The Effect of M&A on Banks’ Relationship with Firms after M&A – Literature Review and Conceptual Framework

Introduction

The part looks at the theoretical framework and empirical scholarships that have been carried out, focusing on the consequence of bank M&A on relationships with organizations after M&A. The study will first look at the theoretical literature, the M&A’s and bank performance, and the empirical literature on the field.

Theoretical Review

The concepts acknowledged for the study concern financial performance and mergers. In the efficiency theory, mergers are inevitable because synergies are critical between firms, i.e., the acquirer and the targets. Later, the synergies enhance the participant’s value (Hitt et al., 2001). It argues that M&A will only mature when they are projected to yield feasible synergies to guarantee benefits to parties involved after the arrangement; the symmetric prospect of value instigates the proposal and acceptance of an open merger (Kiarie, 2012). 

The gain in value should be favorable to both parties, or the target firm would be reluctant to submit to the acquisition, or the bidder forfeits the agreement. Nonetheless, this theory has had critics, especially in efficiency gains. For instance, Chatterjee (1986) suggests that there should be a clear distinction between operative synergies attained via economies of scale and range and apportion collusive synergies after improved market influence and an enriched capacity to excerpt customer surplus when mentioning value creation in mergers. Operative synergies yield the most considerable value (Houston et al., 2001).

           The Managerial Hubris Hypothesis suggests that administrators and executives may attempt to capitalize on the firm’s value, which may result in overestimating what they acquire due to hubris (Roll, 1986). Additionally, managers could misjudge the impact or price of post-merger incorporation or miscalculate the capacity to run a more prominent organization. That becomes more apparent in waves of merging when executives carelessly look at the markers and shift views on accumulation as opposed to calculated emphasis or when there is multiple bidding competition for a particular target. 

Therefore, a deal projected to profit the acquirer could be an inadequate strategic verdict where gains are overvalued and budgets are undervalued. The consequence is that the acquirer’s stakeholders gain nothing from the arrangement as the market responds to the error by the company’s executive Thaler (2000). On the other hand, the Monopoly Theory suggests that mergers are predicated on the pursuit of a monopoly through enhanced market influence – a depiction and description of horizontal and corporation unifications. Market control can be attained through premeditated supply decline, cross-subsidizing products, and dissuading possible market competitors (Rodermann, 2004). The gains are collusive synergies and entrant interrelations (Chatterjee, 1986; Porter, 1985). 

M&A’s and Bank Performance

Over the last ten years, the increasing number of studies relating to bank M&A has catalyzed the upsurge of empirical research accessible on the topic (Pham et al., 2015). Two diverse noticeable empirical approaches are employed to evaluate the accomplishment or failures of M&A agreements among banks: event studies and performance studies (Beitel & Schiereck, 2001). The earlier directly evaluates the effects M&A has on stakeholder capital (Kolaric & Schiereck, 2014). On the other hand, the latter compares pre and most merger or acquisition performances of financial institutions (Akpan et al., 2018). Financial institutions have been merging since 1989 by forestalling in holding the worldwide monetary structures and credible to experience further shakeup against impacts of current financial market crunches. 

Many studies have been carried out in various developed economies, assessing the possible benefits of mergers and acquisitions (Shi et al., 2017). However, the necessity to attain such gains from M&A has attracted significant attention from numerous researchers globally (Hassen et al., 2018; Pasiouras & Gaganis, 2007). The core objectives of mergers and acquisitions are the need to penetrate markets and vertically expand for better control of supply and distribution sources (Eccles et al. 1999). Fixler and Zieschang (1993) postulate that proficiency improvement approaches may be successive with budget regulations, administration expertise, and aptitude. The expertise needed for attaining efficacy can be attained through mergers and acquisitions. 

Congruently, after M&A, institutions experience enhanced profitability, and due to the increased capacity and richer resources, the firms gain increased success Resti (1998). Empirical discoveries on mergers and acquisition effects and bank performance uncover varying findings. For example, Sufi’s research emphasized that small organizations are inclined to gain successful yields from mergers compared to more prominent organizations, as they later present more considerable managerial hurdles (Sufi, 2004). Further, M&A affects the relationship of the acquired or merged firm as the newly crafted organization has a superior market influence on top of the entire skill set and expertise that can effortlessly control the majority of the administration hurdles predicated on the aim and effort of stakeholders (Weingberg, 2007).

Regarding banks’ relationships with other firms, more so products and services, the provision and accessibility of a broad array of economic commodities may be affected. Moreover, such are the standards used by consumers to make a decision when picking banks (Focarelli & Panetta, 2003). Additionally, consumers look at products and services offered by financial institutions to assess quality. The merger and acquisition stage may yield an upsurge in the scope or enrichment of the portfolio (Kato, 2012). Additionally, when two financial institutions with varying portfolios merge, the unified organization could provide a more inclusive range that enhances the status and streamline relationships with other firms, including clients Kim & Finkelstein, 2009).

Akpan et al. (2018) found a substantial increment in investment financial institutions after M&A in Nigeria. Equally, the commercial success of the institutions increased due to the positive influence of mergers (Abdou et al., 2016). A similar effect was uncovered in a study assessing the impacts of M&A in 60 financial institutions in seventeen European states between 2005 and 2012 (Hassen et al. 2018). Hassen et al. connect the positive influence to M&A, indicating that such arrangements serve their purpose in the end. Liquidity, productivity, wealth, and investment are assessment ratios that indicate the performance of firms after M&A. Nevertheless, other studies indicate that nearly half of mergers and acquisitions result in undesirable gains (Badreldin & Kalhoefer, 2009). For instance, M&A cannot always be linked with profit efficiency as there is no substantial proof. 

References

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Akpan, M. N. U., Aik, N. C., Wanke, P. F., & Chau, W. H. (2018). Exploring the long-term trade-off between efficiency and value creation in horizontal M&As: Evidence from Nigeria. African Journal of Economic and Management Studies, 9(2), 130-147. https://doi.org/10.1108/AJEMS-06-2017-0139

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