As a vital essential of corporate finance, the primary reasoning behind mergers and acquisitions is to create more value together as a combined entity than being on an individual standing. The primary objective of wealth maximisation rests upon evaluating different opportunities with the route of merger or acquisitions.
The banking system has undoubtedly accomplished several achievements. The sector has witnessed significant reforms, and a few successful mergers and acquisitions have helped it grow leaps and bounds. Several domestic and international banks worldwide are engaged in mergers and acquisitions. Enrolling in a mergers and acquisitions online course can help to boost profits and shareholder value.
Types of mergers and acquisitions:
The following are the transactions under the M&A umbrella:
In this type, the board of directors for two different companies approves the combination while seeking the approval of shareholders.
The acquiring company acquires a majority stake in an acquired form that does not alter its name or the organisation structure.
It creates a new company and combines core businesses while abandoning the old corporate structures. The stakeholders need to approve the consolidation and receive common equity shares in the new organisation.
- Tender offers:
One company offers to purchase the other firm’s stock at a particular price instead of the market price. The company communicated the offer directly to the shareholders bypassing the board of directors and management.
- Acquisition of assets:
A company directly acquires assets of another company. The company whose assets are being acquired must obtain approval from the shareholders.
- Management acquisitions:
The executives of a company purchase a controlling stake in another company while taking it private. The former executives often partner with a former corporate officer to fund a transaction.
Merges can further be classified into three distinct kinds, unique to the business combination, such as types of industries. There are various kinds of mergers, such as statutory mergers, short-form mergers, mergers of equals, and subsidiary mergers. These are horizontal mergers as the merging entities are associated with similar commercial activities. At times, non-banking financial institutions are combined with other banks, provided they offer similar services.
Why do mergers happen?
- Companies will secure resources while the scale of operations will increase.
- Banking firms may undergo a merger to benefit the shareholders. As a result, the existing shareholders of original organisations attain shares in the new company.
- Banking companies might agree to a merger to target the new markets while diversifying the offering of products and services, leveraging profits.
- Mergers also happen when the companies need to acquire assets that would be time-consuming to develop internally.
- It also eliminates competition while reducing the advertising prices of products. The reduction in prices benefits customers while leveraging sales.
Benefits of mergers and acquisitions in the banking sector:
- Economies of scale:
Underpinning the M&A activity promises economies of scale. The benefits promise increased access to capital, better bargaining power, and lower costs due to higher volume. In addition, a mergers and acquisitions online course can teach you the ability to work closely with the banking organisation over an extended period.
- Economies of scope:
Mergers and acquisitions welcome economies of scope, which are impossible through organic growth. It allows banks to tap into the demand of a more extensive client base.
These are described as ‘one plus one equalling three’. This is the value obtained with banks working together to create something powerful.
- Value generation:
Some of the best deals occur when a bank is not pursuing an acquisition. The primary hallmark of the acquisitions is the purchase price being lower than the fair market value of the assets.
- Increased market share:
One of the most common reasons for M&A is the market share. Accordingly, the retail banks have stepped up to evaluate the geographical footprint as a primary objective to achieving market share. Hence, there has always been a considerate level of industry consolidation in the sphere of retail banking.
- High level of competition:
Competition leverages larger banking organisations. It is one of the biggest benefits of economies of scale that allows you to compete for greater scales.
- Tax benefits:
Acquisitions can bring tax benefits when the target banking company lies in a strategic industry with a favourable tax regime.
How does M&A activity affect shareholders?
In the days leading to an acquisition or a merger, shareholders of an acquiring banking firm will most likely witness a temporary drop in share value. Conversely, shares in the target firm typically experience a surge in value. This is primarily since the banking firm will need to spend capital to acquire the target banking firm at a premium to pre-takeover share prices.
Once the merger or acquisition comes into effect, the stock prices exceed the value of the underlying banking organisation during the pre-takeover stage. As a result, shareholders of the merged banking companies experience favourable dividends and long-term performance.
The banking industry is witnessing significant Mergers and Acquisitions in the last few years, with several global players emerging through successive mergers and acquisitions in all sectors, including banking. The present study indicates that several banks’ pre and post-merger acquisitions have no changes in the profitability ratio. A similar decline in performance is observed in several matching firms. Hence, the slow decline solely attributed to the merger.
However, in the future, there are several prospects that improvement in profitability offers. The results indicate that a higher cost efficiency was achieved thanks to mergers. A merger between the strong and the distressed did not yield any significant merger among the banks. This succeeded in safeguarding the interest of depositors of weak banks; however, stakeholders of the banks have not achieved any gains from the mergers. You can also seek a private equity online course to learn the benefits of private equity.
The growth size does not matter and can be achieved through mergers and acquisitions easily.
It can be achieved by seeking the assistance of mergers and acquisitions in the banking sector, also known as inorganic growth. The government banks are adopting policies for mergers and acquisitions. The online mergers and acquisitions course will help teach how to structure the M&A model efficiently.
Enrol in a professional mergers and acquisitions online course to explore more about mergers and acquisitions, as it is one of the most favoured careers in any investment bank. Gain in-demand industry knowledge and hands-on expertise on the subject under trained experts.