This document discusses mergers and acquisitions (M&As) in the banking industry. It analyzes the drivers of M&As, including geographic expansion, market consolidation, and restructuring. Successful M&As require realizing synergies between the banks. However, cultural differences and challenges integrating operations can undermine synergies and M&A performance if not properly managed. The document concludes that banks must focus on cultural due diligence during acquisitions and develop personalized integration strategies post-merger in order to improve efficiency and maximize the benefits of M&As.

1. CAN MERGERS AND ACQUISITIONS IMPROVE BANKING
INDUSTRY?
Liviu WARTER
―Alexandru Ioan Cuza‖ University
Faculty of Economics and Business Administration
Iaşi, Romania
liviu@warter.ro
Iulian WARTER
―Alexandru Ioan Cuza‖ University
Faculty of Economics and Business Administration
Iaşi, Romania
iulian@warter.ro
Abstract
The new global M&A landscape reveals the reconfiguration of the banking
sector through mergers and acquisitions (M&As). Structural changes in this industry,
under different economic and regulatory conditions, matters a great deal to the
shareholders, top managers, and employees of the banks involved. But it also matters
due to the fact that its performance affects all economic sectors and the fate of global
economies.
In the last two decades, banks have expanded their business to serve global
customers. It is vital to know how banks are now reevaluating their M&A strategies
based on the current global economic situation.
The banking M&As experiences and practices that have been well proven in
the traditional economic conditions are hitting their limitations in the global world.
This paper contributes to the management literature by analyzing the
underlying drivers of the M&As process, the economic concepts and strategic precepts
used to justify M&A deals, and the synergy potential of M&As.
Key words: mergers and acquisitions (M&As), synergy, M&A performance,
banking industry.
JEL Classification: G34, G21, Z19
1. INTRODUCTION
Calipha et al. (2010) conclude that generally named M&A motives
reflect external motives (such as growth or globalization) as well as more
internal orientations (such as changing business models or achieving synergies).
Banking M&A activity varies across different regions, driven by
differences in economic and political conditions and industry regulations. In the
last years, the banking industry witnessed an increased number of new and
stricter regulations such as the Durbin Amendment, Volcker Rule, Basel III, and
Dodd-Frank Act with impact on global operations.
As a result of these regulations, many banks are likely to focus on the
reconfiguration of their M&A plans and the restructuring activities needed for

2. their targets. As they plan their M&A strategies, bank boards and top executives
should consider all the factors that may impact M&A readiness, execution, and
post-merger integration.
Regardless of their size, banks contemplating M&A transactions will
need to use different tactics and acquire additional skills. While the new global
M&A landscape has not changed the nature of core banking M&As processes
(target identification, due diligence, valuation and post-merger integration), the
new conditions are forcing the deal makers taking into account a host of
additional factors during both the pre- and post-merger stages of the deal.
The assessment period leading to the announcement of a merger or
acquisition is typically conducted in relative secrecy by a limited number of
representatives from the involved organizations, and in relative brevity to avoid
the leak of information about the intended transaction (Rottig, 2013).
It is also vital to know for practitioners and stakeholders that M&A
activities are more closely scrutinized by both public and government regulatory
bodies in order to avert the risk of losing business and reputation.
Other important factors, in banking M&As, are: economies of scale,
economies of scope, market power, conflicts of interest and managerial
complexity and their impact on market share and stock price performance for
merged banks.
The economic drivers of mergers and acquisitions in the banking sector
need to be integrated into a consistent valuation framework.
For instance, Zait et al. (2014) define an integrated system of
determinants of FDI (especially on M&A) composed of seven categories of
determinants: Economic, Social, Cultural, Institutional, Technological,
Organizational and Commercial.
Scholars and practitioners remark that an important factor for the
successful outcome of a merger is also the methodology of briefing used by the
top managers of the banks during the merger phases.
Regardless of team makeup, it is important that all parties be briefed at
the start of the due diligence process on the following (Recardo & Toterhi,
2014):
 Overview of target—company history, size, structure, etc.;
 Deal drivers and expected synergies;
 Nature of transaction;
 Receptiveness of management; and
 Intended level of integration/integration strategy
The banking sector has probably had far more than its share of M&As
that have failed or performed far below expectations due to mistakes in
integration. The banks involved in M&As have to focus on key managerial
issues, including the level of integration required and the integration capabilities
on the part of the acquiring firm, disturbances in human resources and bank
leadership, cultural issues, and opportunity of decision making.

