by Altaf Sahibzada

Created on: January 28, 2008

Opportunity

US prime mortgages have created some opportunities of mergers in the banking industry. If mortgage troubles persist, there will be more causalities in the lending sector.

There has been talk of mergers and consolidation between Bank of America, Countrywide Financial Corp, JP Morgan Chase & Co, Washington Mutual Corp, National City Corp, Sun Trust Corp etc.

Some mergers have already happened like the first one and others may follow suit.

The financial institutions which did not lend money to risky borrowers are in a strong position. They can benefit from the companies in trouble not only by their acquisition but also by reduced competition.

Failed banks and financial institutions can bring in clients, infrastructure, capital etc. to acquiring firms. This will benefit the buying companies in building a strong base, a wider market and trained staff. That can also push up their earnings over time and thus share prices.

Therefore, it could be advisable to watch out for companies which are on acquisition as they are going to be directly benefited by the subject takeover.

Because of credit problems and big losses, many US banks have turned to foreign governments and investors like China and Middle East for replenishment of their capital. There have already been commitments. This could also be positive for the financial sector.

Investors will do better by keeping an eye on struggling banks and financial institutions. Some of them by themselves like Citi group can provide excellent returns to investors in the long run if they are bought at these prices.

Investors can also look for banks which are going to benefit the purchasing companies in short and long run. 2008 will be crucial for the banking sector as a whole. Massive losses suffered by many financial institutions have created a credit crisis in the market. This could spread to other sectors like the consumer. That could trigger in further consolidation in the economy beyond the financial sector.

Mergers and acquisitions are generally good for companies and investors as this creates synthesis and synergies between acquiring banks and the acquired ones.

Before investing in these banks, one should always do extensive research and arrive at an informed decision both in terms of timing and amount of investment.

Mergers and acquisitions are not necessarily bad. They can be good. However, if they result in the creation of monopolies, then they may work against the consumers. Monopolies are not conducive to competition. Monopolies also stifle growth.

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