Besides restructuring the second major driver of MAs is consolidation This will

Besides restructuring the second major driver of mas

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Besides restructuring, the second major driver of M&As is consolidation. This will particularly affect small banks. Due to growing competition in lending and deposit markets, they are 17 According to ECB (2004), the greatest potential risk of outsourcing is the loss of control over the activities or services being outsourced and an undesirable dependency on the service provider.
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14 The Journal of Financial Perspectives Business models in banking – how did they evolve and how do they need to be changed in the post-crisis period? under pressure to increase their cost efficiency as well. One strategy is to take over, or merge with, other institutions and to increase scale. A larger size may not only allow them to generate economies of scale, but also help smaller banks to better diversify [Demsetz and Strahan (1997) and Emmons (2004)]. The relationship between bank stability and size is not linear, however. As banks grow, the portfolio diversification effects of a larger bank size might be offset by diseconomies of scale due to managerial inefficiencies and greater complexity. Furthermore, as shown in the descriptive analysis, larger banks are more active in investment banking and trading and have a higher financial leverage, which might offset the diversification benefits of a larger bank size [Demsetz and Strahan (1997) and DeYoung and Roland (2001)]. In summary, M&A activity is likely to increase in the years to come. At present, however, it is still moderate, because many banks are unwilling to acquire businesses from other banks due to capital restrictions, uncertainty and investor skepticism. Furthermore, many banks may first wish to restructure their business model before they invest. The currently low level of M&A activity is reflected in Figure 3. The graph shows that M&A activity has significantly decreased since the beginning of the financial crisis, with the total deal value going down from almost €120b in 2008 to €12b in June 2013. Most targets that were acquired during this period were located in the U.K. (29%) and Spain (17%) and were crisis-driven, where national governments took control of failing banks. These transactions demonstrate that the crisis has changed the nature of M&A in the E.U. banking sector. While most deals in the pre-crisis period were strategic and aimed at building scale and expanding business lines, a large number of deals nowadays involve troubled banks that were (partly) nationalized through bailouts. In some deals, the government or regulatory authority did not directly nationalize the bank, but arranged or initiated a deal with private institutions. Government ownership will, however, likely be only a temporary phenomenon, since E.U. governments are expected to seek an orderly exit in the medium to long term. This should open up additional investment opportunities. In the future, the number of strategic deals should, therefore, rise again as many banks aim to restructure their business models and regain their strength to act as potential buyers on M&A markets.
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