First West Bank Merger from a Savant Perspective
Essay Preview: First West Bank Merger from a Savant Perspective
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INTRODUCTION
According to Ed Mierzinski (2010), “Bank mergers take away competitors and create bigger banks. However, studies have shown that bigger banks have bigger fees.” This quote brings much understanding to the thought process and the bottom line of many businesses in todays world. This section will seek to explore in depth the merger and acquisition transaction or events between First West Bank and Interrregional Bank from a SAVANT perspective. These events include the discussed possibility of a merger, the public announcement of the proposal, competition entering the bidding process, the offer being increased, the SEC ruling and the acquiring of Interregional bank.
The Meeting (Negotiation)
The meeting began on September 7th, 2000 as First West CEO Paul Hayes approached CEO David Stuart about the possibility of a merger. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company. When First West and Interregional first met the initial offer was turned down. Interregional felt that First Wests strategy was not in line with theirs, but Hayes was already set in acquiring the Interregional bank. As we give a brief synopsis of what is actually going on in the meeting it would be best to define what exactly are mergers and acquisitions and what they entail.
According to the Reserve Bank of Malawis (2010) guidelines to the M&A process, “a merger is the amalgamation or fusion of two separate banks into a legal entity. In a merger, the merging banks combine to form a new bank (pp.5).” Banwo-ighodalo (2006) agrees and adds that the term merger appears to be one of imprecise definition. It has variously described as a situation where two or more companies of approximately equal size come together with the share holders and directors of both companies supporting the combination and continuing to have an interest in the combined business. An acquisition on the other hand is a more definite term, whereby it is basically the purchase of one company by another with neither the shareholders nor directors of the purchased companies retaining any continuing interest in the enlarged company.
In a drive for efficiency in a slow growth market and the desire to be the best could be the best broadly stated reasons for a merger, but each merger rationale may be different in suiting the needs and strategic tools that may be needed to carry the acquiring company into the future. According to Pilloff & Santomero (1997), bank mergers and acquisitions encourage improved revenue efficiency in a manner analogous to cost efficiency. According to this view, scale economies may enable larger banks to offer more products and services, and scope view, scale economies may allow providers of multiple products and services to increase the market share of targeted customer activity. Also, acquiring management may raise revenues by implementing superior pricing strategies, offering more lucrative product mixes, or incorporating sophisticated sales and marketing programs. Additionally, Carletti et al (2007) agrees by stating that a merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs.
Pilloff & Santomero (1997) also adds that merger related gains may also stem from increased market power. Deals among banks with substantial geographic overlap reduce the number of firms in markets in which both organizations compete. A related effect of in-market mergers as such is the case with First West and Interregional is that the market share of the surviving organization in these markets is raised. These changes in market structure make the affected markets more vulnerable to reduced competition. The increased market power of the surviving organization may enable it to earn higher profits by raising loan rates and lowering deposit rates.
Finally, mergers enhance value by raising the level of bank diversification. Consolidation may increase diversification by either broadening the geographic reach of an institution or increasing the breadth of the products offered such as the On-Line Financial Services and the Supermarket Banking Centres. Moreover, the simple addition of newly acquired assets and deposits facilities diversification by increasing the number of bank customers. Greater diversification provides value by stabilizing returns. Lower volatility may raise shareholder wealth in several ways. First, the expected value of bankruptcy costs may be reduced. Second, if firms face a convex tax schedule, then expected taxes paid may fall, raising expected net income. Third, earnings from lines of business where customers value bank stability may be increased. Finally, levels of certain risky, yet profitable, activities such as lending may be increased without additional capital being necessary.
Now that we have a basic understanding of mergers and acquisitions we will now speak to the second event in the M&A process.
The War Begins (Strategy, Value Added, Anticipation)
On October 18th, 2000, Interregional and shortly thereafter First West publicly announced that First west had made a proposal to Interregional for a tax free merger in which First West stockholders would receive 0.625 of a share of First West common stock for each share of Interregional stock. The market reacted favourably to the announcement and the investors showed their enthusiasm by driving both stocks to record highs.
First Wests acquisition of Interregional and share repurchase program is aimed at maximizing shareholder value. However, First West is working against stock buyback authorization equivalent to 10% of outstanding shares at the time of the announcement. Effective capital management is First Wests key to keeping bank management focused on creating shareholder value. According to Gupta & Lalatendu (2007) value enhancing (value reducing) bids are more likely to be motivated by attempts at maximizing shareholder value (maximizing managerial wealth). Subsequently, Gupta & Lalatendu (2007) also state that merger bids can be initiated either by attempting to maximize value or by managers with non-synergistic motives classified under the rubric of agency. Additionally, the price reaction to merger bids incorporates the markets assessment of the magnitude of agency problems at the acquiring firm. Value reducing managers are motivated to merge for possible personal benefits, without primary regard to the impact on stockholder wealth. Therefore the initial bid should be high due to managerial expectations of personal gains from the merger. Given that the personal gains to these managers may