In the recent past, many organizations have established mergers to improve the level of competition in the global markets. In the banking industry, various banks have established mergers to improve performance in the markets and to establish competitive strategies. Some of the mergers, which have been established in the banking industry in the last decade, are JP Morgan and Washington Mutual, well Fargo and Wachovia. In this paper, the author provides a discussion about mergers. In addition, the author has examined the reasons why banks are adopting the strategy of establishing mergers. Lastly, the problems facing mergers in the banking industry have been explored.
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According to Andrew (2010), a merger is explained as the combination of two or more companies to conduct business like one company. As such, the liabilities and the assets of the acquired firm(s) become part of the acquiring firm (Andrew, J.A., 2010). Consequently, there are several benefits of mergers; for instance, firms can penetrate new markets. Additionally, the market share of a company increases. Firms acquire new technologies once they merge with other companies. It is also notable that firms gain competitive advantages after merging with other firms in the market (Moyer & McGuigan. 2012).
Reasons for a wave of mergers between Banks
Andrew (2010) opines that some companies fear establishing mergers with other companies. This has been caused by cultural conflicts, which have affected mergers in the global scene. It is a common scenario that, in the global markets, different cultures exist. This causes conflicts when people from different cultures work together. This means that firms differ in the way of doing things. Therefore, how much the merging firms try to merge the conflicting groups, the success of mergers may be impossible. Therefore, the result may not yield the best outcomes as expected because of the conflicting cultures among the merging firms (Andrew, 2010).
Another problem, that faces mergers, is the personal interest of various stakeholders of the merging firms. For instance, when a merger has occurred, employees fear that they may be retrenched. Workers also fear that the work terms and conditions may change, and adversely affect their tenure.
Resultantly, employee turnover may be experienced when mergers are made (Moyer & McGuigan. 2012). Therefore, it is evident that mergers may not be as successful as it seems. The performance of the employees and that of the company may drop after establishing mergers. As such, banks may wave mergers because corporate managers may fear losing control and avoid conflict that may rise as a result of a merger.
Difficulties that Acquiring Banks may face in the future
When banks establish mergers, poor corporate governance may be experienced. This means that the acquiring company may experience poor leadership in the future after acquiring other firms. The resources of an organization may be poorly managed, and decision-making tends to favor individuals rather than the company (Moyer & McGuigan, 2012).
Moreover, a fall in the value of shares may be experienced when mergers are created. In the long run, the value of shares may fall when the mergers fail to perform as expected (Andrew, 2010). This is a result of the unwillingness of a majority of investors to trade in a company that is not performing. Each investor would like to get the best returns out of his or her investment.
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Confusion may also be experienced when creating mergers. This is because the number of reporting units will increase as a result of having too many departments within the company. In addition, poor technology may be acquired by the acquiring firm (Moyer & McGuigan, 2012). This may make the company ineffective and inefficient and consequently reduce productivity. Hence, this may discourage investors and may place a company at risk of collapsing.
Based on the discussion above, it can be observed that, despite having many benefits of mergers, there are also some difficulties. It is evident that banks should be careful in establishing mergers in the future. Appropriate strategies should be established when creating mergers to avoid cultural conflicts and other problems associated with mergers.
Andrew, J. A (2010). Mergers & Acquisition. New York: Library of Congress.
Moyer, R. C. & McGuigan. R.J. (2012). Contemporary Financial Management. New York: Library of Congress.