Bank Merger Strategy: Key Factors for Success

Introduction: Choosing the Right Merger Partner

When choosing a merger partner, a bank needs to consider several factors, both financial and strategic. First, the merger partner should be financially solvent, unless the assets are acquired at a steep discount. There have been instances, however, where even a steep discount was not enough to salvage a bad merger. For example, the acquisition of Washington Mutual by Chase was fraught with problems. It was relatively easy to change over the systems and the assets, but there were significant personnel issues and a culture clash that made it difficult for Washington Mutual to be profitable under Chase's leadership. It took quite a bit of time for those issues to be resolved, and even though Chase acquired those assets out of receivership, it did not ultimately gain from the acquisition because of the cultural incompatibilities and the weak financial position of Washington Mutual (Kugiya, 2013).

Strategic Fit and Synergy

What this case also illustrates is that there needs to be a strategic fit between the companies involved. One of the most important drivers of mergers is the idea that the combined entities can achieve some form of synergy. Either they share business similarities that allow for consolidation of back-end functions, or they are complementary on the front end, leading to cross-marketing opportunities. If the combined company can broaden its geographic coverage, improve economies of scale, or reduce costs, then the merger is more likely to be a success (East, 2012). There must therefore be a thorough examination of the strategic implications of the merger — and that examination has to be honest enough that it is not driven by a merger-forward bias.

The Role of Scale in Banking Competition

In many cases, scale is important for competition. In recent decades, since restrictions on interstate banking were eliminated, many U.S. financial institutions have come to recognize the value of scale in marketing. At the retail level, branding is an important element in the banking industry, and following several financial crises, consumers tend to feel more comfortable dealing with larger institutions. Beyond that, attracting more retail customers provides a bank with more capital to work with.

Many banks and financial institutions view the acquisition of capital as a key success factor, because it allows them to pursue a broader range of activities. For example, a retail bank and an investment bank can now align, with the retail bank using some of its assets to fuel the investment bank's activities. This represents complementary synergy, and there are meaningful strategic gains to be realized from diversification in revenue streams. Such arrangements allow institutions to reduce their dependence on a single line of business while simultaneously expanding their market reach.

Conclusion

Overall, there are a number of factors that must be taken into consideration when evaluating a potential merger between financial firms. These include balance sheet health, geographic and market factors, and corporate culture considerations, since all of these elements can significantly affect the profitability of the combined entity. A disciplined, multi-dimensional evaluation framework — one that resists the temptation to pursue a deal simply for its own sake — is essential to achieving a successful outcome.

References

East, T. (2012). 5 drivers of successful mergers, acquisitions. HVACR Business. Retrieved December 6, 2014 from

Kugiya, H. (2013). 5 years later, local Chase exec reflects on takeover of WaMu. Puget Sound Business Journal. Retrieved December 6, 2014 from