Business Essays - Investment Bank Mergers

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Investment Bank Mergers

1 - Introduction

With the changing environment of business all over the world the need for the banks to audit and update their strategies has also increased and become significant. Merger is an important strategy as a part of growth and expansion, which is being adopted by many of the banks in order to increase their market share and acquiring other motives. “Usually mergers occur in a consensual setting where executives from the target Company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties (Wikipedia, 2007).”

In Europe, some of the largest mega bank mergers include UBS – Swiss Bank, The Royal Bank of Scotland – The National Westminster Bank, Credit Lyonnais – Credit Agricole, and the trend also exists in Asia, with Japan creating the world’s first trillion-Dollar bank from the merger of Fuji Bank, Dai-Ichi Kangyo Bank, and the Industrial Bank of Japan.

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This study will examine the post merger performance of Investment and Commercial Banking mergers that occurred between 1998 and 2004 in the global financial industry. The central research question is Does the Merger of an Investment Bank and a Commercial Bank Create Value? A Study of the largest Banking Merges between 1998 and 2004.

2- Literature Review

Many authors have dealt with the issue of clarity and understanding of the topic of mergers. Most of the research studies are aimed at studying the factors, which motivate the management of the banks to undertake the decision of merger and the advantages and disadvantages.

The study of mergers and acquisitions focuses on understanding what motivates managers to engage in this type of activity and the impact that mergers and acquisitions have on shareholder returns. Principally the key aim of the banks for mergers could be empire building through growth in size, sales, and assets (Mastracchio, et al, 2002).

The consolidation of banks is understood to create value as a result of scale economies, reduction in total expenditure, reduced earnings volatility, and increased market power. Recent studies centered on the global financial merger increase sustain the theory that global banking mergers are efficiency-driven and that the American case defines the model for all other banking systems.

However, several other empirical studies present evidence of irrelevant gains in the value and performance of bank mergers, this provides the question of: “What is the motivation for the increase in M&A deals”. Berger, Demsetz, and Strahan (1999) and Dymski (1999), provide evidence of insignificant links between mergers and financial firms’ performance in a study of the American banking mergers between 1990 and 2000.

Efficiency improvements can be gained from synergy of target and bidding banks due to economies of scale and use of excess capacity. Recent studies stated that value creation couldn’t be achieved in case of horizontal merger (Berger & Ofek, 1995; Lang & Stulz, 1994; Maquieira et al., 1988).

The merger will be examined according to the following motives:

  • Economies of Scale: “This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.” (Wikipedia, 2007)
  • Through the merger the banks will consolidate under price and margin pressure.
  • Increased Revenue/Increased Market Share: This motive assumes that the bank will be absorbing a major competitor and double its power (by capturing increased market share) to set prices.

3 - Reasons for Choosing this Topic

The fundamental reason for choosing this topic is that having searched literature I found that very few works have been conducted concerning the merger of an IB and the Commercial bank. This fact has encouraged me to do this piece of work in order to contribute to the existing knowledge about this subject by adding a new point of view.

Another reason is that most mangers have poor background in planning mergers, so it is so difficult for them to understand the factors effecting the successful merger. In addition to that managers should understand the risks and returns with the merger in order to undertake it effectively. This has urged me to conduct this study in order to show the importance merger for IB and commercial banks.

4 - Aim

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The aim of this research is to examine “Does the merger of IB and Commercial bank create value?”

5 - Objectives

  • To review the literature about this issue up till now.
  • To improve the presentation of risk factors involved.
  • To underline the importance of clear planning.
  • To present the benefits attached with the successful merger in banking industry.

6 - Methodology

6 -1- Philosophy

Research is a fact finding activity (Dominowski, 1980). The aim of primary research is to make known something previously unknown to human beings and to advance human knowledge by making it more certain or better fitting; the aim is discovery (Elias, 1986). Kerlinger (1970) uses more technical language to define it as the systematic, controlled, empirical and critical investigation of hypothetical propositions about presumed relations among natural phenomena.

