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Effects Of Cross Border Bank Mergers On Performance
BACKGROUND: Being a developed economy the European Banking sector is undergoing a process of restricting which may be mainly because of ever permanent trends like disintermediation, deregulation and the ever increasing competition and the very obvious proof of this restricting is the increasing number of mergers and acquisitions. I f we look back we will find out that from the year 1995 to the first half of the year 2000, 2153 mergers and acquisitions were recorded in the European Union of credit institutions out of which 1807 were domestic merger deals out of the remaining 346 cross border bank mergers , a large majority took place outside Europe. Looking at the history of European banking we will find out that cross border mergers and acquisitions have always been outnumbered by domestic bank mergers and acquisitions .An obvious motive of cross border bank mergers can be said to be diversifying the country inherent risk as a more stable profit can be generated by geographical diversification. Moreover cross border mergers and acquisitions explore the economies of scale, have a positive effect on the X- efficiency of the merging banks. The main cause of banks entering into cross border mergers can be attributed to factors like the size of the foreign markets, the presence of non financial firms abroad and the presence of entry restrictions, a comparative advantage due to superior skills can also said to be one of the reasons as to why banks go for cross border mergers. If we take into account the cross border banking in Europe we will find out that it is mainly restricted to European banks only, most of the foreign banks in Eastern Europe are West European Banks. There is a total of 25% of regional component of European banks within Europe. If we take into account the picture of European banking we will find out that currently 11 banks operate in the European market, earlier this number was 7 and it is indeed remarkable that increased to 11 during the period of recession by and a total number of 3 banks operate on a global scale.
AIMS AND OBJECTIVES OF THE RESEARCH: The main aim of my research is to throw light on the cross border bank mergers which have taken place in the European Markets. In my dissertation I will be mentioning about what drives the banks to enter in to cross border mergers and acquisitions, what factors are taken into consideration by both the banks before entering into the deal and the post merger effects on the performance of the banks, for supporting this Iâ€™ll be taking into account the cross border bank merger of Abbey National(Spain) and Santander (UK). The main objective of my research will be to find out the reasons and causes of the infrequent cross border bank mergers and acquisitions in the European markets over a period of time as compared to other markets worldwide.
REVIEW OF LITERATURE: Over a number of years a lot of research has been done on the effects of cross border bank mergers on the performance of the host and the target bank post the merger and the effects have been studied and analyzed from the cross border bank merger deals in the Europe. It has come to light that the foreign banks in the emerging economies tend to perform better than their domestic counterparts. Researchers have found out that the main motive behind the banks entering into cross border bank mergers can be factors likeâ€? follow your customer hypothesisâ€? (Miller and Porkhe, 1998) or it can be attributed to the difference in the efficiency between the acquiring and the target bank(Berger, 2000). In another study by Claessens and Van, it has been argued that competitive advantage to the banks is another motive of cross border bank mergers and apart from that it has been seen that multinational banking moves usually to those countries where there is a similar environment as they face in the home country.
During the past decade the European financial sector has been affected quite significantly by mergers and acquisitions. There has been a substantial growth of 67% in banking assets as a percentage of GDP, but there was a decline in the number of European banks from 12,670 in the year 1985 to 8395 in the year 2000. There has been a constant consolidation in the banking sector all around the globe; basically it involves different banks entering into mergers and acquisitions. In the European Union itself the number of banks came down quite sharply from 11397 in 1990 to7045 in the year 2006 and at the same time some of the large banks entered into cross border mergers. Researchers have found out that in the European market 11 banks operate on the European scale and 3 banks on the local scale. A few years back it was taken into account by (Walter, 2003) that mergers and acquisitions activity in Europe is primarily domestic. When we talk about domestic orientation then European banks have a small domestic component of 54%. Half of the top 30 banks in Europe are international and there have been some very successful cross border deals including the takeover of Abbey National (UK) by Santander (Spain) in the year 2004, the takeover of Banca Antonveneta( Italy) by ABN Paribas(France) to name a few.
