Financial Industry Mergers Overview: Since the 1970s, financial services industry mergers have seen the leading firms increasing in size and decreasing in number. This process has been advancing across two fronts. First, financial industry mergers continue within each major line of business. Second, many leading firms see advantages in becoming diversified financial services empires, offering multiple lines of business. There are several reasons for the latter trend.
Cross-Selling: The concept of cross-selling is an old one, and is not industry-specific. It involves pitching new products to existing clients, and perhaps weaning them away from doing some of their business elsewhere. The broader your product line, the more opportunity you have for it. From the standpoint of corporate strategy, creating opportunities for cross-selling is a major motivation for mergers and acquisitions that add to a firm’s lines of business. The expectation is that the post-merger firm will achieve synergies that produce greater total sales than did the pre-merger firms independently. It also is the principal motivation for extending your product line through internal development.
For a client with a variety of financial needs, doing business with a single diversified firm is highly convenient. This reduces the imperative to shop around for services from a variety of providers. The client will have fewer accounts, saving time devoted to monitoring investments and simplifying record keeping. Moreover, by consolidating investment activity at a single firm, the client may qualify for a comprehensive pricing plan that reduces his overall fees and commissions, and perhaps also increase the interest rate earned on cash deposits.
Distribution Channels: Investment banking, investment management and securities trading are examples of functions that are analogous to manufacturing. Indeed, it is common within the industry to use the term "product" in reference to securities, investment vehicles and client account types, among other things. A manufacturing operation cannot survive without the means to distribute and sell its output.
Investment banking structures and issues securities to raise funds for businesses and governments. Investment management must accumulate pools of money to invest. Securities trading operations match outside orders to buy or sell securities. All these "manufacturing" operations such as these require a sales function, to sell the securities, gather the investable funds, or obtain the flow of orders. Herein lies the logic behind financial industry mergers that combine a securities brokerage firm and its army of retail financial advisors with a "manufacturing" firm.
Vertical Integration: This is the flipside of the distribution channel argument. Financial industry mergers that combine a firm in the distribution business, like a traditional securities brokerage firm, with a manufacturing operation can capture another stream of profits while securing the supply chain.
Diversification: Another motivation for financial industry mergers that add lines of business is to smooth out company profits, under the expectation that the market cycles affecting each are not closely synchronized. For example, investment banking firms are especially prone to widely fluctuating earnings, hitting highs in rising markets and registering losses in falling markets. By contrast, securities brokerage divisions tend to have earnings that are much more stable across a market cycle. For this reason, the former generally have been eager to merge with the latter.
Credit Crisis of 2007-08: The credit crisis of 2007-08 has hastened the trend towards financial industry mergers. Weakened firms have been forced into mergers with stronger rivals. In particular, the remaining large independent securities firms have ceased to exist as such, either being absorbed by large banks or reorganizing themselves as bank holding companies:
Two massive, yet troubled, banks have been absorbed by other already-huge competitors:
Additionally, the credit crisis resulted in federal control of:
Bank Failures: Bank failures are speeding consolidation of the banking industry and reducing job prospects. Since the 9/25/2008 failure of Washington Mutual, 279 more banks have gone under. By contrast, only 36 banks failed in the prior six years.
Meanwhile, as of the second quarter of 2010, the FDIC was monitoring 829 "problem" banks, up 6% from the first quarter. Employment in the banking sector is down by 188,000, or 8.5%, since the end of 2007. One study projects that the total number of banks in the U.S. will decline to about 5,000 by 2020, down from 7,932 as of 9/2010. See "Banks Keep Failing, No End in Sight," The Wall Street Journal, 9/27/2010.
