Page 24 - Banking Finance October 2022

ARTICLE

market share and allow a firm to tap into new markets and disadvantages of bank mergers and acquisitions in India
within a very short period of time. Economists refer to the and analyze the expected challenges and important
phenomenon of the "2+2 = 5" effect brought about by considerations due to these mergers.
synergy.
Why Banks Go For M&A?
Need of the study M&A is driven by a set of motives and no single reason might

Since the early nineteen nineties the structure of the banking provide full explanation. The causes for mergers and
sector has considerably modified due to the liberalization, acquisitions may be segregated into people who enhance
in the course of divestment of public sector banks, entry of shareholder value and others. Shareholder value may be
foreign banks and merger of many banks in India and within increased through enlargement of operations resulting to
the world. In the post reform period about twenty five bank increased market share and cost savings through large scale
mergers took place in India. These mergers have vital economies or by cross selling of products and scope or synergy.
implication on the performance and efficiency in the banking
sector. So, from the view point of both managerial and policy Motives for M &A
interests, it is very vital to understand the impact of these
Large Scale Economies- Economies of scale - means benefit
merges on the potential levels of banks and their temporal
of the large production. If two persons do their business
behavior thus, to understand how the banking system has
separately then they have to bear the cost individually. But,
been reacting to the emerging challenges and which banks
if they combine then there is a chance that the cost may
are performing better than others in this age of transition.
come down because of large production. For example - two
different tutorials organised by two different coachers then
With the globalization of the world economy, firms are
cost is rent 10,000 each, furniture 5,00 each notes 5,000
growing by merger and acquisition in a bid to expand
each so total 40,000 . If combined then rent 10,000 furniture
operations and stay competitive. The complexness of such
5000 and notes 10,000 then total cost is 25000 .this is
transactions typically makes it troublesome to assess all risk
because cost reduced when there is a combination.
exposures and liabilities, and needs the talents of experts.
Elimination of severe and extravagant expenditure -
Banks are facing an increasingly competitive business
The combined operations result in cost savings, in any
environment, which is driving them to perpetual to improve
of the areas like. Manufacturing, marketing, operations,
services and increase potentiality of the banks
manpower, corporate overheads etc., would be the
case of cost reduction synergy bulk discounts from your
The main objective of this paper is to review the advantages
suppliers as you buy in bulk quantity& which leads to
cost reduction. The second thing is depending upon the
business we can also reduce the fixed overhead cost,
for example the head office functions, the support
functions or human resources, this leads to more
efficiency in cost reduction .SO, there are range of
possible reasons why the merger & Acquisition is
beneficial through these synergies. The other reason is
M&A is easier than Starting a company.
Desire to enjoy monopoly power - M&A is planned
and executed to achieve market share and market
power at times including pricing power. M&A is
primarily used as a growth strategy.

In practice, Monopoly works in three ways:
1) Market leaders trying to consolidate their position
further

24 | 2022 | OCTOBER | BANKING FINANCE