Tragedy of the Commons in M&A

Attached is a piece on the tragedy of the commons in banking. It refers to a chain reaction (AKA herding?) in which the action of one bank triggers reactions from other banks leading to a dangerous race to the bottom in risk standards. It underlies the boom and bust cycles in many deal markets including M&A. As Ralph has noted in his anticipation article, once one competitor starts buying firms, others in the industry react. Early buyers tend to get better prices than late in the cycle buyers. Nonetheless, late in the cycle buyers are under pressure to “do something” so as not to be left behind. Hence they make over priced acquisitions. The key takeaway is firms do not operate in a vacuum and are influenced, sometimes negatively, to respond to competitor actions.

j

Banking 2.0: Disrupting the Industry

Community banking has been called into question again. I agree there are far too many small banks. Of the 6700 banks over 2000 have less than $100MM in assets. Additionally, hundreds of small banks failed or were merged during the financial crisis. Nonetheless, community banking, if not community banks, has a bright future. Changing technology promises to upend the branch orientated delivery-there are over 85,000 domestic branches. The technology will supplant the branch system in ways not yet fully understood.

This disruption will cause a massive change in strategies. Institutions, both bank and non bank will struggle to adjust. Those adapting will probably divest branch networks and acquire new technology and consolidate thru mergers to succeed. See Community Banks recently published in the American Banker for a discussion.

Happy New Year.

J