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I have decided to undertake research about the merger between Halifax and The Bank of Scotland because I had read an article in the Times Newspaper, which was quite interesting and made me want to find out more about the merger. I have also been interested in buying shares for a while now especially in the Banking sector and researching about HBOS will give me some idea of how shares fluctuate in such an industry and whether it would profitable for me to buy shares in the organisation.

The UK banking industry has changed dramatically in the past several years. Other financial institutions, such as credit unions, insurance companies, and investment firms, have taken on services that were formerly available only at commercial banks. The banking industry has also embarked on a trend toward consolidation that is expected to continue into the future. Many well-publicised mergers have transformed regional banks into national banking powerhouses. The impact of these bank mergers on shareholders, on the communities involved, and on customers, is significant, and therefore it is important to study their effects.

Mergers are considered to be initiated by financial or value maximising motives when the main objective is to increase shareholder wealth and

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financial synergy through economies of scale, transfer of knowledge and increased control. Some senior executives are motivated to instigate a merger out of fear of obsolescence (Cartwright & Cooper, 1992: 19). In their view managers who survive are people recognised as always looking for new opportunities. Consequently they use merger as a means by which they can enhance or renew their credibility and restore self-confidence and that of the board or can be motivated by an egotistical need to exercise power and flex their muscles by engaging in some empire-building.

There are many reasons why a company fails after the merger; poor selection decisions, in that an over-inflated purchase price was paid; ‘the potential economies of scale and projected earnings ratios were not realised’ (Moon, 1976: 74) because of financial mismanagement or incompetence or there were sudden and unpredicted changes in market conditions. Mergers can lead to job losses and redeployment, as a result of rationalisation and role duplication. In order to accelerate the process of culture change, organisations frequently elect to replace people.

Developing programmes to manage anxiety is a complex process because ’emotions and anxiety’ (Marks, 1988: 20) can be intense and can fluctuate rapidly. Organisations need to deal with the separation anxiety on mergers. There have been successful outplacement programs for coping with mergers. There are many incentives for banks to merge their activities. There is an allure of increased profitability and greater market share. Merged banks may be in a stronger position to deal with competition from other banks and financial service companies. Mergers may also result in reduced operating costs (Standard and Poor’s, 1997).

Aside from actual or perceived price increases to consumers, it is clear that merger activity has an impact on customer retention. Insufficient emphasis on bank customers and their perceptions may cause them to switch away from the newly merged bank (Morall, 1996). On the other hand, small community banks may actually benefit from the changing competitive landscape. Consumers who perceive merged banks to be too large, too bureaucratic, or too impersonal may find a greater customer orientation at a smaller bank (Katz, 1992).

However Bank mergers can benefit customers through larger loan limits, more branches, more cash point machines and greater opportunities for electronic banking. However, mergers may also result in higher prices for bank services. The announcement in May 2001 of the merger between Bank of Scotland and Halifax was greeted with remarkable enthusiasm after a shareholder vote to become HBOS,” (Parsley, D. 2001: 9) it was believed that the strategy of becoming consumer champion would hit returns. The aim of the merger is for HBOS to be a major competitor to the big four banks, and win a substantial market share in small business banking within the next three years by undercutting the high street banks.

The real problems in a merger come from ensuring that people work together and that the corporate cultures fit. The Bank of Scotland and Halifax have worked closely together over many years, for example Bank of Scotland processed Halifax’s initial credit card portfolio and it also seconded a team of people to help in the aftermath of the property crisis at the start of the Nineties. So there were people in both organisations that had known each other over a long period.

The banks hope that the merger will realise 40 million of extra revenue from offering Bank of Scotland’s business banking services through Halifax branches. The combination of the two corporate and treasury divisions is expected to boost revenues by �115 million, with a further �195million of cost savings from putting together central support and back-office functions.

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