May 042014
 

Let’s discuss the future growth value of global banking reorganization and industry consolidation.

If we ask any group of bankers across Asia, Australia, Africa, Europe, South America, Mexico, Canada or the United States about the future of global banking, we would find a majority of banking executives either anticipate being acquired or plan to acquire another bank. Such rapid global banking industry consolidation will result in significant reductions by half in the coming decades of the available currencies exchanged across international markets.

Banks and financial intermediaries are massively consolidating through merger strategies inorganically to manage global enterprise risks. Such risks bring about inter-connectivity, systematic, market, operational, regulatory, credit (and collateral), innovation, legal, and liquidity concerns of banking board directors. Similar concerns are held by the merged bank’s shareholder activists, as well as the merged enterprise’s stakeholder interests (which are customers, employees, and community advocates).

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Acquiring Bank Generally Overpays a Premium Price to a Target Bank

Going forward we can expect to observe continued leveraged buyout targets among global banks. This will originate either through forced mergers at fire sale prices, or through strategic mergers sufficiently addressing ‘control’ and ‘synergistic’ valuations between acquiring banks with target banks.

Empirical evidence widely documented inside corporate mergers and acquisitions literature suggests the acquirer banks generally overpay a healthy 40-70% premium price for the target banks, unfortunately. Among domestic U.S. banks, Citibank leads the pack by far in foreign banking growth, either inorganically through acquisitions or organically through foreign presence (followed by JPMorgan Chase and Bank of America).

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Why? Consider a consolidation between a ‘small bank target’ (having a market capitalization represented for example at say ‘2’ units of enterprise value) and a ‘big bank acquirer’ (having a market capitalization represented for instance at say ‘3’ units of enterprise value). The future growth, as seen in ‘control value’ and ‘synergistic value’ of the resulting global bank mergers, are generally ‘slightly off-course’ in their ‘2+3=4’ math, which is unfortunately ‘destroying value’ for shareholders, instead of ‘being on-course’ in their ‘2+3=6’ math, which is fortunately ‘capturing value’ for shareholders.

Other global banks will be left on the sidelines to squeak out severe crunches in liquidity and capital reserves on ever-shrinking profit margins.

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Source: The Boston Consulting Group, Largest Market Capitalized Global Banks (2013)

 

Inorganic Growth By Way of Bank Mergers Persists

In spite of everything, more global banks will be expanding their market shares and profits inside emerging economies, as they proceed forward in their deliberate strategic intent of inorganic growth planning through mergers and acquisitions.

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Such mergers in global banking will continue to expand dramatically in numbers, mainly because of four reasons:

(1) Regulatory barriers have substantially disappeared, particularly after the U.S. Financial Services Modernization Act of 1999 [e.g., The Erosion of Glass-Steagall (1932), see also the Banking Act of 1933], now being replicated by international banking regulators worldwide. This partially allows banks to integrate and consolidate their businesses with other financial services, such as insurance, brokerage, investment, and commercial enterprises;

(2) Inorganic growth through strategic mergers is believed to hold down costs, and expand banking products and services. But only if synergy costs of the mergers can be held in check in the short run. While, synergistic valuations captured by the mergers are realized in the somewhat immediate longer term;

(3) Bank sell-offs are an alternative to “just hanging on and slugging it out” on narrow profit margins and tight margin calls in an increasingly uncertain global financial marketplace. Global banking industrialists and corporate boards, nowadays, are expanding into more mathematically complex alternative investments and financial instruments, including structured-finance risks, derivatives, and exotic options (on just about ‘anything’ and ‘everything’); and

(4) New entrants in global banking from emerging economy markets believe banks are extremely profitable investments. And more significantly, many foreign entities believe such global banking investments are necessary to their own enterprises, as a going concern, having expanded global interests.

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Banking Decision-Making – Economic Policy Architecture of International Finance in the 21st Century

Profitable acquisitions by foreign banks purchasing U.S. banks are following similar ‘rules of the road‘ inside a post-1999 [U.S. Financial Services Modernization Act] global banking industry.

This is the new global economic policy architecture on global banking decision-making going forward in the age of demography shift alongside heightened engagement and activism of bank shareholders and stakeholders.

Such global banking decision-making requires not only a holistic outlook, but also flexibility and adaptability, alongside governance consensus-building and transparency of good and useful information for global banks and their shareholders and stakeholders. Most of all, a climate of technological innovation is necessary, first and foremost, to ensure supply-side macro-economic soundness of global banks, as well as for them, to assess demand-side micro-economic soundness of borrowers by businesses and consumers.

The emerging global rules governing bank holding enterprises will apply. Foreign banks of emerging economy markets will be especially prepared to exhibit that they will be able to exercise effective, responsible, and accountable ownership and corporate governance.

Roadblocks Facing Global Banking Industry Consolidation

Various concerns will continue to be quite relevant in the future of more global banking industry consolidation. For instance, tax complications will be more relevant. Such tax complexities include unitary approaches to income determination of U.S. operations of foreign banks with a large share of the bank’s income earned across the globe. Oftentimes, foreign tax laws limit uses of holding enterprises for U.S. banking operations through unfavorable shareholder dividend treatments.

Another concern is foreign investors in U.S. banks are receiving closer scrutiny and ongoing supervision by U.S. regulators. Going forward, foreign parent banks are required to demonstrate to the U.S. central banking authorities that the foreign banks possess the liquidity and capital reserves to merge and acquire a U.S. bank and maintain appropriate levels of capital reserves as a going concern.

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Foreign banks these days entering inside the U.S. banking market must establish a domestic state as its ‘home state,’ typically Delaware. Delaware has favorable laws of reciprocity with other domestic U.S. states. Such reciprocity laws govern how banks do their businesses in interest banking, and how taxes are treated on earned income among local strategic business units alongside those units operating worldwide.

Most U.S. financial institutions require extensively greater capital than they are able to create inorganically or internally. Two primary sources are available: (1) from the parent enterprise, which can continually infuse capital, as the home country laws allow, or (2) from the U.S. capital markets, as a stock issue by the parent majority shareholder, sold to a minority shareholder or interest. Foreign bank holding enterprises must be mindful of their U.S. stock issuance, making sound and favorable economic consequences that pass U.S. purchasers’ executive judgment and due-diligence. Most always, this involves retaining the services of U.S. investment advisers and brokerage firms, as well as, legal experts skilled in securities and tax laws, at the early stages of a stock issuance, a capital infusion, or a merger and acquisition.

Culture Plays a Role

Above all else, culture plays a huge role in the age of demography shift and heightened stakeholder engagement and stakeholder activism. This is especially so for foreign banks entering the U.S. banking marketplace. As always, experience is the best teacher in addressing cultural differences inside the global banking industry. Here, it is so much more than accounting. As there are no set best practices in global banking mergers. Every journey starts out and ends differently. Generally speaking, the transactions are restructured several times to meet integrated goals of buyers, sellers, regulators, shareholders, stakeholders, and investment communities.

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Handling cultural differences inside a future of global banking industry consolidations calls for innovation to chart the proper course, as well as, innovators to ‘respect the history’ and to ‘show the way’. Such inventive people have the core competencies of negotiation and mediation practices. Such practices involve not only keeping a watchful eye on the oftentimes competing integrated goals of the banking economic decision-makers seeking joint-value. But also, such practices involve ‘finding the forum that fits the fuss’, heaven-forbid, if such a fuss arises before the dust settles at the global banking consolidation rodeo.

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