3. These problems can easily become systemic and can provoke crises that
are hard to control and whose impact can lead to failures.
2. THE MAIN DRIVERS FOR BANKING M&A
Global business expansion and development through mergers,
acquisitions and strategic alliances is big business. Even in the wake of the
financial crisis of 2008/2009, in a climate of banking difficulties and credit
restrictions, more and more ―share for share‖ deals are being proposed and
effected (Trompenaars & Asser, 2010).
In their study, Very et al. (2012) observe that accurate practical
predictions of M&A activity can be made at country level and that the
dependence/contagion framework appears appropriate for selecting the possible
determinants of M&A activity per country.
Weber et al. (2012) argue that because mergers occur relatively
infrequently and unpredictably, the ability of management to accumulate the
large amounts of observations needed to capitalize on simple mechanisms is
limited.
Firms have a broad range of rationales for engaging in cross-border
mergers and other forms of foreign direct investment (FDI); while some
companies are in search of the cost advantages provided by foreign resources,
other firms are primarily interested in gaining access to new markets
(Sonenshine & Reynolds, 2014).
In the last decade, mega-deals have reconfigured the banking landscape,
propelling some banks to the global top of banks in terms of market value.
UniCredit is a brilliant example driven by two landmark acquisitions
(HVB/Bank Austria and Capitalia)
On the one hand, local economic conditions could influence M&A
activity; on the other, the intense M&A activity in the U.S. could influence
M&A activity in foreign countries. This framework implies both dependence
and contagion with regard to national M&A activity: dependence on a country’s
institutional context, and contagion from U.S. M&A activity.
A closer glance at the essence of the deals in the banking sector reveals
three main drivers: geographic expansion into emerging markets, consolidation
in mature markets, and restructuring of the value chain.
Kim & Finkelstein (2008) show that when these banks merge, the
combined bank can utilize these resources more efficiently by channeling
capital from the lower capital cost market to the market with greater profit
opportunities.
In addition to cost and efficiency effects on competitive performance,
M&A transactions in the banking sector are also driven by revenue effects.
According to Larsson & Finkelstein (1999), the success of a merger or
acquisition is gauged by the degree of synergy realization rather than more
removed and potentially ambiguous criteria such as accounting or market
returns.

4. Other scholar supports the previous ideas showing that the belief in
potential synergy by merger adherents has not diminished very much over the
last twenty years despite a record of extravagant promises, mixed successes and
many outright disasters (Chatterjee, 2007).
A slightly similar approach (Hofstede et al., 2010) reveals that
multinationals with a dominant home culture have a clearer set of basic values
and therefore are easier to run than international organizations that lack such a
common frame of reference.
The specific business strategies that drive banking M&A can be
classified under four categories:
 New business acquisition (the business strategy for the acquiring bank
is to venture into a new line of business)
 Small bank acquisition (the main strategy for the acquiring bank in this
second category is volume expansion)
 Full bank acquisition (all the business operations of the target bank are
acquired, achieving both volume and business line expansion)
 M&A among equals (the acquired bank is similar in size to the
acquiring bank and the business strategy is for volume and business
expansion; both banks have similar reputations in the market)
Commercial banking activities have several characteristics that make
them a particular focus for M&A transactions. These include (1) high cost
distribution and transactions infrastructures such as branch networks and IT
platforms that lend themselves to rationalization; (2) overcapacity brought on by
traditions of protection and distortion of commercial banking competition, and
sometimes by the presence of public-sector or mutual thrift institutions and
commercial banks (such overcapacity presents an opportune target for
restructuring, in the process eliminating redundant capital and human
personnel); (3) slow-growing markets that rarely outpace the overall rate of
economic growth and usually lag it due to encroaching financial
disintermediation, exacerbating the overcapacity problem; and (4) mature
products that make innovation difficult in the production of financial services,
combined with sometimes dramatic innovation on the distribution side, notably
Internet-based commercial banking (Walter, 2004).
Konstantopoulos et al. (2009) remark that an important factor for the
successful outcome of a merger is also the methodology of briefing enacted by
the leaders of the banking branch during both the negotiation and merger
process.
According to Rosenbaum & Pearl (2009), when evaluating strategic
buyers, the banker looks first and foremost at strategic fit, including potential
synergies. Financial capacity or ―ability to pay‖—which is typically dependent
on size, balance sheet strength, access to financing, and risk appetite—is also
closely scrutinized. Other factors play a role in assessing potential strategic
bidders, such as cultural fit, M&A track record, existing management’s role

