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Bank Merger Essay, Research Paper

I. Introduction

Mergers have long been a practice that businessmen have utilized as a way to improve, expand and consolidate their firms. They have come in waves starting as early as the 1800’s (Brigham 1080). The bank merger wave, which started in 1980, continues and each new merger is bigger than the last (Dymski XV). Should this merger activity be a cause for concern? Many laws have been passed to regulate and ensure competition within the market. But, there has been a big turnaround in the last twenty years. Bank deregulation made it much easier for banks to merge and form monopolies (Dymski 41). This deregulation has stimulated more than 7,000 bank mergers since 1980 (Meyer 1). Fears about both the pace and the scale of bank mergers, and their effect on bank customers have been arising. Big businesses, referred to as “Bignesses,” are viewed by CEO’s and executives as a good thing, while many object, feeling that big businesses form monopolistic power (Balassa 10) Although bank mergers are highly beneficial to merging corporations and their CEOs, these large businesses have proven to have many negative effects by trending towards monopoly.

II. What is a merger?

A merger occurs when two or more companies combine to form one, where the buying firm absorbs all the asset and liabilities of the selling firm(s) (Scott 232). Economists classify mergers in to four groups: horizontal, vertical, congeneric, and conglomerate. A horizontal merger is one in which firms in the same line of business join. A vertical merger is when a firm combines with one of its customers or dealers. A congeneric merger involves related enterprises that do not have a producer-supplier relationship. A conglomerate is when companies that are totally unrelated merge together (Brigham 1080). During the mid sixties horizontal mergers were very difficult to execute, because of anti-trust laws. This was when the conglomerate boom came about. Companies believed that joining two separate companies with the earning power of $2 million each could easily produce earnings of $5 million (Malkiel 61).

III. Why merge?

There are six primary reasons why companies merge. The first reason is synergy, which is known as the two plus two effect (Malkiel 61). This is the primary motive for most mergers, increasing the value of the combined enterprise. The second reason, tax consideration, has motivated a number of mergers. In this case companies in a high tax bracket could buy a company with large tax losses, then turn these losses into immediate tax savings ( Brigham 1076-77). According to John Parsons, merging for this reason and only this reason is considered illegal, because it is premeditated just to eliminate taxes and has no real business purpose. Another reason for mergers is that in some cases the cost of replacing assets for a company is higher than its market value. For example, in the 1980’s the cost of doing exploratory drilling was higher than the cost of acquiring reserves by purchasing another oil company. Another rationale for merging is diversification. Managers contend that “diversification helps stabilize a firm’s earning stream and thus benefits its owners” (Brigham 1078). Managers’ personal incentives has also been found as a reason for many mergers. In this case power is the driving force. The belief that more power is attached to owning a larger corporation drives businessmen to mergers. Though no manager will admit to their ego being a reason for merging, egos do seem to be a big reason for merger activity (Brigham 1079). Breakup value, another reason why companies merge, is the most unethical. In this case a takeover specialist acquires a company for the sole purpose of selling it off in pieces to make a profit. The specialist acquires a firm that has a breakup value higher than its market value in order to make a hefty profit (Brigham 1079-80). Though some of these reasons for mergers may be legitimate, the underlying truth is that managers want their companies to grow in order to increase their own income. While they are concerned with providing consumers with the things they need, they are not concerned with the high prices that may result from a merger.

In the banking industry, the accelerated search for a acquisitions or mergers occurs for a variety of reasons. Some mergers may be to provide diversification, giving the company a more competitive advantage. In just about all merger cases, including bank mergers, the merger represents a search for greater efficiency, a broader geographic reach, an expansion of customer base, a new mix of services, a reach toward technology, a need to compete in the global economy (Fleet 1). But undoubtedly, many mega-mergers have and may be ego-driven. “Egos, every bit as much as business logic, can decide which mergers take place and which ones don’t. Clashes of this sort are common enough that investment bankers have developed a euphemism for them: social issues” (Viscusi 18).

IV. “Merger waves”

As history shows, mergers have come in four major waves. The first wave was in the late 1800’s when oil, steel, tobacco, and other basic industries consolidated. The second was in the 1920’s when utilities, communication, and auto companies merged. The third wave was in the 1960’s, the time when the conglomerate merger boom was going on. Finally the fourth and final wave started in the 1980’s and is still going on (Brigham 1080-1081). Bank mergers fall under this final category. Previous to eighteen, banks had a hard time consolidating mainly because of numerous anti-trust laws that have been passed, starting in1890 (Dymski 34).

