Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why (Economics & Finance)

318 Pages·2004·3.37 MB·English

by  Ingo Walter

Mergers and Acquisitions
in Banking and Finance:
What Works, What Fails,
and Why
Ingo Walter
OXFORD UNIVERSITY PRESS
MERGERS AND ACQUISITIONS
IN BANKING AND FINANCE
This page intentionally left blank
MERGERS AND ACQUISITIONS
IN BANKING AND FINANCE
What Works, What Fails, and Why
Ingo Walter
1
2004
1
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Walter,Ingo.
Mergersandacquisitionsinbankingandfinance:whatworks,what
fails,andwhy/byIngoWalter.
p. cm.
ISBN0-19-515900-4
1.Bankmergers.2.Financialinstitutions—Mergers.I.Title.
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Preface
On April 6, 1998, the creation of Citigroup through the combination of
Citicorp and Travelers Inc. was announced to the general applause of
analystsandfinancialpundits.The“mergerofequals”createdtheworld’s
largest financial services firm—largest in market value, product range,
and geographic scope. Management claimed that strict attention to the
use of capital and rigorous control of costs (a Travelers specialty) could
becombinedwithCiticorp’suniquelyglobalfootprintandretailbanking
franchise to produce uncommonly good revenue and cost synergies. In
the four years that followed, through the postmerger Sturm und Drang
andasuccessionoffurtheracquisitions,Citigroupseemedtooutperform
itsrivalsinbothmarketshareandshareholdervaluebyahealthymargin.
Like its home base, New York City, it seemed to show that the unman-
ageablecouldindeedbeeffectivelymanagedthroughwhatprovedtobe
aratherturbulentfinancialenvironment.
On September 13, 2000, another New York megamerger was an-
nounced.ChaseManhattan’sacquisitionofJ.P.Morgan&Co.tookeffect
at the end of the year. Commentators suggested that Morgan, once the
most respected bank in the UnitedStates, had at lastrealized thatit was
notpossibletogoitalone.Inaneraofapparentascendancyof“universal
banking” and financial conglomerates, where greater size and scope
would be critical, the firm sold out at 3.7 shares of the new J.P. Morgan
ChaseforeachlegacyMorganshare.Managementofbothbanksclaimed
significant cost synergies and revenue gains attributable to complemen-
tary strengths in the two firms’ respective capabilities and client bases.
Withintwoyearsthenewstockhadlostsome44%ofitsvalue(compared
tonovalue-lossforCitigroupoverthesameperiod),manyimportantJ.P.
Morgan bankers had left, and the new firm had run into an unusual
numberofbusinesssetbacks,evenastheboardawardedtopmanagement
some$40millionin2002for“gettingthedealdone.”
vi Preface
Even acknowledging that the jury remains out in terms of the long-
termresults,howisitthattwomajordealslaunchedbypeopleatthetop
oftheirprofessions,approvedbyboardspresumablyrepresentingshare-
holder interests,couldshowsuchdifferentinterimoutcomes?Isitinthe
structureofthedealsthemselves?Thestrategicprofileofthecompetitive
platform that resulted? The details of how the integration was accom-
plished? The people involved and their ability to organize and motivate
the troops? Or, in the light of both banks landing right in the middle of
someoftheworstcorporateandfinancialmarketscandalsinhistory,will
the two deals end up looking much the same? These are some of the
criticalissuesweattempttoaddressinthisbook.
Thefinancialservicessectorisabouthalfwaythroughoneofthemost
dramaticperiodsofrestructuringever undergonebya majorindustry—
a reconfiguration whose impact has carried well beyondshareholdersof
thefirmsinvolvedintothedomainofregulationandpublicpolicyaswell
asglobalcompetitiveperformanceandeconomicgrowth.Financialserv-
ices have therefore been a center of gravity of globalmergersand acqui-
sitions activity. The industry comprises a surprisingly large share of the
valueofmergeractivityworldwide.
