Due to changes in the operating environment, several licensed institutions, mainly commercial banks, had to merge (combine their operations in mutually agreed terms) or one institution takes over another’s operations (acquisitions).
The words “merger” and “acquisition” are commonly used interchangeably, although there is a slight difference in their meaning. A merger is the consolidation of two or more companies into one larger company for economic or strategic reasons. Typically, the businesses and management of both companies become one.
An acquisition occurs when one company otherwise called the “acquirer” takes over another company known as the “target” by purchasing a controlling interest in the target. In many cases, the acquired company ceases to exist and its stock (in the case of listed companies) ceases to trade while the acquirer absorbs the business and consolidates it under its management.
However, in other instances, an acquisition may only result in the target’s business being under the indirect ownership or control of the acquirer’s shareholders and management.
Mergers and acquisitions play an important role in the world of finance and are the most widely used strategy by the banking sector to strengthen and maintain its position in the marketplace.
Mergers and acquisitions are a relatively fast and efficient way to expand into new markets and incorporate new technologies.
An example of merger and acquisitions transactions is the Merger between Access Bank and Diamond Bank. The deal was strategic as it consolidated Access bank’s position as a tier-one bank with a strong capital base. The merger has contributed to healthy competition between the new entity and other existing banks and helped strengthen the Banking system.
Some of the reasons put forward for mergers and acquisitions are: to meet the increased levels of share capital; expand the distribution network and market share; and benefit from best global practices among others.
In addition, there are many benefits of mergers and acquisitions for both organizations involved and they include:
Revenue may increase with the elimination of redundant costs
Potential market share increases either across geographic borders or through loyal consumers willing to look at new products developed as a result of the merger or acquisition
The companies gain access to new resources and human capital previously held by their competitor.
Mergers and Acquisitions play several roles in the banking sector, which include:
Agent of growth
Many financial intermediaries use mergers and acquisitions to grow in size and leapfrog their rivals. In contrast, it can take years or decades to double the size of a company through organic growth.
To aid Competition
This powerful motivation is the primary reason why Merger & Acquisitions activity occurs in distinct cycles. The urge to snap up a company with an attractive portfolio of assets before a rival does so generally results in a feeding frenzy in hot markets.
The banking sector also merges to take advantage of synergies and economies of scale. Synergies occur when two companies with similar businesses combine, as they can then consolidate (or eliminate) duplicate resources like a branch and regional offices, manufacturing facilities, research projects, etc.
Every million dollars or fraction thereof thus saved goes straight to the bottom line, boosting earnings per share and making the Merger & Acquisitions transaction an “accretive” one.
Most financial intermediaries also engage in mergers & Acquisitions to dominate the banking sector. However, a combination of two behemoths would result in a potential monopoly, and such a transaction would have to run the gauntlet of intense scrutiny from anti-competition watchdogs and regulatory authorities.
In conclusion, the banking sector has been undergoing major instances of Mergers and Acquisitions overtime for the achievement of consolidation of banks. It would also help institutions scale up quickly and gain a large number of new customers instantly. Not only does an acquisition give your bank more capital to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which to operate.
Whilst growth might be achieved organically, mergers and acquisitions present a quick way to grow inorganically and achieve organizational objectives.Featured Image Source: WATTAgNet
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