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Mergers and acquisitions are corporate strategies used in business. Merger refers to the condition whereby two or more separate business entities join to form a new independent business unit. Acquisition, on the other hand, is the purchase of a given business or company by another separate business venture, which is usually bigger when compared to the acquired one. Acquisition can be also performed through purchasing the majority of shares of the traded company. The act of buying the whole business or majority of shares traded is called acquisition while consolidation is the merging of smaller businesses to form a single larger business. The European banking industry has been undergoing restructuring since the early 1990’s. It has been characterized with a great number of mergers and acquisitions, financial deregulations, and banking consolidations; it passed the stages of the single currency adopting and integration of financial markets across the European continent.

The restructuring of financial market in Europe aimed at gaining financial stability and improving the performance of the banking sector. This step has been necessitated by improved technology and abolishment of regulations in the banking industry, leading to the creation of a single market. According to Lubatkin (1983), strategic and organizational aspects are the key determinants of performance of mergers and acquisitions in the financial markets. Consolidation of banks has resulted in a single pattern of behavior in the banking industry and increased market concentration for the banks involved.

Structural Impact of Consolidation

Financial consolidation has influenced both the structure and performance of the European banking system. Such influences have had a crucial effect on the competitiveness of banks in the financial market, as consolidated banks gain market control due to consolidations. Larger banks in Europe have managed to increase their profits while reducing their risk to profit loss. These banks enjoy stronger capital base, which creates protection from external liquidity shocks in the market (Matutes & Vives, 2000). Consolidation has also helped to maximize the shareholder’s value, as the consolidated banks gain more market power authority. The larger size of the formed banks enables them to determine the level of prices in the market.

Financial consolidation has made cross-border transactions much easier and more affordable. The merging of banks across boarders results into abolishment of barriers in their performance. The increased size of banks also provides a more elaborate channel of undertaking transactions and specialization in the banking industry. Banks are able to have better monitoring services for their activities with a diversified portfolio and enjoy the advantage of economies of scale and scope (Thakor, 1984). Managers are able to engage in other profitable activities, which maximize the profit margin and increase shareholders value.

Financial consolidation has caused diversification of operations in the banking sector, as well. This state of affairs makes managerial service less effective while operation risk increases due to increased activities demanding supervision by the management. Increased size also poses a challenge of lower transparency as banks expand across boarders.

Performance Impact of Consolidation

Since consolidation causes an increase in the size of business, banks in Europe have also been experiencing significant influence on their performance. Financial consolidation in the banking industry causes a significant impact in efficiency of the banks’ operations. Consolidated banks experience the reduction in costs in their operations coupled with risk diversifications, while increasing sources of revenue. Cost reductions are also obtained from economies of scale as it reduces the cost of production of a uniform product with an objective of maximizing profit.

Consolidated banks experience market concentration and market power, which creates trust with the public; hence, they receive grants and subsidies, as they are considered successful in their operations. This results into engagement of consolidated banks in risky investments, which pose significant moral hazards. Financial consolidation of banks results in a decline in the population of banks in the financial market; hence, credit availability to small firms and clients are limited. The consolidated financial institutions expand their market scope to larger borrowers while restructuring their portfolio in the market. They take more loans while limiting their security issue to the market.

Banking consolidation has improved the quality of banking services in Europe. Qualities of bank services are measured by financial availability to clients, technology employed, and geographical area of scope of these services. Banking consolidation determines the availability and access of financial services through retail branches and price regulation in the market. The bigger the size of the consolidated firms is the lesser the quality of service offered is, while smaller consolidated firms tend to offer services of better quality. Clients benefit from new and improved service qualities due to new products offered and wider geographical coverage by these consolidated banks.

However, financial consolidation in the banking industry has adversely affected Europe. It has reduced competition as banks join in their operations and managements to form consolidated banks. Consolidation reduces over capacity of banks; hence, stiff competition is limited, but profit margins for consolidated banks are increased. As a result, the banking industry in Europe has become more stable and healthier. This has been enhanced by the adoption of a single currency used in many European countries.

Conclusion

Financial consolidation of banks in Europe has resulted into both positive and negative consequences. Despite posing extremely undesirable effects, the banking industry in Europe has remained stable in the past years with high currency exchange rates in the world market. There has been both performance and structural influences in the banking sector. These effects have been well monitored to prevent adverse consequences on the banking sector. Mergers and acquisitions are corporate strategies used in business. Mergers refer to the condition whereby two or more separate business entities join to form a new independent business unity. Acquisition, on the other hand, is the purchase of a given business or company by another separate business venture, which usually is bigger when compared to the acquired one. 

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