5. going forward, relative and pro forma market position (including antitrust
concerns),and effects on existing customer and supplier relationships.
Although most of the researchers point to cultural determinants of
M&A, there is not a general common opinion of the main M&A success factors
(Warter & Warter, 2014)
DePamphilis (2014) concludes that cultural differences can instill
creativity in the new company or create a contentious environment.
3. POSITIVE SYNERGY AND M&A SUCCESS
Generally, the justification of M&A operations is the intention to create
positive synergies (Li Destri et al., 2012).
DePamphilis (2012) emphasises also a different opinion: rapid
integration may result in more immediate realization of synergies, but it also
contributes to employee and customer attrition.
Some empirical studies report positive combined announcement period
returns to the acquirer and target in a merger, leading to the conclusion that
synergy is an important explanatory factor for merger activity.
According to Hitt et al. (2009), in particular, firms are better able to
achieve synergy when the institutions of the host country are more similar to the
institutions in the acquiring firm’s home country.
Post-acquisition synergies appear to be essentially rooted in the social
relations and interactions that emerge between organizational members (Mirc,
2012).
Although the synergy potential of M&A deals is widely promoted,
attempts to exploit such synergy in all stages of M&As are often unsuccessful.
Garzella & Fiorentino (2014) consider that synergies take longer to
achieve than expected. In addition, the time estimated for synergy to be realized
is not respected.
In a recent paper, Warter & Warter (2015) remark that turning a merger
or acquisition into a success may be difficult due to the challenges inherent in
virtually all stages of banks M&As. Dealing with differences in regulatory and
accounting systems and, cultural differences among banks operating in different
countries, requires high-level management skills and significant resources.
The conclusion reached by Fiordelisi (2009) is that the brand name
continuation is more apparent than the others, the preservation of culture,
leadership and decision making are crucial to achieve the M&A strategic aims:
for instance, a higher degree of autonomy would be appropriate if the target
bank has excellent skills (such as the workforce ability to minimize wastes
and/or customer-orientation) that are important to preserve.
In the case of cross-border bank M&A, how to weld the target into an
integrated business structure, how to deal with intercultural issues, and how to
bridge regulatory systems are among the key questions.
Warter & Warter (2014) consider that cultural diversity in organizations
can be both an asset and a liability. Whether the losses associated with cultural

