Is there a relationship between the merger and acquisitions and the 2007 financial crisis – Literature review Example

RELATION OF MERGERS AND ACQUISITIONS TO FINANCIAL CRISIS PAPER School Introduction This paper will empirically test if there is a relationship between the Mergers and Acquisitions mainly in the banking sector and the 2007 financial crisis. The study will mainly be on the mergers and acquisitions that occurred between USA and European countries.
The term merger indicates a consolidation of two companies in order to form a new company. An acquisition is the procurement of one business by another. However, these terms are used together as they relate to each other. According to Amihud and Miller (1998) mergers and acquisitions can be preferred by many companies for various reasons such as diversification of risks, better conditions in another country for trade, elimination of competition and many more.
Empirical Analysis
During the period before the financial crisis in 2007, many banks in the United States of America and in European countries involved in a lot of mergers and acquisitions. According to Berger and Hannan (1994), this was driven by many factors mainly the desire for higher profits, increasing the size of firms and reducing competition. Further studies show that there was a huge increase in the number of banks in the two areas, which led to significant competition among them. Hence, the move to engage in merger and acquisitions came in handy.
However, in 2007, great financial crisis that led to a decline in business for financial institutions and non-financial institutions came up. This was due to certain reasons. Concerning the six waves of mergers and acquisitions starting with the Great Depression in 1883, periods after mergers and acquisitions were followed by lower transactions Brigham and Daves (2002). Also, engaging in many mergers and acquisitions between USA and European led to major macro-economic concerns such as the probability of higher systematic risk. This further affected the financial stability of the two countries greatly as seen in the financial crisis in 2007.
The great number of mergers and acquisitions that occurred during the period between 2005 and 2011 posed major policy concerns to banking sector. According to Davies (2010), this is because the banks increased in size so much and it was therefore very hard to be regulated by the regulatory authorities. As a result this led to major effects in the financial stability of the banks and hence the financial crisis.
Finally, the fact that these mergers and acquisitions involved banks in two different geographical regions that use different currencies is also a reason that led to the financial crisis in 2007. According to Froot and Stein (1996), different currencies are prone to various external factors such as political and legal issues. In this case the dollar used in USA and the Euro used in European countries were being affected by various factors at the time. Therefore, it affected the exchange rates between these two currencies and hence led to financial instability. This was a key reason to the financial crisis.
Conclusion
There was a great relationship between the mergers and acquisitions in the banking sector done between USA and European countries during the period from 2005 and 2011. This was mainly because of various issues such as fluctuating exchange rates, higher risks and lack of a strong regulatory force on the banks due to their increased sizes.
References
Amihud, Y., & Miller, G. . (1998). Bank mergers & acquisitions. Boston: Kluwer Academic Publishers.
Berger, A. ., & Hannan, T. . (1994). The Efficiency cost of market power in the banking industry: a test of the quiet life and related hypotheses. Washington, D.C: Division of Research and Statistics, Division of Monetary Affairs, Federal Reserve Board.
Brigham, E. ., & Daves, P. . (2002). Intermediate financial management (7th ed.). Fort Worth, TX: South-Western/Thomson Learning.
Davies, H. (2010). The financial crisis: who is to blame?. Cambridge, UK: Polity Press.
Froot, K., & Stein, J. . (1996). Risk management, capital budgeting and capital structure policy for financial institutions: an integrated approach. Cambridge, MA: National Bureau of Economic Research.