Magazine article Mortgage Banking

Dissecting Banking's Bigness: Mega-Mergers in Banking Are Being Pushed in Part by Market Forces Too Impatient to Grow New Markets and Higher Returns the Old-Fashioned Way. Is This Good, Bad, or Just a Fact of Life? (Industry Trends)

Magazine article Mortgage Banking

Dissecting Banking's Bigness: Mega-Mergers in Banking Are Being Pushed in Part by Market Forces Too Impatient to Grow New Markets and Higher Returns the Old-Fashioned Way. Is This Good, Bad, or Just a Fact of Life? (Industry Trends)

Article excerpt

SECURITY PACIFIC NATIONAL Bank, Grocker National Bank, NationsBank, Norwest, First Interstate, Great Western Savings, Home Savings--all great banking names from the past that no longer exist. In a society where Corporations live and die by brand-name recognition, shelf space and market share, what happened to these once-proud banking icons? More importantly, what's driving the consolidation trend that has retired these once highly visible brands?

Mergers and acquisitions (M&As) are a means to expand a customer base, breathe life into consumer products and services and create instant gratification for those who require higher rates of return. In today's marketplace, businesses are expected to grow and prosper in a competitive environment that lacks the patience or inclination to follow the "old" business models, which accounted for much of the expansion that took place in the banking industry over the past 70 years.

Expectations of institutional and private investors alike are a driving force behind the business strategies of corporations seeking to deliver higher earnings. Though not a 21st-century innovation, over the past few years M&As have dramatically changed the banking landscape--leaving behind smaller, more community-driven banks and thrifts in favor of large, postmerger corporations whose assets rival third-world countries.

Now, large is by no means a bad thing. Neither does it automatically presuppose inefficiencies or lack of service, as some claim. In America we like things big. We like our cars large, our backyards wide and our fries "supersized." But what about the consumer? Will the trend toward supersizing our banks leave the customer-service orientation of the past intact?

Inevitably, M&As have a side effect that affects all corporations that engage in them: scale. When Bank of America merged with NationsBank, it not only gained in assets, but expanded in every other way from physical space to personnel. These side effects are generally considered a boon, as well as an effective way to merge internal operations--like marketing and human resources--yielding savings in operating costs. They also effectively and instantly create an enlarged consumer base to which new services and products can be sold.

But despite the appeal that high-end mergers and acquisitions hold for successful and growing companies, growth through M&A is no slam-dunk. In fact, it's quite the opposite. Mergers today fare about as well as the average American marriage. Roughly 50 percent end in divorce or some form of separation. They also endure a higher percentage of problems taking much longer to resolve than many anticipate.

Because M&As are here to stay, it is critical to devise a way to measure the likely success or failure of a merger. Such a measure would be extremely helpful to those trying to gauge whether a contemplated union is going to be a good move.

Washington Mutual Inc. (WaMu), Seattle, has become a de facto leader in the M&A game in the mortgage and banking industry. Its track record of growth through well-directed acquisitions has shown signs of working quite well. In the past 15 years, WaMu has purchased more than 30 thrifts, mortgage companies and financial entities, creating a veritable "laboratory" on the effectiveness of growth through M&A.

In an article by George Anders in the January 2002 issue of Fast Company magazine, Kerry Killinger, Washington Mutual's president, chairman and chief executive officer, said, "Acquisitions need to be a by product of your basic strategy We would never want to do scattershot acquisitions and then have to think up strategies to justify them. We believe that the best way to build value is to focus on a few markets where we can achieve national leadership."

On the opposite side of the coin, however, are companies such as Countrywide Home Loans Inc., Calabasas, California, whose growth has been generated largely internally. …

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