Question

Mergers and Acquisition in Banking

1. What is a merger?

2. What are the regulatory rules for bank mergers in the U.S?

3. What is the Herfindahl-Hirschman Index (HHI)?

4. What is merger trends and motives behind mergers?

Answer 1

Answer

1.

The term merger is defined as the agreement between two companies to form a whole new company to enhance the productivity of the new company. Merger and acquisition help an organization to increase the shares of the business along with that it further helps to enhance the value of the shareholders. There is certain reason behind going for merger or acquisition which is of two types which are the horizontal and vertical mergers. Sometimes merger takes place to save the business of a company from hostile takeover. Apart from that merger also takes place for the financial benefits of both the company based on future perspective.

2.

There are various regulatory rules for bank merger in the US which are as follows:

• Based on the bank merger act it is required to not approve certain proposals which results in the monopoly in the business related to the same market.
• One of the other crucial norms is that certain level of competition in the market must be subsidized to lessen the competitions where the community will be equally served.
• The financial management system of the banks must be effective along with that the potential resources must be preserved for future usage.
• The depository must be taken into account based on the rules a regulation laid under the act of community reinvestment.

3.

Herfindahl-Hirschman Index is commonly known as HHI index which is requires for calibrating the market depth and certain competition which takes place pre- and post-merger and acquisition. When the concentration of the market is higher than the usual then there arises the chances business monopoly. On the other hand, when the business competition in the market is low then it suggests pretty low market concentration which reaches perfectly competitive stage.

4.

The concepts of merger and acquisition is quite a hot topic in recent world which is used for restructuring the business organization. There consists of three motives of the merger and acquisition which are the Agency, Synergy and Hubris motive. The common prospects of these three motives provides a detailed overview of the positive outcome accumulated by the shareholders in terms of the merger and acquisition. Positive outcomes result in enhancing the value of the shareholders along with that it increases the performance of the business.