It seems as if the stream of news regarding bank buyouts will never let up. Indeed, we’ve already heard plenty over the course of the past few years about failed banks, and 2014 hasn’t shown much of a slowdown for the trend. Now, CIT Group plans to purchase OneWest Bank for an astonishing price of $3.4 billion. Those who have been following news regarding bank buyouts will most likely remember IndyMac, which failed in 2008 and remains one of the most costly federal bank insurance bailouts ever, at $13 billion. If OneWest Bank doesn’t sound familiar, it’s the organization that was formed after IndyMac’s collapse.
IndyMac is often remembered as being a high-risk mortgage lender. The company famously created mortgages based upon very loosely put-together financial information from customers, requiring little more than a statement that could easily be adjusted in whichever direction necessary. It is for this reason that the bank’s loans were referred to by many as “liar loans.” After things fell apart, an investment group led by Dune Capital Management put forth effort to revitalize the bank under a different name and acquire it from the federal government, which occurred in 2009.
While most people are familiar with hearing about bank buyouts at this point, many don’t realize why mergers and acquisitions occur in the first place. Indeed, there are a number of reasons why these things happen, and the fact that they can affect how the average consumer goes about financing a home, means it’s essential for everyone to know what goes into a buyout. Here are just a few of the more common reasons why these things happen, all of which can occur at different times and in different situations.
Increased market share
One reason why banks and companies in general are bought out has to do with increased market share. Let’s say there are two banks that are in direct competition with one another. In the case that one has the dominance over and ability to purchase the other, doing so would be the best way to absorb the competition and deal with the issue of increased market share.
A great deal of money stands to be made for all parties involved in such a situation, which is why this occurs so commonly. In many ways, this is what’s happening with OneWest, and the bank’s president Joseph Otting is saying that the deal will expand lending options for businesses. Whether or not this ends up being the case is difficult to tell, although there’s reason to believe that it could indeed be beneficial to businesses small and large.
When a bank is struggling, it can be viewed as if it’s almost like a sitting duck. A struggling bank is one that is just waiting to be scooped up by another, and typically for a song. This means that the bank who ends up making the purchase stands to gain a great deal, while the one being bought out can at least rest easy knowing it won’t go broke. Ever since the housing crisis, American banks have seen financial difficulties, and it’s not uncommon for these issues to derail a bank altogether. As far as being a reason for buyouts, it’s also towards the very top.
It should stand to reason that a bank that is looking to succeed will do whatever it can to spread throughout the country as much as possible. Indeed, there’s a lot to be said for geographical diversification in banking, and it can make all the difference in the world in terms of bringing in a new audience.
In many ways, this serves as an additional reason why OneWest is being scooped up by CIT. OneWest is located in southern California, while CIT is based in New York. Combining the two, then, will serve both East and West Coast customers. While geographical diversification isn’t right for all banks, it’s one of the biggest reasons for mergers and acquisitions.
Streamlined scale and operations
No matter what type of business one is running, there’s nothing more important than trying to streamline scale and operations as much as possible. Every bank wants to save money on employee salaries and other costs, and sometimes, the best way to do so is to combine operations with another bank. When costs are lowered, revenue typically increases in short order. Again, this may have something to do with the CIT acquisition of OneWest, although it’s tough to say exactly what the reasons are for any acquisition.
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In the end, it’s important for consumers to realize that not all bank acquisitions, buyouts and mergers are about the rich getting richer. It’s easy for people to feel this way considering the history of buyouts, but businesses and others who are in need of loans often do indeed find themselves benefiting from situations such as what is occurring with OneWest. Time will tell who benefits from this acquisition, and there’s no telling what other huge mergers and acquisitions could occur in the near future, as 2014 has already been quite the year for bank buyouts.
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