V. Events leading to the bank merger wave

“The laws of the United States have been hostile to market monopoly since the passage of the Sherman and Clayton Antitrust Acts” (Dymski 13). The Sherman Anti-Trust Act, passed in 1890, was designed to control and prohibit monopolies by forbidding certain business actions that might reduce or eliminate competition within the market (Scott 347). The Clayton Act of 1914 was implemented to promote competition by outlawing actions such as acquisition of competitors, price discrimination, exclusive dealings, and interlocking directorates that could reduce competition (Scott 65). These laws along with the Federal Trade Commission Act of 1914, which established the Federal Trade Commission with its regulatory powers, formed the back bone of U.S. anti-trust policy (Dymski 34). After the Depression, President Roosevelt and Congress were forced to take action. The McFadden Act, passed in 1927, prohibiting interstate banking, and the Glass Steagal Act, passed in 1933, making financial firms choose between wholesale or retail banking transformed the U.S. banking system. The banking system at this time was thought of as segmented, and market entry was almost impossible. “The bank manager’s obligations was to manage her institution of behalf of depositors- that is, with safety and soundness foremost” (Dymski 35-36).

In response to increased corporate reorganizations and mergers in the fifties, the Bank Holding Company Act was passed in 1956 followed by the Bank Merger Act in 1960. These laws, that required federal banking agencies to look further into the effects on competition of the prospective mergers, made it even more difficult for companies to merge (Dymski 34). Two recessions and high levels of price inflation were caused by chronic exchange rate depreciation, resulting in high interest rates. This led to the creation of money-market mutual fund, which gave upper and middle-income households an interest-earning alternative to bank deposits. “The “blue chip” corporations that had been the backbone of banks’ commercial and industrial lending turned to these direct credit markets for most of their financing needs (Dymski 36). Commercial banks’ earnings were flat, trending downward through the 70’s, and bank owners wanted a change (Dymski 39).

VI. Deregulation opens the door for bank merging

Finally political leaders and industry regulators stepped in, resulting in the passage of the Depository Institution Deregulation and Monetary Control Act was passed in 1980. This deregulation was inevitable, with uncontrollable inflation, credit growth, and pressure from banks, something needed to be done and the federal government believed that this was the answer. This law gave banks more freedom, and the ability to compete with other financial firms. They were now able to make loans, purchase funds, attract deposits, buy and sell in financial markets, and even participate in underwriting and capital provision in some states (Dymski 39). In 1982 and 1984, the Federal Reserve changed the merger guidelines making it easier for banks to merge (Dymski 41). 1994 also opened more doors for banks by the passage of the Riegle-Neal Interstate Banking Act which gave banks interstate-merging rights (Dymski 44).

VII. Is “Bigness” better?

The barriers to mergers and acquisitions across state lines have been crumbling for almost two decades, making way for bigger and bigger companies every day. Since 1980, there has been over 7,000 bank mergers. The pace and dollar amount of these mergers has rapidly accelerated since the beginning of deregulation. Going from190 mergers with $10.2 billion in acquired assets in 1980 to 644 mergers with $123.3 billion in acquired assets in 1987. This pace of merger has continued through to the new millennium with mergers getting larger and larger (Meyer 1). This brings in the question of “Bigness.” Bigness may be defined in terms of the company’s share of the industry in which it operates or absolute size the measure of size being assets, sales, or employment (Balassa 9). Is “Bigness” better? According to George J. Stigler, “The fundamental objection to bigness stems from the fact that big companies have monopolistic power, and this fundamental objection is clearly applicable outside the realm of corporate business” ( Stigler 10). Sumner H. Slichter disagrees, saying: “In fact, in order to stimulate competition, existing restrictions on mergers should be relaxed, not tightened, and large enterprises, instead of being threatened with breakup, should be given a clear mandate to grow, provided they use fair means” (Balassa 21).

VIII. Market concentration as a result

The bank merger has also been accompanied by market concentration. There has been a substantial increase in shares of total banking assets held by the largest organizations from 1980 to 1997 (Meyer 2). Most studies that have been done on the link between banking concentration and prices in banking markets conclude that high market concentration is correlated with prices that are unfavorable to consumers (Dymski 89). This market concentration is mainly the response of larger corporations to the passage of the Riegle-Neal Interstate Banking Act ( Meyer 2). Previous to the passage of this act, horizontal mergers were the only form of branching, and were extensively reviewed before they could be executed (Dymski 44). The Horizontal Merger Guidelines were passed in 1992 to keep horizontal mergers from creating monopolies (Dymski 44). Now, branching is easier through interstate mergers. “If this bank is able to branch statewide, it can do so freely when its financial capacity and market conditions permit; if not, it may engage in a merger strategy within the state to reach the same goal.” (Dymski 45).

