The cost benefits from mergers and acquisition Essay

        The cost benefits from mergers and acquisition. What there motivations are

The word merge readily suggest the coming together of institutions to form a larger group. The dictionary meaning of Merging also means union, a blending, combining, or joining of something with something else, or the state of being blended, combined, or joined together. It also connotes amalgamation, partnership, joining, establishment, solidification, firming up, strengthening, firming etc. Hence, merging of companies can be described as the joining together of two or more companies or organizations for the sole purpose of forming a bigger and stronger group.

Since there are several types of merging and acquisitions, this research work will be incomplete without mentioning them. Merging is basically distinguished by either the relationship between the merging companies or the finance of the merging companies. Based on the relationship, there are three types of merging, which include vertical, horizontal and conglomerate merging. Vertical merging is when a company acquires another company that serves as its supplier or consumer. A typical example is when an oil company acquires a gas filling station. It is an acquisition to move closer to consumers. Horizontal acquisition simply means when two companies producing similar product and are direct competitors merge together to form a stronger bond. A good example is the acquisition of Compaq computers by H.P. Finally, conglomerate is when two or more companies that do not share any similar product together to come together to form a bond. This is usually a move to the acquiring company to diversify

Based on the finance of the merger, there are two types of merging and each has peculiar implications for both the companies involved and the investors. They are, Purchase Mergers and Consolidation Mergers. Purchase merger as the as the name readily suggests is when one company buys another one. The purchase could be either in cash or through other negotiable or debt instruments, this sale is taxable. Many companies prefer this type, simply because it can provide them with a tax benefit. Assets acquired can be easily written-up to the actual purchase prices and the difference between the book value and the procure price of the assets will be depreciated annually, reducing taxes payable by the acquiring company. Consolidation Mergers on the other hand is when an entirely new company is formed by two companies, both companies merge to form a new identity and combined under the new entity.

With the above-listed types of merging it is already becoming apparently clear, even before mentioning that merging has great benefits for both the merging companies and their consumers. Since this research is about bank merging and acquisition, focus will now be directed on banks, the several benefits and motivations for this move. The rate of merging and acquisition among commercial banks has not only increased greatly in the recent past in America, it has also been same in Nigeria and other parts of the world generally. In Nigeria, the biggest West African country, over 100 banks have merged and acquired among themselves to form only 25 stronger and more reliable banks, both in capital base and deposits, both being the instruments that greatly determine the level of profits of banks.

In America, the average annual rate of merging increased from an average of 170 during 1960 to 1979 to 498 during 1980 to 1989 period. These mergers have given banks ample opportunities to “penetrate new markets, realize potential economies, and acquire financial power and prestige associated with larger size.” In Nigeria, before the advent of its The Central banks announcing that each bank must have a minimum capital base of 25 billion naira, banks were not traditionally know to have a strong capital base, making liquidation a case one too many. This order by the central bank made all the weak banks to crumble under the strong ones. The bigger banks simply acquired the weak ones, further strengthening their capital base. However, with the merging of these banks, competition became keener, customers have fewer banks to choose from, so many banks simply merged to form a conglomerate just to be able to withstand the competition. Acquisition policy designed to maximize the value of deposit are aimed to increase profit of bank and hence shareholders wealth.

Benefits of Merging;

Indeed merging of banks has invariably made banks to be too big or too important to fail, common dilemma that has exited for several years. The merging banks readily put to use the capital and infrastructures of merging banks to use, making them have several more branches, more capital for business and a pool of well trained human resources to mention only a few. In as much as the primary aim of all merging is to increase or maximize profits, hence maximizing shareholder wealth, this is achieved through the following benefit. Elimination of Competition; Acquiring a competitor has proved to be one of the best method of improving a company’s sales in the marketplace.

 Cost Efficiency: due to bigger size, company benefits more technological advancement and enjoys economic of scale, due to large scale buying and selling. Severally cost are reduced which invariable improves the profit of the company.

 Stability and improved earnings; a larger company stands a better chance of reducing corporate risk and thereby ensures stability. If a smaller bank is experiencing instability in the market, if it merges whit a bigger one, it stabiles and experience greater patronage due to the support from the bigger one.

Market and Product Line Issues: Many banks enjoy a particular market or products many other banks do not enjoy, this could easily attract other banks that easily want to enjoy this benefits to seek a merging with these few privileged banks

Acquire Needed Resources: resources are easily pooled together for great efficiency.

These resources could be tangible ones such as plants, equipments, trade secret or even human resources. Most times the technology acquired goes along way to improve the productivity of the merging company.  It is like buying an asset, for it provides utility.

Corporate Tax Savings: This is quite technical, but in merging, Tax is saved when stocks of the merging company are sold. There are ways of corporate maneuvering to achieve.

“ …When a purchase of either the assets or common stock of a company takes place, the tender offer less the stock’s purchase price represents a gain to the target company’s shareholders.  Consequently, the target firm’s shareholders will usually experience a taxable gain.  However, the acquiring company may reap tax savings depending on the market value of the target company’s assets when compared to the purchase price.  The acquiring company can write up the target company’s assets by the amount that the market value exceeds the net book value of the target company’s assets.  This difference can then be charged off to depreciation with resultant tax savings.  This differs from goodwill in that goodwill is never tax deductible.  Depending on the method of corporate combination, further tax savings may accrue to the owners of the target company.”

Motivations for merging

One important motivation for merging is Increased competitive pressure. Presently, in the world, there is a rather fierce competition among existing banks, especially in this period of economic recess, banks struggle for the few available customer and market. It has become imperative that, when a bank sees a bigger one as a competitor, too formidable to beat, the bank simple make move to merge with the larger one for survival. Similarly, corporations sometimes make an acquisition with the assumption that their future earnings will be enough to pay off the debt of acquiring the company. Corporation many times forecast the future of the company they are acquiring.  If they see the future as bright they can go ahead to invest in it for a future profit.

Again, any bank experiencing bankruptcy or about to experience it readily give themselves up for sale. If any bank has interest in the folding up bank, thus the reason to merge.

Summarily, these are the various benefits of merging banks. They do not only achieve greater profits but greater efficiency, patronage and goodwill which all go along way in determining the success of the company. This research has not only discussed the types of merger and acquisition, it has also discussed the reasons and cost benefits of merging of banks. Today, banks have been able to stand the test of time most especially in this period of global economic declination.

Reference

Downes, J., and Goodman, J.E. (1995). Dictionary of finance and investment terms (4th Edition) Hauppauge, NY: Barron’s Educational Series.

Cheryl Frohlich, University of North Florida. An Examination Of Bank Merger Activity. A Strategic Framework Content Analysis

 George J. Benston, William C. Hunter, Larry D. Wall; Journal of Money, Credit ; Banking, Vol. 27, 1995

 Asian Leasing Yearbook 2006

Gary E. Mullins, Ph.D. University of Wisconsin – Stevens Point Mergers and Acquisitions: Boon or Bane?

            Samuel Tedjasukmana, April 2007, University Of Durham: Mergers and Acquisitions, Summative Assignment

ABA Banking Journal Articles, Jan 2009, Wealth Management and Trust

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