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Can Competitors Steal Market Share After Mergers?

As a competitor in a tough market, a bank may be quite concerned to hear about a merger amongst its competition. It is commonly thought that the benefits of mergers will enable the new, combined company to become relatively more dominant in its markets, reducing overhead, pursuing efficiencies in operations, and combining captured market share for each bank. But this may not always be the case. In some instances, competitors of the newly merged firm may actually have an opportunity to increase their own position by “stealing away” some of the merged banks’ customers.

For more than a decade, School of Business assistant professor of finance, Steve Pilloff, has studied the banking industry. In two separate studies, Pilloff investigates the characteristics of banks that make them more likely to be acquired and the market structure in the years following mergers in the U.S. banking industry.

Today, during this time of financial crisis, bank consolidation is growing as larger banks are acquiring smaller banks in an effort to survive. In recent years we’ve seen news that Wells Fargo and Wachovia merged in a $15.1 billion deal that created a very strong financial institution. In addition, Capital One merged with Chevy Chase Bank acquiring their 250 branches in the Washington, D.C. area, as part of their strategy of buying regional banks to gain access to their deposits.

In his article titled, “Acquisition Targets and Motives in the Banking Industry” published in the Journal of Money, Credit, and Banking, Pilloff and his colleague explore acquisitions, including in-state and out-of-state acquirers, as well as the role of managerial ownership in explaining the likelihood of acquisition.

Pilloff says, “One interesting finding from this paper is that acquisitions serve to transfer resources from less efficient to more efficient organizations. The market for corporate control appears to operate in the banking industry as companies that don't operate efficiently are at increased risk of being taken over by firms that operate more efficiently. Managers should know that if their firm does not perform, then it is at greater risk of being acquired, and that those managers are at greater risk of being unemployed.”

In related reseSteve Pilloffarch, Pilloff and colleagues analyze the changes in market structure three and five years after mergers in the banking industry. Much research has been done to evaluate the competitive effects of proposed mergers, but little is known about how market structure changes over time. In an article titled, "Market Structure after Horizontal Mergers: Evidence from the Banking Industry" published in Review of Industrial Organization, Pilloff suggests that competing banks can gain new customers in the years following a merger.

Pilloff says, “The results of this paper that concentration decreases and the number of banks increases in banking markets where mergers resulted in high concentration levels suggest that customers may be "in play" after a merger in which the resulting firm greatly increases its market share.”

When mergers occur, policy changes are often implemented which could result in checking fees, debit card fees, and operational changes to how a customer’s account is handled. In both the Wells Fargo and the Capital One mergers customers are just beginning to realize some changes, as now, nearly three years later, both banks are rebranding the original branches into new ones, and Capital One is finally converting Chevy Chase’s computer systems into their own.

“Wary or dissatisfied customers may be "ripe for the picking" by rival firms,” Pilloff says. “Therefore, managers of firms not involved in a large merger may be able to benefit from the deal as it may provide an opportunity to attract new customers.”

Steve Pilloff is a term assistant professor of finance at the School of Business at George Mason University. He previously taught at Hood College and the Robert H. Smith School of Business at the University of Maryland. Pilloff has worked as a senior economist with the Board of Governors of the Federal Reserve System. He has also worked for Freddie Mac, the Office of Thrift Supervision, and Ernst & Young. Pilloff's work has been published in various journals including Journal of Banking and Finances, Journal of Competition Law and Economics, Multinational Finance Journal, Review of Industrial Organization, and Journal of Financial Services Research. Pilloff received his PhD and MA in Finance from the Wharton School, University of Pennsylvania, and his BA in Economics from the University of Virginia. Click here for full bio.

George Mason University School of Business

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