IX. Effects on labor

“The major reason for the surging share prices is a view that these mergers will lead to substantial cost savings through what’s termed economies of scale. That’s another way of saying, greater volumes of business will be managed by smaller structures- and fewer people” (Hogg 1). Mergers and acquisitions have and may continue to produce many negative effects. There is no doubt that mergers are beneficial to the managers and the owners of companies involved. But there are social issues involved that are not even considered before a company merges. Big companies keep joining with other companies becoming larger while leaving many people without jobs. This process of downsizing, which the buying firm considers the retooling of their bank strategy, has become a regular practice due to more exposure to market force, and entry pressures. Changes in technology of the newly formed firm and the rise of “supermarket branches” can be attributed as the reason for downsizing. “According to Radecki (1997), some 4,000 bank offices are supermarket branches, and more are on the way; he estimates that, when fully implemented, the adoption of this delivery method could reduce bank employment by about a tenth.” (Dymski 43). Along with decrease in banking institutions and an increase in technology, comes a decrease in the number of workers needed and an increase in lay-offs.

X. Small business lending

Several studies have been done exploring the concern that continued shrinkage of the banking industry through mergers will lead to a decrease in small-business credit (Dymski 93). According to research, there are three major effects on small business lending that could occur from a bank merger. The first effect is the static effect, when small business lending is reduced. In this case, large banks are found to devote smaller proportions of their portfolios to small business lending. The next effect is the dynamic effect, which is an increase in small business lending by means of restructuring policies. The last effect, the external effect is often an increase in small business lending by other banks in the local market. In this case local banks may pick up profitable loans dropped by the merging institutions ( Peek 1). A report from the Office of Advocacy of the U.S. Small Business Administration finds that recent bank mergers have had mixed effects on lending to smaller businesses (Peek 1). On the contrary, an analysis of urban banking mergers found that business loans fell substantially when the merged bank became a junior partner in a new firm. When out-of-state firms bought banks owned by urban firms these loans fell even more drastically (Dymski 93).

XI. Effects on Consumers

When banks are going to merge they will announce that they are merging, listing all of the positive aspects of the newly consolidated company to the consumer. On September 7, 1999 Fleet and BankBoston received the Fed’s approval on their merger application. The news release of this merger read: “After both the merger of Fleet and BankBoston and the divestiture of operations in connection with that merger are complete, Fleet Boston Corporation will be a $170 billion diversified financial services company and the eight largest bank in the nation, with consumer and commercial platforms serving 20 million customers. The new company’s lines of business will include commercial and consumer banking, institutional and investment banking, cash management, trade services, export finance, mortgage banking, corporate finance, asset-based lending, commercial real estate lending, equipment leasing, government banking, investment management services, credit cards, discount brokerage services, student loan processing, and full service banking” (Fleet 1). Obviously, none of the negative factors of the merger were stated in the news release, which was put out by BankBoston. There are a number of things that usually result from a merger, that consumers should be aware of: Fees for cashing checks may be increased, new minimum account balances may be required to continue low-or-no-fee services, tellers may be replaced by may be replaced by machines, accounting errors may occur, automated teller machines may not work properly causing cash deposits to end up in the wrong account, and phone numbers for account services, balance inquiries and other bank-by-phone features will change (Rothman 1). The consumer program director for the U.S. Public Interest Research Group, Edmund Mierzwinski, stated that studies confirmed that bigger banks use “monopoly muscle” to charge customers higher fees. Without competition the merged banks can charge whatever fees they want (Moore 1). With all of the anti-trust laws that have been passed over the years an absence of competition still prevails in the banking sector.