6. diversity can be minimized and the gains be realized will depend likewise on
the managers’ ability to manage the negotiations and due diligence processes in
an effective manner.
Traditionally in a M&A, culture is the last thing that is being integrated
as it is a common belief that firstly it is important to create the synergies that
lead to a lowering of costs and then, over time, caring about culture and values
(Brogiato, 2012).
Whatever the strategic goals driving a merger or acquisition, a
successful M&A by no means ensures a successful integration. Because no two
mergers or acquisitions are alike, it is required to adapt the integration approach
and speed to individual cases.
Most management researchers and practitioners point out that,
particularly in the case of international M&A, cultural differences and
integration efforts during the post-acquisition integration period are critical to
performance (Gomes et al., 2013).
According to Proft (2014), the pace of integration depends on the type
of integration. The author replaced the question ―Is speed of integration
beneficial to M&A success‖ with ―Which type of speed of integration is
beneficial for M&A success?‖.
An interesting opinion (Marks & Mirvis, 2010) considers that the
optimal result is full cultural integration — the blending of both companies’
policies and practices.
With a few exceptions, the strategic and finance literature has not
considered the possibility that in the management of a merger, the problematic
interaction between the buying and the target firms (due to cultural differences)
or low coordination and cooperation between managers (as a result of the
culture clash following the merger) may play a key role in the M&A success
(Weber et al., 2011).
A high degree of personnel turnover of the acquired bank tends to
negatively impact the post-merger performance of the merged bank through the
departure of key people and the demoralization of the remaining employees.
The aggressive personnel replacement in the acquired bank is a frequent
pitfall in many banking M&As due to a strong pressure to slash costs. This can
lead to severe damage to employee morale, with negative repercussions on
personnel retention, and on possible synergies.
Galpin & Herndon (2014) posit that most companies do a decent job of
traditional financial due-diligence analysis but a dismal job of nontraditional
human capital and cultural due diligence.
In sum, the presence of synergy is as an important determinant of value
creation in a merger. The development of M&A integration capabilities seemed
to have a strong positive impact on merged bank performance, but not without
costs and efforts during the post-merger integration stage.
In their comprehensive analysis, Gleich et al. (2010) posit that although
we cannot predict with certainty the outcome of an M&A, done properly,

7. strategic fit, organizational and cultural due diligence could, and should, be an
effective insurance policy against failures that too often accompany M&As.
Success depends on decisions in different M&A phases. To successfully
manage M&As, managers need to be aware of these complex relationships -
there are no simple solutions to complex problems (Bauer & Matzler, 2014).
4. CONCLUSION
Banks are under more and more pressure to improve their operational
efficiency due to the changing regulatory landscape and challenging economic
conditions around the world. Banks are expected to be more cautious in their
M&A expansion strategy and to leverage the full benefits of a successful M&A.
The way to do this is to create the integration strategy, based on the cultural due
diligence, in the pre-acquisition stage of the M&A.
The acquiring bank needs to assess the potential of both banks, and can
adopt a personalized integration model. Also, the acquiring bank needs to assess
the complexity of the integration process in order to improve operational
efficiency and stakeholders’ satisfaction, helping the bank realize the full
potential of a strategic M&A.
In building a new bank culture, top management has to focus key
personnel on the future by adopting new values and beliefs, most of which tend
to be performance related.
M&A activity in the banking industry may be challenged by
turbulences such as an unpredicted extension of the long-drawn low interest rate
circumstance, heightened regulatory investigation of potential transactions and
prudent acquirers and sellers.
Prior studies uncovered that over 60% of mergers and acquisitions fail
and do not increase organizational and individual performance so the merged
banks have to change top management and employees with poor performance
records into new management and staff to improve outcomes of the new
organization.
Bank M&A that endorses customer or geographic specialization is
presumptive to continue. Many banks are taking an extended view of their
geographic and customer markets, in order to increase, by M&A, their activities
in countries, where they are already well situated or where they see future
opportunities. At the same time, numerous banks are exiting low-performing
markets to improve capital efficiency.
The banking sector is much less consolidated than other sectors in the
global environment. Still, the global financial crisis can be expected to increase
the rate at which subsequent consolidation takes place. Subsequent value chain
restructuring will also generate more deals.
The gainers of tomorrow are presumably to be anti-cyclical acquirers of
today, as the M&A wave in the 90’s proved. But whether the next M&A wave
will create real value and positive synergies relies on how well the merging

8. banks perform in the merger competition. Only those that excel in the key
challenges can expect to achieve the full benefits of a successful M&A.
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