The Economics of Financial M&A

ABSTRACT

Over the past 10 years there have been 7,600 cases of Mergers & Acquisitions (M&A) in the financial industry, with a total transaction amount of $1.7 trillion. This has contributed to continuing, massive structural changes in the industry. Economies of scale and economies of scope are conventionally raised as the main causes for the current trend in financial M&A. However, according to empirical research conducted to date, the relative contribution of economies of scale and economies of scope to the profits of banks is too small to explain the current trend in bank mergers. Particularly, the mega-mergers of the latter half of the 1990s cannot be explained by this hypothesis. This report will raise two alternate hypotheses as possible explanations for the trend in financial M&A: 1) Mergers are conducted in order to attract the attention of potential customers through expanding the size of the business ("Monopolization of Attention Hypothesis"), and 2) Managers pursue mergers voluntarily as a strategic method of survival ("Entrenchment Hypothesis"). This report will investigate the influence of these two hypotheses as causes of financial M&A, and in particular as possible reasons behind recent mega-mergers. Further, this report will also discuss the effects of financial M&A on competition in the financial industry and on medium and small business' borrowing activities, as well as problems stemming from prudence regulations, such as the "too-big-to-fail" doctrine.