The research philosophy depends on the way we think about the development of knowledge and this thinking affects the way we do search (Saunders 2000). Whilst undertaking the research, a clear understanding of research philosophy is essential. Easterby-Smith et al (1997) identify three reasons why the exploration of philosophy may be significant with particular reference to research methodology:

Firstly, it can help the researcher to refine and specify the research methods to be used in a study, that is, to clarify the overall research strategy to be used. This would include the type of evidence gathered and its origin, the way in which such evidence is interpreted, and how it helps to answer the research questions posed.

Secondly, knowledge of research philosophy will enable and assist the researcher to evaluate different methodologies and methods and avoid inappropriate use and unnecessary work by identifying the limitations of particular approaches at an early stage. Thirdly, it may help the researcher to be creative and innovative in either selection or adaptation of methods that were previously outside his or her experience.

Two views about the research process dominate the literature: positivism and phenomenology which have an important part to play in business and management research (Saunders, 2000). Positivism is founded on the belief that study of human behaviour should be conducted in the same way that as studies conducted in the natural sciences. On the other hand phenomenology is concerned with the understanding human behaviour from the participant’s own frame of reference (Hussey and Collis, 2003).

Positivistic paradigm

Phenomenological paradigm

Tends to produce quantitative data

Tends to produce qualitative data

Uses large samples

Uses small samples

Concerned with hypothesis testing

Concerned with generating theories

Data is highly specific and precise

Data is rich and subjective

The location is artificial

The location is natural

Reliability is high

Reliability is low

Validity is low

Validity is high

Generalises from sample to population

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Generalises from one setting to another

Figure 1: Features of the two main paradigms (Hussey and Collis, 2003)

As the research philosophy depends fundamentally on the research question (Saunders 2000), the phenomenological philosophy has been chosen in this paper. This choice originates from that researcher’s topic/question that aimed to investigate does the merger of IB and commercial bank creates value. In this specific research, -related to the question- the author will collect data and develop a theory as a result of data analyses rather than developing a theory and test it afterwards.

6 - 2 - Qualitative Versus Quantative Primary Research

Techniques

Qualitative techniques stand in contrast to quantitative techniques, the main difference being that quantitative techniques involve numerical data whereas qualitative techniques involve more abstract information. Data collected using qualitative techniques do not generally lend themselves to statistical analysis whereas quantitative techniques do (Veal, 1997).

A mixed methodological approach will be used in this research, because mixing methods enables the insufficiencies of both qualitative and quantitative methodologies research design to be overcome and can assist with data collection and data analysis (Jennings, 2001).

6 - 3 - Interviewing

An interview is a purposeful discussion between two or more people. It enables you to gather valid and reliable data that are relevant to tour research question and objectives. There are three types of interview; structured, semi-structured and unstructured interviews (Saunders et al, 2000).

A semi-structured interview model will be utilised as it:

  • Is flexible, not standardised
  • Enables me to gain an analysis, explanation and description in relation to my research aim and objectives.
  • Facilitates the exploratory nature of my research
  • Gives me an opportunity to discover issues I have not considered before

Interviews provide in-depth information about a particular research issue or question. They are designed to gather a broad range of information from a few units. They are the best method to get detailed answers about your questions.  They are also the best method for advertising pre-testing, where researcher is seeking individual interpretations and responses. The main disadvantage of interviews is that they are time consuming, and that the respondent may feel like ‘a bug under a microscope’ and be less willing to open up than in the relaxed atmosphere of a group (Research solutions 2005).

A number of 10 people working in the managerial level in the accounting department of different companies in England.

Questions concluded from the literature review will be asked such as:

  • What are the motivations behind the merger?
  • How the planning for the merger should be undertaken?
  • How can a manager estimate the risk involved in taking a merger decision?
  • Studies have revealed that careful planning can lead to a successful merger. What are the other factors in your opinion which can effect the success of a merger?

Choosing interviews for this stage of this part of the research was in order to get as much information as possible from the few people that will be interviewed. Interview questions will be compiled from the existing literature and detailed in relation to the research topic, aim and objectives

6 - 4 - Documentation Review

Documentation review is an excellent way of evaluating the industry by taking a review of the research done in the past. Lot of useful information can be obtained through this method. For the effective implementation of the documentation major objectives of the research should be identified. Research plan should be developed very carefully keeping in view the main objectives of the research. Sequence of process should be such, that the a large amount of information can be possible to obtain in a very short time span, written notes should be taken and finally written notes on the documentation review are verified.

