In view of the number of drivers and their overlapping nature, it may also be useful to examine a few ways in which they might be grouped or classified.
Table 1.7 Main drivers/aims of an M&A operation
Domestic Cross-border
Between banks Small and medium-sized banks:
– expansion of area of operations
– economies of scale – rationalisation of the
distribution, accounting, IT and risk management structures
– avoidance of hostile takeovers
Large banks:
– achievement of leadership in terms of size
– economies of scale – exercise of market power – creation of shareholder
value
– leadership in terms of size – development of new
market areas
– international economies of scale
– development of opera- tions with an interna- tional clientele
Cross-sector – economies of scope – diversification of risk-
return profile
– complementary use of distribution networks – possible rationalisation of
the production structure
– leadership in terms of size – overall strategic-
geographical diversification
creation of shareholder value, the achievement of economies of scale, and the generation of market power, while the second comprises the manage- ment’s personal motivations and the decisions of the industry’s supervising bodies. Overall, this line of interpretation tends to distinguish between operations on the basis of the extent to which they are intended to achieve aims relating to earnings or size.
A second approach sets out to identify the specific factors underlying the decision to undertake a consolidation process, summarised in Box 1.1. In this interpretative model, which groups these factors into categories, the accent is placed mainly on the synergies an M&A operation is expected to generate as a result of higher levels of efficiency, due in turn to economies of scale or scope, on the acquisition of market power (deriving both from the size of the organisation created in relation to the structural characteristics of the market, and perhaps from the acquisition of too big to fail status), and on a combination of essential subjective factors which determine and guide the management’s attitudes.
Box 1.1 Factors that affect the decision-making process
• Economies of scale:
– based on costs
– based on brand recognition – based on earnings
– based on the presence of safety nets
– based on protection against hostile takeovers
• Economies of scope:
– based on costs – based on earnings
– based on financial diversification
• Market power
• Search for a quiet life or hubris behaviour
Another way of classifying the drivers of mergers and acquisitions between financial institutions distinguishes between the various factors on the basis of membership of one of the following five categories:
secular: long-term factors, including economies of scale, technology, competition, profitability, pressure from the financial markets;
•
to fail’ principle, the achievement of critical mass, the consolidation of market shares and managerial ambitions;
crisis: motives relating to systemic rather than individual crises;
catalyst: these may include factors such as regulatory changes, the creation of the single European currency, the deregulation process, etc., which speed up consolidation processes already ongoing or provide fresh stimuli for such operations;
herd factor: banks’ tendency to behave in the same way as their competitors.
In real life, however, the various drivers of a merger overlap to a large degree and form a complex blend of motivations/aims, to the extent where every single operation has its own specific nature, also considering the influence of a large number of contingent factors, both macroeconomic and geographical.
It should also be borne in mind that, although useful in giving us a general understanding of what really occurs, all analysis frameworks and classification procedures are actually simplifications of reality, even if every operation (or group of operations, of any size) may contain drivers, underly- ing factors, aims and effects which can be summed up with the aid of one of the categories defined.
As well as the aims or drivers of M&A operations, we must also remember the risks involved. They affect the parties to operations in different ways, and depending on the operation’s strategic importance and size, they may have far-reaching effects on the subsequent life of the banks concerned and the groups to which they belong. These risks occur partly during the period immediately prior to the deal, partly while the operation is actually taking place, and partly after its conclusion, with effects which may be extended well beyond the short term.
Table 1.8 informs us that in the phase prior to the conclusion of the nego- tiations, the main factors to be considered are those relating to the price of the operation (including the agreement of the technical procedures by which the operation is to be carried out) and the basic soundness of the strategy pursued; the definition of the managerial and control structure of the institu- tion created by the operation could be added to these. During this phase, and in the one immediately afterwards, the input of the advisors of the financial institutions involved is usually highly significant.
There are also major risk factors during the actual realisation of the M&A operation, when difficulties may arise from the interaction between the corporate structures involved and the system of stakeholders, who include investors and the financial markets in general, the staff of the banks involved, and even competitors, who may oppose the operation or apply pressure to the banks’ clientele and shareholders.
•
•
•
Between banks Ex ante:
– strategic – pricing During:
– competitive pressure – relations with clientele – human resources
management
– relations with the finan- cial market
Ex post:
– operational – resources allocation – loss of clientele –
market shares
Ex ante:
– strategic
– pricing/exchange rate – regulatory differences
– differences in environmental and cultural factors
– political interference During:
– competitive pressure
– relations with domestic clientele – human resources management – relations with the financial market Ex post:
– operational – resources allocation
– loss of clientele – market shares – problems of integration with regard
to regulatory, fiscal, accounting and administrative aspects
– reputational risks Cross-sector Ex ante:
– strategic – pricing During:
– competitive pressure – relations with clientele – human resources
management – relations with the
financial markets Ex post:
– operational – resources allocation – loss of clientele –
market shares – reputational risks
Combination of the risks listed for cross-border and cross- sector operations, for all three phases considered
In the next phase, over a time-scale of varying length, a wide variety of risks occur, generally involving difficulties in or the impossibility of achiev- ing the aims initially pursued. Conceptually, the risks of this phase therefore merge with those of the initial period, since it is now that any errors in the planning of the operation will be revealed.
to the increased complexity of the risk and contextual factors. Secondly, the consequences of the recent crisis clearly reveal an obvious link between M&A-based growth strategies and crises, starting from some of the biggest European and US financial groups. Although no wide-ranging analyses are available as yet, there are evident causal relationships between the intensity of growth processes carried out by means of acquisitions, the achievement of large or very large size, expansion of geographical context and strategic diversification, on the one side, and the incidence of crises on the other.
It is no coincidence that the groups hardest hit include players which, in the period immediately before the crisis, had implemented processes of intensive growth through external lines and a massive diversification of activity, mainly in the investment banking and mortgage lending sectors, as well as rapid expansion into new geographical areas. Similarly, as we have already seen, the way out of these difficulties is to be sought, apart from the essential recapitalisation, in processes of refocusing on the more stable core business (usually retail & commercial banking) and a reduction in geo- graphical coverage, abandoning marginal markets, including some recently acquired ones.