriented strategy, aimed at guaranteeing its stability and healthy growth, without leading to an increase in the rates of profitability based on high risk, which would eventually result in mergers forced and hostile takeovers of banking institutions that operate in accordance with the rules and regulations of the monetary authorities and supervisors of the country’s banking system.

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