1. What's Driving Banks To Merge? By Viktor Matevosyan

2. Introduction Large number of mergers between large banking institutions. Large number of mergers between large banking institutions. Mergers reflect market pressures to reduce costs and increase efficiency. Mergers reflect market pressures to reduce costs and increase efficiency. Little evidence of a decrease in operating expenses arising from the mergers Little evidence of a decrease in operating expenses arising from the mergers

3. Introduction From 14,483 banks at the end of 1984, the number of U.S. commercial banks had fallen to just 8563 by the end of 1999. From 14,483 banks at the end of 1984, the number of U.S. commercial banks had fallen to just 8563 by the end of 1999. The US banking industry has undergone dramatic changes since the early 1980s. The US banking industry has undergone dramatic changes since the early 1980s.

4. Benefits The benefits of merging to form new, larger banks include: The benefits of merging to form new, larger banks include: 1. Competing more effectively in global markets 2. Offering expanded services to a broader geographic customer base 2. Offering expanded services to a broader geographic customer base 3. Increasing profits from economies of scale and synergies. 3. Increasing profits from economies of scale and synergies.

5. Benefits Mergers can improve shareholder value in three ways: Mergers can improve shareholder value in three ways: -Operating benefits such as economies of scale, asset restructuring, and technical and managerial skill transfer; -Financial benefits such as risk reduction, increased debt capacity and lower interest rates; -Tax savings.

6. Disadvantages Two-thirds of bank mergers generate disappointing shareholder returns compared with alternative investment opportunities. Two-thirds of bank mergers generate disappointing shareholder returns compared with alternative investment opportunities. The potential benefits of bank mergers are often not achieved for unexplained reasons. The potential benefits of bank mergers are often not achieved for unexplained reasons. The cost efficiencies of banking mega-mergers do not result in cost efficiency gains on average (Berger and Humphrey (1992)) and the small insignificant gains identified were offset by reductions in scale efficiency. The cost efficiencies of banking mega-mergers do not result in cost efficiency gains on average (Berger and Humphrey (1992)) and the small insignificant gains identified were offset by reductions in scale efficiency.

7. Disadvantages Chemical Banking Corp. and The Chase Manhattan Bank NA achieved economies of scale in their 1996 merger that resulted in layoffs and branch closings. Chemical Banking Corp. and The Chase Manhattan Bank NA achieved economies of scale in their 1996 merger that resulted in layoffs and branch closings. Widespread confusion resulting in the alienation of many customers. Widespread confusion resulting in the alienation of many customers. Lost of customer deposits Lost of customer deposits The branches and telephone support centers understaffed due to the layoffs. The branches and telephone support centers understaffed due to the layoffs.

8. Disadvantages Merging corporate cultures and organizations Merging corporate cultures and organizations –Poor reconciliation of different bank cultures may cause mergers to underperform Lower communication costs are strengthening the role of competitive forces

9. Impact of bank mergers through the branch network Are there substantial potential benefits of moving all acquired branches to the bank-wide best practice levels, suggesting that integration synergies can improve profits and shareholder returns? Are there substantial potential benefits of moving all acquired branches to the bank-wide best practice levels, suggesting that integration synergies can improve profits and shareholder returns? What hinders or facilitates management achieving increased profits by integrating acquired branches and how does this result relate to the many studies that find mergers generate disappointing shareholder returns? What hinders or facilitates management achieving increased profits by integrating acquired branches and how does this result relate to the many studies that find mergers generate disappointing shareholder returns?

10. Drivers for merging Banks are merging just to get bigger. –bigger is perceived as greater concentration of power –bringing new sources of competition to local banking markets. –deregulation –advancements in technology –improvements in communication technology –dissemination of information throughout a geographically widespread organization

11. Biggest Merger Deals Deal value Deal value Merging institutions (billions of dollars) Announcement date Merging institutions (billions of dollars) Announcement date Travelers–Citicorp 73 April 6, 1998 Travelers–Citicorp 73 April 6, 1998 Bell Atlantic–GTE 68 July 28, 1998 Bell Atlantic–GTE 68 July 28, 1998 SBC Communications–Ameritech 60 May 11, 1998 SBC Communications–Ameritech 60 May 11, 1998 NationsBank–BankAmerica 59 April 13, 1998 NationsBank–BankAmerica 59 April 13, 1998 AT&T–TCI 48 June 24, 1998 AT&T–TCI 48 June 24, 1998 WorldCom–MCI Communications 37 November 10, 1997 WorldCom–MCI Communications 37 November 10, 1997 Daimler-Benz–Chrysler 36 May 7, 1998 Daimler-Benz–Chrysler 36 May 7, 1998 American Home Products–Monsanto 35 June 1, 1998 American Home Products–Monsanto 35 June 1, 1998 Wells Fargo–Norwest 34 June 8, 1998 Wells Fargo–Norwest 34 June 8, 1998 Banc One–First Chicago NBD 26 April 13, 1998 Banc One–First Chicago NBD 26 April 13, 1998

12. Types of Mergers Mergers of unequals (the acquisition of one firm by another firm that is typically much larger and stronger) Mergers of unequals (the acquisition of one firm by another firm that is typically much larger and stronger) Mergers of equals (the so-called mega- mergers of two large firms). Mergers of equals (the so-called mega- mergers of two large firms).

13. Effect on competition In an effort to quantify whether a merger would substantially reduce competition, the Department of Justice uses the Herfindahl– Hirschman Index (HHI). HHI is calculated by summing the squares of the individual market shares of all the participants. For example, a defined market consisting of four firms with market shares of 15 percent, 20 percent, 25 percent and 40 percent has an HHI of 2,850 (225 + 400 + 625 + 1,600). The HHI ranges from 10,000 (in the case of a pure monopoly) to a number approaching zero (in the case of an atomistic market). Conceptually, the HHI measures the concentration of the marketthat is, the degree to which a large share of the market is concentrated among a small number of competitors. In an effort to quantify whether a merger would substantially reduce competition, the Department of Justice uses the Herfindahl– Hirschman Index (HHI). HHI is calculated by summing the squares of the individual market shares of all the participants. For example, a defined market consisting of four firms with market shares of 15 percent, 20 percent, 25 percent and 40 percent has an HHI of 2,850 (225 + 400 + 625 + 1,600). The HHI ranges from 10,000 (in the case of a pure monopoly) to a number approaching zero (in the case of an atomistic market). Conceptually, the HHI measures the concentration of the marketthat is, the degree to which a large share of the market is concentrated among a small number of competitors.

14. Conclusion Mergers would be worrisome if they were threatening competition in the industry. While mergers are reducing the number of banks nationwide, their impact on concentration in the typical local market is small. Mergers would be worrisome if they were threatening competition in the industry. While mergers are reducing the number of banks nationwide, their impact on concentration in the typical local market is small.

15. QUESTIONS?