Impending Consolidation of Financial Firms Could Be Lucrative

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US Financial Banks Fill Mortgage Crunch

When one door closes in the stock market, another window of opportunity opens.

Case in point: Bank of America (BAC) saw the window of opportunity with Countrywide’s sub-prime catastrophe, and thus, initiated a takeover of the Countrywide Financial Corp (CFC) via $4 billion in stock.

The US sub-prime mortgage crisis has created a tremendous opportunity of acquisition in the banking industry. For example, as the financial doors this week slammed shut on Merrill Lynch’s worst historical performance, the window for buying severely discounted stocks arise for the savvy investor. If mortgage troubles increase or prolong, there will be more causalities in the lending sector – leading to major falls in stock prices that could become great long-term buying deals.

More whispers of opportunity…

More financial firms are taking advantage of the open windows of opportunity. JP Morgan Chase & Co (JPM), the third largest US bank, is in negotiations for a merger with WaMu, whose shares have considerably fallen due to mortgage-related issues.

The Name of the Financial Game: Survival of the Fittest

Those financial companies that did not get lured into risky sub-prime mortgages are left with economic strength that allows them to be the victors in this economic game. They have the financial wherewithal to be on the lookout for failed banks. Ripe with cash, these financial powerhouses can easily salvage the ruined businesses of certain mortgage lenders. Thus, big sharks are ready to devour the smaller ones.

Long-term pocketbook rewards

For those companies whose earnings are intact, the failure of the mortgage market provides ample opportunity to increase their asset holdings. Acquisition of firms whose shares have plummeted can bring in valuable assets, including greater business, clients, infrastructure, and capital to the acquiring firms. Subsequently, the acquiring firms build a stronger client base, a wider market, and an instantly trained staff. All of these factors work together to push up earnings, and thus, share prices.

In light of these opportunities, savvy investors should be on the watch for companies tearing through an acquisition spree. When the smoke clears, these acquiring firms will own valuable assets, which were acquired at clearance sale prices.

Asia: the world’s international bank

With both the domestic and international financial crisis, one region has come to the rescue, clearly becoming the financial world’s bank: Asia.

Ironically, the one region that suffered exponential losses from the Asian Financial Crisis in the late 1990s has come to the rescue of the Western world.

Breaking the news this week was Merrill Lynch’s desperate need to shore foreign capital to stay afloat – who went to the Korean Investment Corporation for $2 billion in bailout funds. This was after Singapore’s Temaesk, one of two sovereign wealth funds, rescued Merrill with $4.4 billion in December.

Just last month, China Investment Corporation injected $5 billion into Morgan Stanley. Internationally speaking, European financial institutions are turning to Asia as well. As the Union Bank of Switzerland hit financial roadblocks in December, the institution turned to China and Singapore for billions of rescue money to recover from the subprime mortgage crisis. Last summer, British Barclays also went to the China Development Bank and Singapore’s Temasek to gain financial footing against its investors’ jitters.


Translating takeovers to retail investors

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, further weakening the consumer market. All of these events could trigger further consolidation in the economy beyond the financial sector.

We are certainly entering an era of mergers in the banking industry. These opportunities could be healthy for the overall financial sectors; as the weak and sick banks are eliminated from the game, the overall industry’s productivity and efficiency increases.

Mergers and acquisitions are normally good for acquiring companies. With the acquisitions in hand, they are in a position to obtain a larger market share without many expenses. In addition, after the initial fits and starts, the synergy between the merging companies can be beneficial for investors.

Investors will have to be on the lookout for strong banks that will financially benefit from ailing companies. In an era of crisis, there are many great deals to be had for your portfolio – as long as you keep your eyes open to the windows of opportunity.

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