Running Head: Old National Bancorp: Final Report

Old National Bancorp

Kamal Briscoe
Eric Brown
Ashley Heyliger
Ren Javois
Towson University

Old National Bancorp: Final Report

Old National Bancorp (ONB), a financial holding company which has a wholly owned
subsidiary, Old National Bank has operated since 1834 in Evansville, Indiana. ONB is one of the
largest financial institutions in Indiana and Kentucky and plans further expansion within these
regional markets. Fundamental means of expansion (as with most FIs) are mergers and
acquisitions and the company has been persistent in this endeavor with the acquisition of several
large retail branch locations in recent years, but the landscape is not without risk, specifically,
expansion risk.
Risk Related to Expansion
Mergers and acquisitions (M&A) are the primary tools of the expansion process. In order to
expand, the company either merges with a firm or acquires the firm outright. Either way, the
company outlays a considerable amount of cash and usually incurs significant costs other than
monetary and as a result may dilute the shares of current shareholders, expand into a market that
it lacks experience, and risk losing valuable customers, to name few. Expansion has no guarantee
of success as expressed in the companys 10k, There can be no assurance that integration efforts
for any mergers or acquisitions will be successful and with respect to profits points out that it
may not achieve profits comparable to, or better than, our historical experience (Old National
Bancorp, 2013, p. 16). Though the risks are numerous, the company has some safeguards in
place that may mitigate these risks. The use of a strategic resource (firm resource), firms
capabilities that are valuable, rare, costly to imitate, and costly to substitute may be one such
tool (Dess, Lumpkin, Eisner & McNamara, 2012, p. 95).
Proposed Solution
One of Old National Bancorps goals is not only to acquire other banks, but they also plan to
bid to acquire the assets and liabilities of failed banks in FDIC-assisted transactions (Old

Old National Bancorp: Final Report

National Bancorp, 2013, p.16). Using a strategic resource as a means of diminishing the risks
associated with expansion could prove beneficial. For example, one of the strategic resources
Old National Bancorp uses to sustain their competitive advantage is the community-banking
segment, which provide products and services that address clients needs and help clients reach
their financial goals by offering a broad array of quality services (Old National Bancorp, 2013,
p.4). By incorporating their own strategic resource in the newly acquisitioned properties could
possibly help lower the associated risks.
Firm Resource
One strategic resource the firm possesses is its ability to provide convenience to its customers,
which is attained by the strategic branch locations through which a space for private
consultations and quick client access to routine transactions can be attained (Old National
Bancorp, 2013, p.4). One of the risks with acquiring failed banks documented in the companys
10k includes the risk of a loss of customers of the failed banks (Old National Bancorp, 2013,
p.16). Incorporating the firms ability to provide convenience to its customers in their
acquisitions is another strategic resource that could possibly prevent or reduce this risk.
Financial Analysis
To ascertain relative financial strength of Old National Bancorp an analysis was conducted using
two key indices (stock price and PE ratio) over a period of 36 months benchmarked against three
key competitors: United Bancorp, Inc. (UBMI), Fifth Third Bank (FITB), and Huntington
Bancshares Incorporated (HBAN). Competitors were selected from the regional Midwest
banking industry with similar Market Cap.
Notice the relative consistency of ONBs stock price (Figure 1), which also yielded an increase
of twelve percent. HBAN however, yielded a thirty six percent increase with higher volatility.

Old National Bancorp: Final Report

Figure 1: 3-year Stock Price Comparison

Note: 3-Year Stock Price Comparison adapted from Yahoo! Finance.

Table 1

PE Ratio
Company
Old National Bancorp
United Bancorp, Inc.
Fifth Third Bank
Huntington Bancshares Incorporated

2012
13.1
21
8.5
8.9

2011
14.1
15
10.6
10.2

2010
25.2
17
20.3
29.8

Note: Adapted from Value Line

The PE ratio (Table 1) reflects the relative decline in the industry with the exception of United
Bancorp, which experienced an overall increase but greater volatility.

Old National Bancorp: Final Report

Michael E. Porter created Porters five-forces model (Appendix A, Figure 2) of industry