The Case of Banco Santander and Abbey National: On July 26 2004 Banco Santander of Spain acquired Abbey National of the UK and it was the first pan European bank takeover, it was a boon for Santander as it opened a pathway for them to enter into Britainâ€™s retail banking sector. Abbey National was acquired with a total share package of $ 16.1 billion. Two years prior to the merger Abbeyâ€™s operations were showing loss due to the condition of inefficient market so if we see it in that context then the merger may be an opportunity for them to get stabilize their performance. People had different views regarding this takeover some of them praised Santander for stepping foot into the European markets and on the other hand Abbey was criticized that for merging with Santander when it always had other options. Shares worth $16.1 billion were issued to finance this deal and it was decided that the shares will be exchanged with the shares of Abbey on a one to one basis. After the deal had been struck I was decide that the shareholders of Santander will hold 76.4% of the total capital and the shareholders of Abbey National will be holding 23.6%. However as far as bank management is concerned it was decided that Santander will have full control over bank management, it will bring over itâ€™s own corporate culture and organizational ways in order to control costs but the brand Abbey will be retained. Alferdo Sainz, the vice president of Santander said thatâ€? What we know best is commercial banking, which contributes 85% of our profits. That is what we are going to do with Abbey. It is a very important brand that has under-utilized potential.â€? In my dissertation I will be taking into consideration the performance of Banco Santander and Abbey National post merger and throwing some light on the positive and negative impacts of this deal on both the banks.
We can without a doubt say that the picture of cross border banking is diverse. There are very limited global players I commercial banking and some large European banks like ABN Amro have a global reach. It has been seen that most of the times the acquiring banks are larger in cross border deals as compared to domestic deals ( European Commission, 2005), and the target banks are more or less of the same size and it has come to light that the target firm enjoys the majority of ownership in cross border deals. However still the literature and research work on the cross border banking in the European union is still less as compared to the research on the takeovers in US and moreover not much emphasis has been laid upon the fact that what are the effects on the acquiring and the target banks post merger and infrequent cross border bank mergers in the European market so therefore my research question is the Post Merger effects of cross border bank mergers on the bankâ€™s performance in the European Market and what is the root cause of infrequent cross border bank mergers in the European market.
RESEARCH METHODOLOGY: As far as my research methodology is concerned I will be taking into account both primary and secondary data. Secondary Data will be used to throw some light on what drives the bank to enter into cross border deals and what factors do the banks take into consideration before entering into cross border deals, and apart from that secondary data will be of much help to me in finding out the main factors which determine cross border bank merger deals. Whereas I will be using Primary data while focusing on the post merger effects on bankâ€™s performance and while answering my research question that what are the causes and reasons for a low number of cross border bank mergers in the European market as compared elsewhere, basically I will be focusing on the Quantitative research for collecting of data related to my research question which will involve interviewing people, analysing their point of view and then finally including it in my dissertation. Apart from this I will be contacting the banks which have entered into cross border deals and try to get some useful information from them and imply it in my dissertation. Apart from this I will be referring to authors who have done some prior research on cross border bank mergers and last but not the least the University of Bedfordshire Library will be of great help to me while completing my dissertation.
Structure Plan: In my Dissertation first of all I will starting with the introduction part in which I will be mentioning about the history of cross border bank mergers worldwide and taking special notice of the European market I will be focusing on the trends of cross border bank mergers over a period of time and how it has evolved, then I will be mentioning about the favorable market conditions for cross border bank mergers in Europe. Then comes the Literature Review in which I will be throwing light on what researchers and other analysts have said related to my topic . In the main body I will be talking about the factors which drives the banks to enter into cross border mergers, then I will be mentioning about the determinants of cross border bank mergers where light will be thrown on factors concerning to both acquiring and the target banks to enter into a deal. Then I will be focusing on my research question about the post merger affects on the performance of both acquiring and the target banks taking into consideration the case of Banco Santander and Abbey National , following this will be my second research question as to what are causes of infrequent cross border bank mergers in the European market and after answering both the questions I will be giving the much needed conclusion and the Bibliography.
I will be starting with my dissertation from the mid of June and I expect to end my work in the first week of September. For the first two months I will be taking time to collect sufficient data to support my research and then I will be implying the data collected into my research to complete my dissertation. I am mentioning two months time but it may be possible that it may take more time to collect data as contacting people and taking their feedback requires a lot of time.