Success Not Guaranteed in FleetBoston/Bank of America Merger

Newswise — The fact that the Federal Reserve has approved the Bank Of America-FleetBoston merger doesn’t necessarily guarantee the merger will be successful in the long run. David Sherman, Northeastern University associate professor of accounting, says that even though the Federal Reserve has cleared the way for the stockholders to finalize the union, there remains a greater than 50 percent chance the newly merged company will fail to cohesively meld.

“Even with the approval of the merger, a good chance exists that this will fail,” said Sherman. “While these type of mergers are rife with opportunities for synergistic increases in profitability, too often delays in consolidating operations are costly and prevent shareholders from deriving benefits and the merged banks from realizing their financial potential. This is an important reason why more than two-thirds of bank mergers fail. Clearly, the success of the FleetBoston and Bank of America merger is not guaranteed.”

Sherman added that an additional factor behind failed mergers lies in the propensity of merger and restructuring reserves not being sufficient enough to cover the costs of integration.

“Some bank acquisitions would be rejected if the true costs of the merger were acknowledged,” he said. “There are obvious costs associated with mergers, which is why funds are specifically designated to cover the costs of integration. However, too often, these funds are used up quickly and one of the solutions to avoid potential decline in earnings that result from absorbing these additional merger costs is to acquire another bank and create a new merger reserve. This may explain the frequent bank acquisitions, considering that there are few, if any, real economics of scale.”

Sherman noted that political issues among the merged entities can also prevent mergers from realizing benefits in a timely manner, and that “boards, security analysts and other investors could raise the success rate of mergers if they put more pressure on management to resolve political problems and accelerate the integration of the merged entities.”

Professor Sherman, author of Profits You Can Trust: Spotting and Surviving Accounting Landmines (2003 – Prentice Hall-Financial Times) has been a member of the Northeastern faculty since 1985. He teaches executive and MBA courses in accounting, control, and global financial statement analysis with a focus on high technology, medical technology, financial services, health care, and nonprofit organizations. His current research focuses on financial literacy issues for management and boards in global businesses, financial reporting issues, improving shareholder returns in bank mergers, and managing health care service cost and quality. He is an expert on developing and using financial and non-financial measures to evaluate and manage performance.

Northeastern University, located in the heart of Boston, Massachusetts, is a world leader in cooperative education and recognized for its expert faculty and first-rate academic and research facilities. Through co-op, Northeastern undergraduates alternate semesters of full-time study with semesters of paid work in fields relevant to their professional interests and major, giving them nearly two years of professional experience upon graduation. The majority of Northeastern graduates receive a job offer from a co-op employer. Cited for excellence two years running by U.S. News & World Report, Northeastern was named a top college in the northeast by the Princeton Review 2003/04. In addition, Northeastern’s career services was awarded top honors by Kaplan Newsweek's “Unofficial Insiders Guide to the 320 Most Interesting Colleges and Universities,” 2003 edition. For more information, please visit http://http://www.northeastern.edu.