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Talks continued in earnest and both banks entered into a non-binding Memorandum of Understanding in 2015. Legal and financial consultants were appointed for the due diligence process. In 2016 when both boards agreed on a Share Swap Ratio, subject to regulatory approvals, it appeared that after a long gap this merger would go ahead.
However, in October 2016, after three years of negotiations, Bank Dhofar advised its shareholders that due to the banks being unable to agree on certain key issues, negotiations were discontinued.
In June 2018, The Commercial Bank of Qatar announced on their stock exchange (in Qatar) that it would commence discussions for a possible merger between Bank Dhofar and NBO. Bank Dhofar responded a month later with an announcement that the Board of directors had resolved to also enter discussions. However, by December the Commercial Bank of Qatar made a further announcement that they do not support the merger, similar to their decision in 2010.
It is shown that over the past ten years there has been a desire for bank mergers in Oman to address the over banked situation with relation to the small population, and to rebalance the market in relation to Bank Muscat’s strong foothold.
Whilst earnest negotiations had been set in motion, none of the larger banks have been able to agree on a format to merge. There have been six documented attempts for amalgamations, but only at the lower end of the market have Boards and management been able to fully agree terms.
The questions that arise from the study of this ten-year background are; why is there a consistent undertone of merger discussion in Oman and how will any mergers of banks in Oman benefit the market and other stakeholders specifically?
also serve to fill gaps in business lines; and by doing so they combine the resources of two or more businesses into a single entity (Sawler, 2005). Mergers are designed to be permanent and the expectation of successful integration of the combining businesses is for long term positive gains.
Motivations for Mergers
Recent research (Rabier, 2017; Hassan et al., 2018) indicates that internal motivations for mergers consistently include (i) efficiencies resulting from costs savings, (ii) internal structural benefits (for reasons of tax, wealth transfer, or capitalizing on merged business strengths), often called synergies, and (iii) enhanced market power from becoming a bigger player. Cost savings occur when the merged entity can share human and physical resources, thus enjoying greater economies of scale. An example of a synergy (or economies of scope) is when client data from one line of business (e.g., retail banking) of the first bank can be productively employed in a second line of business (e.g., life insurance) of a second bank. Finally, becoming a big player comes with privileges such as the ability to become a price leader2.
A controversial consideration that is not always readily identified in board room discussions, is managerial self-interest. In agency theory research, Eisenhardt (1989) shows that mergers are an arena in which principal and agent (owner and manager) interests can deviate. Gupta and Misra (2007) confirm that managers can use mergers to build their own objectives and personal interests, and as a way to boost or to defend their authoritative positions. Managers could go on an acquisition spree to boost their compensation, avoid the possibility of being acquired themselves, or in the case of banks enjoy the perks of becoming “too big to fail”3.
Timing of Mergers
History has shown that mergers in the banking sector occur in waves (De Young et al., 2009). More than ever, in recent times banking mergers follow the waves
2 Price leadership occurs when a preeminent firm announces a price change, and all other players follow in the same direction. Economist consider such behavior to be tacit collusion between players in an oligopolistic market (Besanko, et al. 2010).
3 A company becomes too big to fail if its bankruptcy would result in a catastrophe to the economy as a whole (due to some domino-effect or massive job loss). The government is therefore implicitly guaranteed to bail the company out if it ever falls into serious trouble.
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of financial crises. Since the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2008, banking industry mergers are perceived to promote financial sector stability, as there is a general expectation that mergers will lead to better bank performances (Du & Sim, 2016). Mergers are also more likely after financial upheaval because share prices tend to be cheap.
Financial crises are always followed by regulatory reforms. Mergers can also occur as a response to changes in compliance and regulations (Karolyi & Taboada, 2015). Stricter regulation can force banks to merge in order to comply with new rules.
Alternatively, deregulation can also encourage mergers to exploit arising new opportunities. In short, waves of mergers are expected following significant changes in the regulatory environment.
Outcomes
The art of bank management has been ever changing. It is complex in its nature and often the inner workings of merger motivations and outcomes are opaque, at best, to the outside community, and less transparent than other types of firms (Jiang et al., 2016; Blau et al., 2017).
While most mergers are negotiated and implemented to favor the acquiring company, many merger efforts fail to result in intended performance enhancements.
McKinsey and Company (2010) report that merger activity is critical for long term survival. Yet, their study finds that as low as 23% of mergers are fully successful. Many of the failures begin with poor due diligence, through to lax consideration for pre-merger and post-merger capabilities. There are examples of merger failures from a lack of understanding of the tasks involved, inadequate assessment of the target, lack of leadership and strategic supervision, and human resources issues such as fundamental cultural differences, and managerial hubris (Brouthers et al., 1998; Banal-Estañol &
Seldeslachts, 2011; Vazirani, 2012).
In spite of the rapid changing technology and regulatory environment, the poor record of merger successes should serve as a reality check for managers looking to improve efficiency and enhance stockholder value through mergers and acquisitions.