Indsutrail structure finance report: Mergers & Acquisitions

Motivations behind the Citigroup Merger

It is observed that, according to the academic literature, in banking and industrial economics, a variety of motivations, drive consolidation ranging from value maximization, to other external and managerial goals. As discussed below, the motivations behind the merger of Citicorp and Travelers.

The motivation behind the merger was to greatly expand the distribution channels that will include locations of branch office in one hundred countries in the region of the world in service, home and the Internet. Instead of providing individually service, after the merger Citigroup was able to provide a package of financial services (Walter, 2009).

The motivation behind the merger to distribute the integrated service, through which Travelers agents were able to provide Citicorp products and services, and the Citicorp was able to provide Travelers products and services (Citigroup website).

The motivation behind the merger was to provide the high level of value and comfort to customers through cross selling synergies, the faith that combined company  will able to succeed in the long run due to quality and breadth of their products.

The motivation behind the merger was to combine the market strengths of the two firms, through which Travelers gained globalization and Citibank secured diversified presence in the United States.

The motivation behind the merger was cost savings by providing efficient and improved customer service and decreased distribution costs.

The motivation behind the merger was to make the combined company largest in the world ahead of UBS and the Deutsche Bank.

It was expected from the combined company, that it would serve 100 million customers in more than 100 countries of the world and capitalization of the combined company would receive first rank between all the financial companies of the world.

After the merger, the combined company was able to reduce the cost in same department and the costs of the company in relation to same revenue stream; therefore finally it helped the merged company, to increase the profit.

The combined company was able to manage savings in generally cost to the purchaser of the numerous financial services, as compared to the single supplier.

The combined company had the advantage of monopolistic and oligopolistic firms, it provided a chance to the merged company to grow and discover new markets. The combined company motive was to provide financial shopping, conventional banking, debit cards, credit cards along with brokerage and insurance services.

Regulatory influences

It is observed that, because of the regulatory influences, commercial and saving banking was not together. But after the existence of Citigroup, it destroyed the regulatory influences, and opened the gates to financial services, by providing a mix of saving banking, commercial banking, underwriting and commission.

The Glass-Steagall Act of 1933:

 After the Great Crash of 1929, in the United State of America, one of each five banks was failed. The reason for the failure was market speculation done by banks during the 1920s. In 1933 for protection of the banks, Congressman Henry Steagall and Senator Carter Glass came out with the legislation called The Glass Steagall Act of 1933 to protect the interest of the individual investors, when commercial banks issued bonds and stocks. In the earlier times, investors were felt dejected by the banks whose dominant interest was encouraging interest and benefits to the banks as compare to individual investors. But the new law restricted commercial banks from issuing securities, and given instructions to the banks to choose between a lender and an underwriter. In 1956, the bank Holding Company Act was made by the government to ensure that two or more banks cannot engage in non banking activity and cannot sell the banks out of the state. Many steps were taken, to loosen some restrictions on financial institutions in 1989,the act came into force, when the Federal board  certified a Citicorp, bankers trust and J.P Morgan to diversify Glass Steagall Act ambiguity by dealing in debt and equity securities in addition to Certificate of deposits, commercial paper  and municipal securities. This shows a diversification of the activities in the financial and banking Industry (By Heakel, 2009).

The Gramm –Leach Bliley Act

After the announcement of merger between Citicorp and the Travelers on 1988, the Federal board was under pressure to renovate legislation of financial services, finally removed The Glass Steagall Act 1933 with The Gramm –Leach Bliley Act to open up the doors of the competition between the banks and insurance companies.

Influence of Merger on US Banking Structure

In the United States, the commercial banking in the 1970s and during the early 1990s was featured by first, a propagation of sense of competition from service industries such as leasing companies and the mutual funds, second, the expansion of holding multibank companies ,third,  the banks had changed their way of doing a business because of new technology.

Certainly, it can be seen that financial institutions have emerged to meet the needs, and the banks have changed to the holding company because of increase their share in the market. While from the 1960s a number of laws have passed by the government to favor the multibank holding companies. Because of increasing importance of multibank holding companies, the U.S banking industry grew gradually according to the bank holding companies since 1990s.

The movement behind holding companies such as Citigroup to provided benefits for commercial banks to provide broad financial service correspondence, as well as financial planning, asset brokering, and insurance. Nonbanking actions taken by banks had strongly synchronized during the Depression, however in the 1980s and in the 1990s; lawmakers provided increasingly understanding to banks who wanted to propose integrated services.

Citigroup suffered with great losses throughout the global economic slowdown of 2008, and to recover these losses, the Citigroup had taken a help from the U.S government and this affected the US bank industry. The decrease in the market value of the Citigroup market share showed its instability to undiversified risks. The Citigroup merger provided a fee generating activities to banks which helps them in generation of revenue.

The researchers have analyzed that, the mergers and the consolidation, are required to provide achievement, but non favorable business cycles and other unpleasant conditions would make it less proficient. The advantages of Citigroup merger in the U.S banking structure may arise at a lower rate because of fluctuations took place in the economy (Walter, 1990).

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