competition. The model is a tool for examining the industry-level competitive environment,
especially the ability of firms in that industry to set prices and minimize costs (Dess et al., p.
55). There are five parts to the five forces model; the threat of new entrants, the bargaining
power of buyers, the bargaining power of suppliers, the threat of substitute products and services,
and the intensity of rivalry among competitors in an industry (Dess et al., p. 55).
In the center of the five-forces model is the intensity of rivalry among competitors in an industry.
Strategic Management: Creating Competitive Advantages defines the intensity of rivalry among
competitors in an industry as the threat that customers will switch their business to competitors
within the industry (Dess et al., p. 59). According to the text some of the factors that result in
these rivalries include, numerous or equally balances competitors, slow industry growth, high
fixed or stage costs, lack or differentiation or switching costs, Capacity augmented in large
increments, and high exiting barriers (Dess et al., p. 60).
The threat of new entrants refers to the possibility that the profits of established firms in the
industry may be eroded by new competitors (Dess et al., p. 55). The threat of new entrants is
very low if there are a lot of barriers to enter the market. There are six huge entry barriers:
Economies of scale- decreases in cost per unit as absolute output per period increase (Dess et
al., p. 56).
Production Differentiation- the degree that product has a strong brand loyalty or customer
loyalty (Dess et al., p. 56).
Capital Requirement- When existing competitors have strong brand identification and
customer loyalty, differentiation creates a barrier to entry, especially if the capital is required for
risky or unrecoverable up-front advertising or research and development (Dess et al., p. 56).

Old National Bancorp: Final Report

Switching Costs-one-time costs that a buyer/supplier faces when switching from one
supplier/buyer to another (Dess et al., p. 56).
Access to distribution channels- The new entrants need to secure distribution for its product
can create a barrier to entry (Dess et al., p. 56).
Cost disadvantage independent of scale- some existing competitors may have advantages that
are independent of size or economies of scale. These derive from:

Proprietary products

Favorable access to raw materials

Government subsidies

Favorable government policies

In the textbook, Strategic Management: Creating Competitive Advantages, the authors define
the bargaining power of buyers as buyers threaten an industry by forcing down prices,
bargaining for higher quality or more services, and playing competitors against each other.
These profits erode industry profitability (Dess et al., p. 57). There are six main reasons why
buyer groups are powerful:
It is concentrated or purchase large volumes relative to seller sales, the products it purchases
from the industry are standard or undifferentiated, the buyer faces few switching costs, it earns
low profits, the buyers pose a credible threat of backward integration, and the industrys product
is unimportant to the quality of the buyers production or services (Dess et al., p. 57). The
textbook also defines the bargaining power of suppliers as threating to raise prices or reduce the
quality of purchased goods and services. Powerful suppliers can squeeze the profitability of
firms so far that they cant recover the costs of raw material inputs (Dess et al., p. 58). There are
six times when the supplier group will be powerful and they are when; the supplier group is

Old National Bancorp: Final Report

dominated by a few companies and is more concentrated (few firms dominate the industry) than
the industry it sells to, the supplier group is not obligated to contend with substitute products for
sale to the industry, the industry is not an important customer of the supplier group, the suppliers
product is important to the buyers business, the supplier groups product are differentiated or has
built up switching costs for the buyer, the supplier group poses a credible threat of forward
integration (Dess et al., p. 58).
The threat of substitute products is defined as the threat of limiting the potential returns of an
industry by placing a ceiling on the prices that firms in the industry can profitably charge without
losing too many customers to substitute products (Dess et al., p. 59).
Porter Applied to Old National Bancorp
Looking at the Porters five-forces model, the overall threat of new entrants to Old National
Bancorp is low. There is such a large capital requirement that Smaller financial institutions find it
difficult to compete or are closing due to the harsh economic climate. According to the
companys website, ONBs assets are in excess of $9.5 billion and with over 178 years of
experience and many partnerships created it would be very difficult for another financial
institution to enter and perform well in their market area.

Old National Bancorp: Final Report

(Appendix A)

Threat of
New
Entrants

The
Threat of
Substitute
Products
and
Services

The
Intensity of
Rivalry
among
Competitor
s in an
industry

The
Bargainin
g Power of
Suppliers

Figure 2: Porters five-forces model of industry competition

Note: Adapted from Harvard Business Review.

The
Bargainin
g Power of
Buyers

Old National Bancorp: Final Report

(Appendix B)
Balanced Scorecard
The balanced scorecard is a method of evaluating a firms performance using performance
measures from the customers internal, innovation, and learning, and financial perspectives (Dess
et al., p.107). The perspective that will most accurately measure Old National Bancorps longterm success is the innovation and learning perspective. In todays market, there are constant
changes in technologies and methods of doing business. Especially in the highly competitive
banking industry, the firm cant remain the same and be unwilling to adapt to the environment.
The firm must be committed to improving operations and products in order to create more value
for its customers (Dess et al., p.108). Only by developing new products and services, creating
greater value for customers, and increasing operating effectiveness can a company penetrate new
markets, increase revenues and margins, and enhance shareholder value (Dess et al., p.108).
Because of this, the firm not only must be willing to change, and has to be better at changing and
innovating than competitors in order to not lose customers to its competition. Therefore, an
important statistic of innovation is new product introduction vs. competition.

Old National Bancorp: Final Report

Figure 3 Example of balanced scorecard

Note: Adapted from Managerial Accounting

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Old National Bancorp: Final Report

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Reference
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/corporateprofile.aspx?IID=100391
Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business
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