Agenda should have, review of the agenda, review of the goal of the agenda, review of the ground rules and wrap-up etc.

Documentation review normally comprise of the important information from documents of similar nature relating to the field of research, so documents should be selected from the set of documents having useful information regarding the research topic. They should be selected from variety of sources such as journal article, newspaper reviews, experts interviews, information available at Internet. In the review each document should be referenced properly and the key addressed points should be summarised.

6 -5 - Analysis

On their own, data are rarely used in their original form. Through the process of data analysis, value is added to the data to turn them into information. It is information rather than data which users especially policy and decision-makers are interested in (Uganda bureau of statistics, 2005). However this will be a very sensitive and critical stage in my research process as misinterpretation or over-interpretation is always a potential risk.

The process of data analysis in this research will include the following steps:

  • Indicate the date of the questionnaires. Who completed them, and the number of returns?
  • Categorise the data collected. This can be done according to gender, origin, age... etc.
  • Reading through the documentation review and interviews carefully and coding them after the event in relation to the types of answers, themes and issues, and then categorising of response (keeping a note of what the codes refer to).
  • Then by asking some questions like what are the answers that keep repeating, what are the deviations from these answers, and Are there themes emerging? Contradictions? Then it would be possible to draw some relative generalisations.

7 - Possible Limitations of the Research

  • Lack of literature done so far concerning the disclosure of risk in annual reports might represents a major obstacle.
  • Another limitation might be lack of time. The researcher will follow a hybrid approach in data collection, which will include interviews and questionnaires. Collecting data through these methods, analysing and demonstrating them is time consuming and the researcher does not have much time.
  • There might be challenges in convincing to gain access to the relevant information required within the companies I intend to research. Confidentiality has been a barrier before researchers. It is required to reassure the firm that all data and information collected will be treated in the strictest confidence.
  • When attempting to send questionnaires to shareholders, it might be difficult to access companies’ shareholders databases in order to send them these questionnaires.

References

  • Berger, P.G. & Ofek, E. (1995). Diversification's effect on firm value. Journal of Financial Economics, 37, 39-65.
  • Dominowski, R, L, 1980. Research Methods. Prentice-Hall
  • Easterby-Smith M., Thorpe R. & Lowe A., 1997, Management Research: an Introduction, London, Sage Publications.
  • Elias, R. (1986). The politics of victimisation: Victims, victimology and human rights. New York: Oxford University Press.
  • Hussey R., Collis J., Business Research, 2nd Ed. 2003, Palgrave Macmillan
  • Jennings, N. R., (2001). An agent-based approach for building complex software systems. Communications of the ACM, 44 (4) 35–41.
  • Kerlinger, F, N, 1970. Foundations of behavioural research. New York: Holt, Rinehart and Winston.
  • Lang, L.H.P. & Stulz, R.M. (1994). Tobin's q, corporate diversification, and firm performance. Journal of Political Economy, 102, 1248-1280.
  • Maquieira, C.P., Megginson, W.L., & Nail, L. (1988). Wealth creation versus wealth redistributions in pure stock-for-stock mergers. Journal of Financial Economics, 48, 3-33.
  • Mastracchio, Nicholas J. & Zunitch, Victoria M., (2002). “ Differences between mergers and acquisitions,” journal of Accountancy, Online Issues, November 2002, available at http://www.aicpa.org/pubs/jofa/nov2002/mastra.htm
  • Research solutions, 2005. Information available from: www.researchsolutions.co.nz/in_depth_interviews.htm
  • Saunders M, Lewis P, & Thornhill A, 2000., Research Methods for Business Students, 2nd Ed. Pearson Education Limited.
  • Uganda bureau of statistics, 2005. Information available from: www.ubos.org
  • Veal, A, J, 1997. Research Methods for Leisure and Tourism: A Practical Guide. Chatham, Kent, Pearson Education Limited.
  • Wikipedia, (2007). Mergers and acquisitions, available from http://en.wikipedia.org/wiki/Mergers_and_acquisitions