In this book I have attempted to lay out, in a clear and intuitive but
also comprehensive way, what we know—or think we know—about re-
configurationofthefinancial servicessectorthroughmergersandacqui-
sitions (M&A). This presumed understanding includes the underlying
driversofthemergersandacquisitionsprocessitself,factualevidenceas
to whether the basic economic concepts and strategic precepts used to
justify M&A deals are correct, and the efficacy of merger implementa-
tion—notablythemergerintegrationdynamic.
Chapter1describestheactivity-spaceoccupiedbythefinancialservices
industry, with a discussion of the four principal businesses comprising
the financial services sector—commercial banking, investment banking,
insurance, and asset management. This description includes profiles of
subsectorssuchasretailbrokerage,insurancebrokerage,privatebanking,
andwholesalebanking,andhowtheyarelinkedintermsofthefunctions
performed. The objective of this introductory chapter is to provide a
“helicopter” overview of the financial services businessesengagedinre-
structuringthroughmergers.Thechapterprovidessomebackgroundfor
readersnotfullyfamiliarwiththeindustryor(asitoftenthecase)familiar
onlywitharelativelynarrowsegmentoftheindustry.
Chapter2positionsfinancialservicesM&Adeal-flowwithintheoverall
contextofglobalmergersandacquisitionsactivity,assessingthestructure
ofM&Avolumeintermsofin-marketandcross-marketdimensions(both
functionallyandgeographically).ItconsidersNorthAmerican,European,
and selected Asian financial services transactions in order to provide a
context for discussing the underlying causesof structuralchangesinthe
industry,oftenunderverydifferenteconomicandregulatoryconditions.
Preface vii
Chapter 3 provides a comprehensive review of the economic drivers
of mergers and acquisitions in the financial services sector. Where does
shareholder-value creation and destruction come from? How important
are economies of scale, economies of scope, market power, conflicts of
interest and managerial complexity, too-big-to-failsupportbytaxpayers,
conglomerate discounts, and other factors—and how likely are they to
influence market share and stock price performance of financial services
firmsengagedinM&Aactivity?Italsosuggestsaframeworkforthinking
about financial services M&A deals that integrates the economic and
financial motivations raised in the preceding chapter into a consistent
valuation framework. From a shareholder perspective, mergers are sup-
posed to be accretive—they are supposed to add value in terms of total
returnstoinvestors.Theyalmostalwaysdothatforthesellers.Oftenthey
do not succeed for the buyers, who sometimes find that the combined
firmisactuallyworthlessthanthevalueoftheacquiringfirmbeforethe
merger. This chapter uses a “building block” approach to identify the
possible sources of shareholder value gains and losses in merger situa-
tions.
Chapter 4 is the first of two that deal with merger integration. The
underlying economics of an M&A transaction in the end determine
whether the acquirer is “doing the right thing.” The managerial and be-
havioral dimensions of the integration process determine whether the
acquirer is “doing the thing right.” That is, failures and successes can
involve either strategic targeting or strategic implementation. Best for firms
and their shareholders is obviously “doingtherightthingright.”Notso
goodis“doingthewrongthing”and“doingtherightthingpoorly.”The
financial sector has probably had far more than its share of mergersand
acquisitionsthathavefailedorperformedfarbelowpotentialbecauseof
mistakesinintegration.Thischapterfocusesonthekeymanagerialissues,
including the level of integration required and the historic development
of integration capabilities on the part of the acquiring firm, disruptions
in human resources and firm leadership, cultural issues, timeliness of
decisionmaking,andinterfacemanagement.
