Academic journal article The Journal of Bank Cost & Management Accounting

Financial Synergy of Bank Mergers: The Case of Bank of America

Academic journal article The Journal of Bank Cost & Management Accounting

Financial Synergy of Bank Mergers: The Case of Bank of America

Article excerpt


The merger of the Bank of America and the Security Pacific Bank in late 1991 caused a significant amount of speculation by the industry analysts regarding the cost-cutting opportunities for the combined entities. This merger was just one of the top ten buy-outs in the US banking industry in the early- and mid-1 990s. The lower cost expectations for the new BankAmerica Corp. seemed realistic in light of the fact that the major operations of both entities were concentrated in California and other western states. While the profitability of both entities was hindered by non-performing foreign loans, this situation was not atypical, as many commercial bank loan portfolios are ten to fifteen times larger than bank equity. And, in fact, the Security Pacific Bank's investment in Arizona in 1985 and the 1990 disbanding of overseas merchant banking had brought about an expectation of large write-offs.

This paper looks at the merger of the Bank of America and Security Pacific Bank from two financial perspectives: lower costs, increased return on loan portfolios, and stock price changes attributable to the merger. The analysis includes the financial conditions of the two entities for a five-year period prior to the merger and such conditions over the five-year period after the merger. Additional analysis of the Bank of America's stock returns, as compared to the return index of twelve largest financial institutions, were completed for the period of 1985-1996.

The results of this analysis find that the cost-cutting expectations in the personnel and occupancy expenses were more immediate and pronounced than the overall non-interest expense total after the merger. In contrast, the data indicate that the return on the loan portfolios improved over the five-year period following the merger. Additionally, even with nearly a ten percent decline in total bank loan portfolios immediately after the merger, the Bank of America managed to increase its incomeproducing assets to a level slightly above the 1991 total for the two banks. Such an increase in return on assets resulted in an improved performance for the Bank of America after the merger. These results suggest that the benefits of bank mergers may outweigh the benefits of staying independent. The stock returns analysis indicated smaller volatility for Bank of America stock after the merger relevant to the returns for comparable bank return index constructed in this study. The regression analysis of the returns, consistent with implication of financial reports, suggests that synergy resulted from the merger of the two banks provided stockholders with a more desirable investment in the Bank of America.

During the current decade, mergers in the US banking industry are increasing at an accelerated pace as banks rush to build super-regional institutions in order to survive in an industry that is plagued by overcapacity, lack of capital, and chronically poor profitability. Already in 1997, three "mega deals" have been announced; the latest is a $15.50 billion buyout by NationsBank Corp of Barnett Banks. (Waters and Waters 1997) Emanual Monogenis of Heidrick & Struggles, one of the largest executive search firms in the United States, suggests that "there are too many banks chasing too few customers." (Moffat 1991 ) In addition to the paucity of customers, Washington regulators have demanded that the banking industry be more profitable and efficient.

Bank mergers often surprise the investment community, and the merger of the Bank of America (BOA) and Security Pacific (SP) was no exception. Although the announcement did not send shock waves throughout the community, a surprise was the two parties involved. Merger talks between Wells Fargo and Security Pacific had the banking community buzzing that these two would be the next "marriage of convenience." Suddenly in August 1991, BOA announced a $4.67 billion deal to acquire SP. According to Sellers (1992), some of the incentives for bank mergers are economic benefits, synergy, depth of management, and expansion of customer base and services. …

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