Mergers and Acquisitions in the Banking Industry: The Human Factor

Article excerpt


This paper attempts to chronicle the acquisition of a small community bank by a larger national bank that tried to enter the local market area. Unlike previously written papers that describe the performance of the firm after the acquisition, this paper focuses on the human factors involved in the acquisition before the acquisition is completed. This paper tries to explain the behavior of the acquired bank's personnel and what their expectations, fears, hopes, and beliefs are before the transaction takes place. Different points of view are included in this analysis, including those contained in the literature review, the Banks' upper management, and the rank and file.


In the early 1990s, there was a great increase in the number of mergers and acquisitions in the banking industry. Such increase was prompted by deregulation, as well as by a change in the laws governing interstate banking. Much research has been conducted about the financial consequences of mergers and acquisitions throughout industries after the transactions have taken place; however, there is not much data available about how the news of an impending acquisition affects employees of the firms that are to be acquired. These employees may experience high levels of stress and anxiety when an acquisition or merger is announced; these feelings may prompt attrition, alienation, and despair, among other behaviors. Given these symptoms, this article addresses actions that O.D. practitioners can take during such situations.

The Bank to be Acquired

The Bank to be acquired (the Bank) is a small community bank located in the Southwestern United States. It is considered a small bank due to the small volume of assets it holds. Its loan portfolio is mainly composed of commercial loans, specifically single-family residence construction loans. Consumer loans are a very small part of the Bank's portfolio due to the higher loan default rates that prevail in that segment of the banking industry and to the great competition that exists from nationally chartered banks in the area. The Bank's total number of employees is less than 30 and it has only one branch.

The acquiring bank (buyer) operates outside of the Bank's lending area, and is looking to purchase the Bank in order to obtain the Bank's charter to operate within the state. The buyer has a presence in several states throughout the Southwestern United States and is considered to be in the top 50 largest banks in the area.

In the fall of 2005, both banks entered into a contract to purchase and sell the Bank's holding company's stock. Both parties have agreed on the particulars of the contract, and the purchase of the Bank was estimated to be completed in the latter part of the 1st quarter of 2006.

The Banking Industry

The Riegle-Neal Act of 1994 allowed the banking industry to change dramatically, due to the reduced barriers to interstate banking. During the 1990s, the industry led all other industries in terms of merger frequency (Becher & Campbell II, 2005, p. 1-2). Consolidation within the industry greatly reduced the number of bank holding companies in the United States. Becher & Campbell explain how the reduction in interstate banking restrictions allowed banks to acquire other banks anywhere in the United States, and to process transactions across states. Merging their operations across states allowed banks to minimize their processing expenses, as well as to reduce other operating inefficiencies (p. 4).

The banking industry as we know it today was never this dynamic. According to Becher & Campbell, in the 1980s some states allowed banks to expand through regional compacts by branching into other states (but not as a new entry). These compacts expanded until the 1990s, when national agreements superseded most compacts (p. 3).

In general, a bank's entry into a new market is dictated by the prospects for future profits (Berger et. …