Stocks to Consider when Banks Merge

Introduction

A merger between two banks means they together form one single financial entity. The logistics behind merging more than two banks can be quite complex and a rare occurrence. Bank mergers usually occur in two ways: one bank completely buys out another bank, or with mutual understanding, both banks form one unified entity by pooling their resources.

The merger of banks has a profound impact on their shareholders. Before examining what the shareholders gain or lose in a bank merger, let us understand the advantages of it towards both entities:

Consolidation of debt: While one of the primary operating functions of a bank remains to lend to the public, it incurs debt on its name as well. Through a merger, the debt of the two banks gets combined, reducing their interest obligations compared to what they would pay as individual entities.

• Higher reach: One of the reasons for banks mergers is to enhance its reach and expand geographically. By mergers, the two banks will have a wider reach through their branches, operating under the same umbrella.

• Economies of scale: This is the direct implication of a merger that results in business advantages through cost efficiency. As a single bank, post-merger, varying programs and initiatives gets undertaken in a more cost-efficient manner.

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Impact on Stocks

Situation 1: Often, people confuse mergers with acquisitions. You must understand the difference. Acquisition leads to one bank outrightly buying or acquiring the other bank. In this situation, if you were holding the shares of the smaller bank in the stock exchange, your existing shares gets cancelled, and you receive new shares on a pro-rata basis of the new bank.

There is a premium involved in these situations, wherein the acquiring bank offers a little something over and above the new shares in the entity to gain the loyalty of existing shareholders. Usually, suppose you hear news about a bank being acquired by the other, and you do not wish to hold shares post the acquisition. In that case, you must be proactive in disposing of your current Stock Market position in a timely fashion.

Situation 2: In an equal merger, when two banks of the same stature join hands, premium shares are absent. This is because it is believed that through the combined synergies of the two big banks, the share prices only go up in the stock exchange, and the shareholders get adequately compensated.

The combined economic power of the two banks gets further amplified with the merger resulting in higher demand for their stocks, leading to a market rallying in the Share Market. Hence, if you hold stocks of a big bank and hear about a potential merger with another one soon, hold on to your existing shares to reap the benefits from this development.

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Conclusion

A bank merger is a highly complex and intricate process undertaken to aim for the participating banks to grow significantly. However, sometimes even the best plans do not work out, and despite two big banks merging, the result could be dismal. Hence, if you hold shares in either participating bank, you must stay abreast of the developments through this process to know if it is beneficial to hold on to your existing shares or take a selling position in the stock exchange.