Question

The recent collapse in the banking sector caused many banks to close and many others to merge with other banks, in some cases from very different parts of the country. How would these changes have affected the historical connections that many borrowers and lenders had? And how would those changes have affected the capital structure of most firms?

Answer 1

Due to Globalisation there is a drastic change in economy. in some countries development seen but there is no growth. if we talk about banking sector, it is the backbone of any economy. The growth of any economy depends upon their financial system. Lets take an example of Lehman.

During the mid-2000s, the housing boom was in full force, and Lehman, like many other firms, were becoming more and more heavily involved in issuing mortgage-backed securities, MBSs, and collateral debt obligations, or CBOs. However, Lehman took it to the next level between 2003 and 2004 by extending into loan origination - acquiring, among three other lenders, BNC Mortgage and Aurora Loan Services - both of which specialized in subprime loans. Between 2004 and 2006, the capital markets unit surged 56% due to Lehman's real estate businesses - causing the firm to become one of the fastest-growing investment banking and asset management businesses than any other. By 2007, Lehman was reporting big numbers - with $19.3 billion in revenues and a record $4.2 billion net income.

One of the primary causes for the firm's collapse was due to their overzealous lending during the housing bubble in 2003 to 2004. By acquiring five lending firms that focused primarily in subprime lending, Lehman was investing in a risky enterprise that, although earning a huge market capitalization in 2007 of around $60 billion, soon came crashing down due to a historic high of subprime loan defaults - and, despite the firm's assurances to the contrary, inevitably came back to bite them. The firm was over-leveraged, and the value of its mortgage portfolio was no longer compelling.

Merger and Acquisition Affected the Capital Structure:

Market reaction to news of an M&A transaction may be favorable or unfavorable, depending on the perception of market participants about the merits of the deal. In most cases, the target company’s shares will rise to a level close to that of the acquirer’s offer, assuming of course that the offer represents a significant premium to the target’s previous stock price. In fact, the target’s shares may trade above the offer price if the perception is either that the acquirer has low-balled the offer for the target and may be forced to raise it, or that the target company is coveted enough to attract a rival bid.

There are situations in which the target company may trade below the announced offer price. This generally occurs when part of the purchase consideration is to be made in the acquirer’s shares and the stock plummets when the deal is announced. For example, assume the purchase price of $25 per share of Targeted XYZ Co. consists of two shares of an acquirer valued at $10 each and $5 in cash. But if the acquirer’s shares are now only worth $8, Targeted XYZ Co. would most likely be trading at $21 rather than $25. There are any number of reasons why an acquirer’s shares may decline when it announces an M&A deal. Perhaps market participants think that the price tag for the purchase is too steep. Or the deal is perceived as not being accretive to EPS (earnings per share). Or perhaps investors believe that the acquirer is taking on too much debt to finance the acquisition.