Rationale behind merger of equals

Let’s discuss mergers and acquisitions. Why do they take place? Why is a merger not an acquisition? What’s next? The intention here is to then direct the article towards bank mergers and, more specifically, the latest being that of the National Bank of Abu Dhabi and First Gulf Bank. In defining mergers and acquisitions, I have added one more that falls somewhere in-between.

So, first, a merger is when two companies decide to pool their resources into one bigger company. An acquisition is when a company decides to “swallow” another one. For that to happen though, the targeted company is normally either a fierce competitor that could very possibly be in trouble, financial mostly.

There are a few common aspects to both mergers and acquisitions; one of which is that the main purpose is normally to eliminate local competition and increase prospects in competing regionally or globally.

Another common thing between mergers and acquisitions is that it provides the bigger company with an excuse to lay off extra staff, which can be very beneficial for companies that suffer from overstaffing. I mentioned earlier a third type — one that looks like a merger when it’s more or less an acquisition. That is, one of the companies is much bigger in size, operations, etc, than the other one.

Nevertheless, the bigger company is called the merged entity. Let’s now move to mergers among banks. If you go back to the 2008 financial crisis and what happened post it, you would have noticed an increase in the number of mergers taking place. And that wasn’t taking place in the US only, but in many other countries that suffered the crisis’s repercussions.

Some may argue that these mergers are in the interest of the firms that manage those mergers, especially if the underlying argument for the merger is not that evident. Anyway, whenever there is a crisis or a looming one, time is always ripe for such mergers to take place. The trend in the US could be tracked down all the way to the early 1900s, with JP Morgan (then JP Morgan and Chase), Wells Fargo, and Bank of America dominating that business.

In the UAE, there has been a precedent when National Bank of Dubai and Emirates Bank merged, before the merged entity acquired Dubai Bank. So, why did National Bank of Abu Dhabi and First Gulf Bank merge?

Mervyn King, a former Governor of the Bank of England, said once: “Banks live globally but die locally”.

Some may argue that this could be because of a slowdown in the banking business. That could be one reason. Another could be that the two banks have become too big for the UAE as a market, and though National Bank of Abu Dhabi has an impressive international presence, it would be in the best interest for both banks to form the biggest bank in the region in terms of size of assets. If anything, this would enable such a mega bank to enhance its international presence and to be able to compete with banking giants on merger deals, IPOs, and such. If you ask me, I would want to see more mergers taking place in the UAE and I have one main reason for that.

Competition in a domestic market is very healthy up to the point when the two companies are too big to keep competing and still make money out of it. The creation of bigger, more efficient companies in sectors like banking, real estate development, telecommunications, aviation, and others would only promote the UAE further and establish a solid footing for its companies worldwide. The last thought I want to leave you with: what should be the next big merger in the UAE?