Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why

Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why

Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why

Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why

Synopsis

This book is intended to lay out, in a clear and intuitive as well as comprehensive way, what we know - or think we know - about mergers and acquisitions in the financial services sector. It evaluates their underlying drivers, factual evidence as to whether or not the basic economic concepts and strategic precepts are correct. It looks closely at the managerial dimensions in terms of the efficacy of merger implementation, notably the merger integration process. The focus is onenhancing shareholder value creation and the execution of strategies for the successful management of mergers. It also has a strong public-policy component in this "special" industry where successes can pay dividends and failures can cause serious problems that reach well beyond the financial servicesindustry itself. The financial services sector is about halfway through one of the most dramatic periods of restructuring ever undergone by a major global industry. The impact of the restructuring has carried well beyond shareholders of the firms and involved into the domain of regulation and public policy as well as global competitive performance and economic growth. Financial services are a center of gravity of economic restructuring activity. M&A transactions in the financial sectorcomprise a surprisingly large share of the value of merger activity worldwide -- including only deals valued in excess of $100 million, during the period 1985-2000 there were approximately 233,700 M&A transactions worldwide in all industries, for a total volume of $15.8 trillion. Of this total, there were166,200 mergers in the financial services industry (49.7%), valued at $8.5 trillion (54%). In all of restructuring frenzy, the financial sector has probably had far more than its share of strategic transactions that have failed or performed far below potential because of mistakes in basic strategy or mistakes in post-merger integration. It has also had its share of rousing successes. This book considers the key managerial issues, focusing on M&A transactions as a key tool of businessstrategy - "doing the right thing" to augment shareholder value. But in addition, the degree of integration required and the historic development of integration capabilities on the part of the acquiring firm, disruptions in human resources and firm leadership, cultural issues, timeliness of decision-makingand interface management have co-equal importance - "doing it right."

Excerpt

On April 6, 1998, the creation of Citigroup through the combination of Citicorp and Travelers Inc. was announced to the general applause of analysts and financial pundits. The “merger of equals” created the world's largest financial services firm—largest in market value, product range, and geographic scope. Management claimed that strict attention to the use of capital and rigorous control of costs (a Travelers specialty) could be combined with Citicorp's uniquely global footprint and retail banking franchise to produce uncommonly good revenue and cost synergies. In the four years that followed, through the postmerger Sturm und Drang and a succession of further acquisitions, Citigroup seemed to outperform its rivals in both market share and shareholder value by a healthy margin. Like its home base, New York City, it seemed to show that the unmanageable could indeed be effectively managed through what proved to be a rather turbulent financial environment.

On September 13, 2000, another New York megamerger was announced. Chase Manhattan's acquisition of J. P. Morgan & Co. took effect at the end of the year. Commentators suggested that Morgan, once the most respected bank in the United States, had at last realized that it was not possible to go it alone. In an era of apparent ascendancy of “universal banking” and financial conglomerates, where greater size and scope would be critical, the firm sold out at 3.7 shares of the new J. P. Morgan Chase for each legacy Morgan share. Management of both banks claimed significant cost synergies and revenue gains attributable to complementary strengths in the two firms' respective capabilities and client bases. Within two years the new stock had lost some 44% of its value (compared to no value-loss for Citigroup over the same period), many important J. P. Morgan bankers had left, and the new firm had run into an unusual number of business setbacks, even as the board awarded top management some $40 million in 2002 for “getting the deal done. ”

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