Reasons m&a

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- 1 JAN. 2010


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PASCAL GRANDIN* Professor Université Lille Nord de France, LSMRC

DHAFER SAIDANE** Professor Université Lille Nord de France, LSMRC, EQUIPPE

growing share of globalmerger and acquisition (M&A) activities now relates to thefinancialservices industry. Whether mergers involving total integration or only acquisitions of parts of target companies, banking M&A transactions are at the centre of attention throughout the world. The changes to the banking business model we are witnessing today will boost the M&A process in the banking industry. In the course oftheiggos, mergers and acquisitions in the globalfinancialsector (banks, insurance companies, investment companies) have increased substantially. Their number has multiplied by 5 and the total volume of such transactions has risen ii-fold\ During this period, the value of banking M&A represented 70% ofthe total value of transactions in the financial sector and 20% of global concentration moves across allsectors. In contrast, the early 2000s, with the bursting ofthe Internet bubble, mark a lull - indeed, a fall - in M&A within the European Union (EU) including the banking sector. At the end of 2007, the total volume of global M&A activities in the financial sector was close to 730 billion dollars, increasing only by 29.1% compared with 2006, when growth was 48.6% over 2005. ^ The financial sectorwas the most active in terms of M&A volume. It represented r6% of global M&A activity, totalling more than 4500 billion dollars.

Source: "Report on Consolidation in the Financial Sector". Group of Ten - Bank far intérnûtionûl Settlements {2001, p. 34). Tliese are transactions amounting'to sums in " excess o f one billion dollars and involving as targets financial institutions in one ofthefollowing 13 countries: Australia, Belgium, Canada, France, Germany, Italy, Japan, theNetherlands,Spain,Sweden, Switzerland,the United Kingdom and the USA. * p.grandin(â) **d.saidane(â) Thomson ONE Banker, "Mergers & Acquisitions Review - Fourth Quarter 2007», Globtjl M&A Financial Aduisory.

The only exception was an increase in cross-border transactions between EU creditinstitutions and third countries, particularly in the course ofthe last two years. The value of M&A rose in 2007, essentially because of major deals concluded in some Member States. These included, for example, the acquisition of ABN-Amro by the consortium made up of Royal Bank of Scotiand, Santander and Fortis. This trend has been dominated since 2004 by a number of relatively weak, large-scaletransactions. The recent turmoil in global finance (the sub-prime crisis, the banking panic induced by Northern Rock, the Société Générale affair... Madoff and the collapse ofthe investment bank model... the universal bank model in the United States, and many more) nevertheless draws attention to the urgency of and need to consolidate the banks and reinforce their soundness and governance practices.Consohdations through M&A.are the order ofthe day, often initiated by government authorities. Are they, justified by increased profitability and efficiency ofthe newly created entities? In their haste. Is it possible that managers been induced in the past few years to undertake M&A deals which are expensive, but nonetheless give them increased power? In normal times, in other words, crisis-free times,might the hypothesis of overconfidence or "hubris hypothesis" (Roll, 1986) relate to a characteristic more prevalent in banking M&A activities than those of other industrial sectors? This argument may barely cross the minds of analysts; it is essential to realise that a bank is not an enterprise like any other. It follows that banks' governance practices are different. The magnitude of the...