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Sun, Feb 08, 2009 - Page 12 News List

Exploding the false myth of the megamerger

Banks need to reconnect with customers and disengage from the trend of sexier but far from profitable bank consolidation

By Simon Caulkin  /  THE GUARDIAN , LONDON

“This is a solution?” marveled Stanley Bing incredulously on business Web site TheStreet.com at the prospect of a new wave of bank consolidations. “Didn’t we see what happened to Citigroup and Bank of America? Aren’t both now being deconstructed due to unsuccessful, if not heedless, acquisitions? Haven’t empires from Rome to ITT fallen into rubble as a result of getting too big, too fast?”

Bing has a point. Most people assume that sorting out the banks is a technical and financial matter — deleveraging, rebuilding reserves and writing down toxic liabilities. But that’s just the half of it. What has been grossly neglected is that, even when that’s done, many banks face the mother of all challenges on the management front — making business sense of vast, sometimes shotgun, acquisitions carried out in the most hostile economic conditions of our lifetimes.

Consider: At the best of times, mergers are worse business, and harder to do, than managers think. One-third fail and 80 percent fail to live up to expectations. The financial brainboxes are no better at it than the plodders: A recent City of London poll on the worst banking mergers ever identified such turkeys as Citibank-Travellers, Credit Suisse-DLJ and Wachovia-Golden West — then put RBS-ABN Amro and Bank of America-Merrill Lynch, the ramifications of which are still to be fully felt, at the top.

“Value destruction in financial services isn’t new — we just can’t afford it any more,” says Dustin Seale, managing director of the Europe arm of Senn-Delaney Leadership, a consultancy specializing in corporate culture.

The risk, he fears, is that the perceived remedy makes ultimate success harder to achieve. Thus, while banking is moving toward being smaller, more focused and more conservative, the entities being cobbled together are bigger and more complex than ever. Banks were once too big to fail; are today’s mergers creating organizations that are too big to save?

Bank mergers are not just ordinarily difficult. The credit crunch capsized all the assumptions on which they were based. RBS’s Fred Goodwin had a good record of making acquisitions work, even expensive ones, but “Fred the Shred” is toast, and his merger rationale and style vaporized along with him.

His bank’s strategy of globalization no longer makes much sense, believes Andrew Campbell, director of the Ashridge Strategic Management Center and co-author of a book called Smarter Acquisitions. Lloyds-HBOS, now relabeled Lloyds Banking Group, is a more coherent unit focusing on the UK retail market, but the merger will not be smooth sailing; integrating the workforce and senior managers of a fierce rival, part of whose identity is bound up with the rivalry itself, never is.

The very success criteria on which the mergers were predicated, and on which the current leaders rose to the top, have reversed overnight.

The macho City of London (and Wall Street) culture of individual achievement and self-promotion has become the problem; but moving to a culture where words such as engagement, trust and self-determination can be heard without provoking gales of laughter is a monumental management task — made more monumental, says Ian Johnston, a Senn-Delaney partner, by the fact that the colossal bonuses that were used to paper over other cultural discontents are no longer available.

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