XII. Effectiveness of Anti-Trust Laws

Due to the increasing numbers in merger activity, the effectiveness of the anti-trust laws is questioned. Many people believe that these laws have not been effective at all. In ten years, from 1982 to 1992, the Fed approved 205 of the 211 bank merger applications that had the effect of increasing banking market concentration (Dymski XV). Arthur Burns says, ” Although Federal anti-trust legislation has been on the books since 1890, there is very little doubt that we have failed to achieve a competitive system at all closely resembling that which was in the minds of the economists of the last century and which provided background for legislation” (Balassa 51). Edward H. Levi lists three reasons for the ineffectiveness of the anti-trust laws. First, he says that the courts are not truly aware of the monopoly problem. He says that courts should consider size, not just monopoly position, to be a violation of law. Second, The Department of Justice has not continuously maintained tight enforcement of the laws. He contend that lack of superior knowledge, due to a limited number of monopoly cases, leaves enormous gaps in the law. These gaps are permitted to remain, making it much easier to have an ineffective enforcement policy. Lastly, Edward believes that economics themselves are to blame for ineffectiveness. Monopolies are explained as inevitable, giving the general public the idea that if inevitable why bother to try preventing monopolies (Balassa 57).

XIII. Mergers Absorb Banks

Along with the high level of merger activity since 1980, there has been a large number of failures. Without a doubt, the number of banking institutions in the U.S. has shrunk dramatically in the past twenty years (Meyer 2). In 1980, there were over 12,000 banking organizations and 14,500 banks. In 1997, those number dropped significantly to 7,100 banking organizations and just over 9,000 banks. This was a forty percent decline in the number of banking organizations, and a decline of one-third in the number of banks (Meyer 2). Where did all of these banks go? The merging of banks, caused a disability for smaller banks to compete. Leaving them with two options; they could go out of business or allow another bank to acquire them. While there where about 1,400 commercial bank failures, 3,600 new banks were opened. 35,000 new bank branches were formed, making up for the 1,800 that were closed (Meyer 2). Even with the large drop in the number of banking organizations, the number of banking offices rose sharply from 53,000 in 1980 to over 71,000 in 1997. Furthermore, the number of customers served by each office has declined (Meyer 5). These recent trends in the banking industry have eliminated a large amount of competition leaving the merged banks with the advantage over the small banks.

XIV. Conclusion

Many events led to the start of the bank merger wave in 1980. Many anti-trust laws were passed to maintain market competition, thus avoiding monopolies. These “anti-monopoly later” later became irrelevant. Deregulation finally gave banks what they wanted all along, the ability to consolidate, stating the bank merger wave. This wave of mega-mergers have been making headlines, due to its rapid increasing pace. As there are many reasons why companies decide to merge, egos seem to always be a driving force. Even if there are other reasons behind the merger, power driven businessmen want more power and more money. Egotistical CEO’s, just like most people, associate being the owner of a large corporation with power and, of course, more money. Therefore, mergers give them exactly what they want. In contrast, bank mergers have been a really big cause of concern lately. This is mainly due to the fear of an uncompetitive market that could arise, causing many negative effects: layoffs for employees, decreased small business lending, and uncontrollable price increases for consumers. These mega-banks would drive out small, locally owned banks that are committed to their customers. The result would be impersonal and inferior service from big banks replacing the small friendly community bank, and increasing the chances of monopoly.


Balassa, Bela ed., Edmund Phelps ed., Problems of the Modern Economy. W. W. Norton & Company Inc., New York, 1966.

Brigham, Eugene F., Louis C. Gapenski, Financial Management-Theory and Practice. The Dyden Press, Orlando, 1997.

Dymski, Gary A. The Bank Merger Wave- The Economic Causes and Social Consequenses of `Financial Consolidation. M.E. Sharpe, New York, 1999.

Federal Reserve Board. “Testimony of Governor Laurence H. Meyers.” June 3, 1998. http://www.bog.frb.fed.us/boarddocs/testimony/19980603.htm

BankBoston News Releases. “Fleet and BankBoston Receive Fed Approval for Merger.” September 7, 1999, http://www.bankboston.com/today/about/new_detail_142.asp

Hogg, Alec. “The darder side of banking mergers.” April 16, 1998. http://www.woza.co.za/comps/alec66.htm

Malkiel, Burton G. A Random Walk Down Wall Street. W.W. Norton & Company, New York, 1996.

Moore, Jaimee. “Bank Mergers May Increase your Fees for Checking.” April 22, 1998.


Peek, Joseph. “Advocacy View Bank Merger’ Effect on Small Firm Lendin.” February 18, 1998.


Rotham, Stephen. “What to expect, what to ask when banks are merging.” May 8, 2000


Scott, David. Wall Street Words. Houghton Mifflin Company, Boston, 1998.

Viscusi, Gregory. “Because Merger Begins With Me.” Bloomberg- The magazine for Market Professionals; March 2000 Vol 9 No 3.

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