Chapter5continuesthediscussiononintegrationwithspecificregard
to information and transactions-processing technology. It has often been
arguedthatinformationisatthecoreofthefinancialservicesindustry—
information about products, markets, clients, economic sectors, and ge-
ographies. At the same time, it is also one of the most transactions-
intensive industries in the world. It stands at the heart of the payments
system of economies and engages in all kinds of transactions, ranging
from individual monetary transfers and stock brokerage to institutional
securities sales and trading. Transactions must be timely, accurate, and
inexpensiveinorderforfinancialservicesfirmstoremaincompetitive,so
the industry invests billions in information technology (IT) systems an-
nually. Whether things go right or wrong in mergers of acquisitions de-
pendsheavilyonhowthefirmshandletechnology.
viii Preface
Chapter 6 takes a look at the facts—what we know about whether
financial sector mergers have “worked” or not. It considers all the evi-
dence,attemptingtodosoinacarefulanddispassionatewaybyavoiding
thekindsofunsupportedassertionsthatoftenaccompanyM&Adealsin
thefinancialservicessector.Thechapterconsiderstheevidencebasedon
well over 50 studies undertaken by central banks, financial regulators,
management consultancies, and academics worldwide. Inevitably, there
isdisagreementonsomeofthefindings—especiallybecausemeaningful
international empirical work is extraordinarily difficult in this industry.
But the basic conclusions seem clear and compelling. Whether mergers
andacquisitionsinthefinancialservicessectorhavebeensuccessfultends
tobedifficulttoassessintermsofshareholdervaluecreationintheearly
2000s. Thereis a need toseparate betweenthecompany-relatedimplica-
tions and the effects of the market at large, as reflected by the evolution
of the post-bubble stock market decline. In addition, one needs to be
cognizant of the fact that unfavorable business conditions and other ad-
verse circumstances can cast an economic shadow over even the best-
conceiveddeals.
Chapter 7 puts financial services M&A activity in the context of na-
tional and global financial architecture. Restructuring in this industry
mattersagreatdealtotheshareholders,managers,andemployeesofthe
firmsinvolved.Butitalsomattersfromtheperspectiveofthesafetyand
soundness,efficiencyandcreativityofthefinancialsystem.Theindustry
is“special”inmanyways.Itdealswithotherpeople’smoney.Itsperfor-
mance affects every other economic sector and the fate of whole econo-
mies. Problemsit encounterscaneasilybecomesystemicandcantrigger
crises that are hard to contain and whose impact ranges far beyond the
industry itself. Chapter 7 considers what kinds of financial structures
seem to be emerging as a result of reconfiguration through M&A deals
and what the financial structures mean in the broader economic and
politicalcontext.
This book is based on two decades of observing and teaching about
theevolutionofthefinancialservicesindustryinarapidlyevolvingglobal
economic,regulatory,andtechnologicalenvironment.Ihavetriedtotake
a dispassionate approach to an issue unusually replete with both scorn
andhype.Inthisrespect,acertaindistancefromthefinancialfirmsdoing
the restructuring has helped, as have discussions with academic col-
leagues, senior executives, and regulators. So has a growing body of
literatureaboutwhatworksandwhatdoesn’t.
Anumberofpeopleassistedwithvariouspartsofthisbook.GayleDe
Longwasextremelyhelpfulincompilingtheevidenceonfinancialsector
M&Aavailablesofarintheliterature—Ijoinherinpayingtributetoher
father,GeorgeA.DeLong(1922–2002),aheroineverysenseoftheword.
Shantanu Chakraboty and David L. Remmers helped with several of
the case studies and issues related to merger integration, while Ralph
WelpewasinstrumentalinsurveyingtheevidenceonITintegrationcon-
Preface ix
tained in Chapter 5. Harvey Poniachek provided helpful comments and
correctionsonthefinalmanuscript.Particularlyhelpfulindevelopingthe
ideas and assembling facts behind this book over the years were Allen
Berger,ArnoudBoot,LawrenceGoldberg,RichardHerring,ChristineHir-
sczowicz, Ernst Kilgus, Richard Levich, David Rogers, Anthony Santo-
mero,AnthonySaunders,RoySmith,GregoryUdell,andMaurizioZollo.
All are owed a debt of gratitude, although none can be held responsible
forerrorsoffactorinterpretation.