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Today, international mergers and acquisitions have eclipsed organic growth as a choice of business expansion. How suitable it is for International Banks to adopt this choice?
Introduction
As deregulation opens up global markets, aided and abetted by ever-swifter developments in communications technology, international mergers and cross-border alliances have never been more popular. Companies are coming together, one way or another, to realize emerging commercial opportunities EMERALD Cost-efficiencies, profitability, and strategic behavior: evidence from Japanese commercial banks Author(s): Nayantara D. Hensel
International Journal of Managerial Finance; Volume: 2 Issue: 1; 2006
This ongoing and seemingly accelerating dance of corporate acquiring and merging appearing on the front covers of business journals almost every week is fairly hard to miss. EMERALD The effective management of mergers Author(s): Han Nguyen, Brian H. Kleiner Leadership & Organization Development Journal; Volume: 24 Issue: 8; 2003 Research paper
As per a research by Booz-Allen and Hamilton it is indicated that more than 20,000 cross-border alliances were formed between 1996 and 2003. At the same time acquisitions are growing in size. EMERALD Cost-efficiencies, profitability, and strategic behavior: evidence from Japanese commercial banks Author(s): Nayantara D. Hensel International Journal of Managerial Finance; Volume: 2 Issue: 1; 2006
Further according to Mergerstat.com for year-to-date of 2002, there have been 4,363 mergers and acquisitions worth over $291.7 billion. The industry breakdown of the top five was as follows
Internet – 659 deals worth $ 26.06 billion;
Healthcare – 319 deals worth $75.25 billion;
Telecommunications – 187 deals worth $11.53 billion;
Banking – 146 deals worth $11.04 billion; and
Semiconductors – 47 deals worth $2.4 billion.
EMERALD The effective management of mergers Author(s): Han Nguyen, Brian H. Kleiner Leadership & Organization Development Journal; Volume: 24 Issue: 8; 2003 Research paper
Thus it shows that recent decades have seen radical transformations within the banking sectors. From highly bureaucratic organizations focused in closed national markets, many banks have become efficient institutions operating in a highly competitive environment and often inclined to search for international markets. The primary forces identified behind these transformations: globalization process, the relaxation of regulations, introduction of new technologies and financial innovations. These changes have been associated with a rapid increase in competition, both at national and international level, often resulting in significant profit reductions for the less competitive banks. In order to maintain or gain competitiveness many banks have seen the need to modify their competitive strategies and traditional forms of organization Journal – Title: Internationalisation of banking in Europe: Implications for European Works Councils Author(s): Miriam Quintana Fernandez Journal: Employee Relations ISSN: 0142-5455 Year: Dec 2003 Volume: 25 Issue: 6 Page: 575 – 594 DOI: 10.1108/01425450310501315 Publisher: MCB UP Ltd
This fast changing environment has, over the past decade, had a profound effect on leading banks in both mature and emerging markets. The era of easy profits and protected markets has finished. Bankers can no longer rely on the traditional businesses of deposit taking and making short-term loans to generate decent revenues.
Todays core profit areas are mainly in consumer lending, credit/debit cards, insurance, investment banking, private wealth management, equity-and-debt financing and offering high-tech instruments, such as derivatives, the trading of credit, interest rate and foreign exchange risks. Many big players boast diverse “product-lines” ranging from retail/wholesale to corporate and treasury services, catering to the needs of a sophisticated clientele.
EBSCO TITLE: Facing new challenges, Middle East, 03050734, Oct2003, Issue338 Database: Academic Search Premier
Banking is becoming a less local business. In the European Union, an economy of comparable size to Americas, the story has a different twist: although there is not much more room for national consolidation, except in Germany and perhaps Italy, there have been few cross-border mergers or other steps towards a single banking market.
Consolidation still has some way to go, but the pace has slowed since the mid-1990s. Last year, according to the FDIC, the number of banks and thrifts fell by 172, perhaps one-third of the decline eight or nine years ago. Banks are founded all the time: 119 new charters were granted last year, whereas 275 banks were swallowed in mergers. In the western states watched over by the Federal Reserve Bank of San Francisco, 14% of banks are less than three years old; 23% are under five.
The high degree of concentration in local banking markets, says Mr Golden, means that for most banks mergers are the easiest route to growth. “Organic growth in a highly consolidated market is more difficult. Its easier to buy a powerful incumbent, even at a premium.” He suggests that this makes the achievements of banks such as Washington Mutual and Commerce Bank, which have broken into new markets by opening branches by the dozen, all the more impressive.
Therefore between 1985 and 2001 international bank M&As have risen steadily, about one-fifth of all bank mergers around the world involved partners headquartered in two different countries. Journal of banking and finance, 2004 – Cross-border bank mergers: What lures the rare animal? Claudia M. Buch , Gayle DeLong New York. www.sciencedirect.com
Strategies of Bank internationalisation
There are three types of strategies for internationalisation .Each of these strategies presents both advantages and disadvantages, and selection might depend on a number of factors, varying from the size and resources of the bank to the nature of the market the bank wishes to enter.
Some banks, such as Citibank or Barclays, have largely opted for the development of their own network of foreign branches.
It helps establishing close relationships with clients, and initiating practices based on the banks principles and strategy in its current country of operation.