Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why (Economics & Finance) PDF
Preview Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why (Economics & Finance)
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 Oxford NewYork Auckland Bangkok BuenosAires CapeTown Chennai DaresSalaam Delhi HongKong Istanbul Karachi Kolkata KualaLumpur Madrid Melbourne MexicoCity Mumbai Nairobi Sa˜oPaulo Shanghai Taipei Tokyo Toronto Copyright(cid:1)2004byOxfordUniversityPress,Inc. PublishedbyOxfordUniversityPress,Inc. 198MadisonAvenue,NewYork,NewYork10016 www.oup.com OxfordisaregisteredtrademarkofOxfordUniversityPress Allrightsreserved.Nopartofthispublicationmaybereproduced, storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans, electronic,mechanical,photocopying,recording,orotherwise, withoutthepriorpermissionofOxfordUniversityPress. LibraryofCongressCataloging-in-PublicationData Walter,Ingo. Mergersandacquisitionsinbankingandfinance:whatworks,what fails,andwhy/byIngoWalter. p. cm. ISBN0-19-515900-4 1.Bankmergers.2.Financialinstitutions—Mergers.I.Title. HG1722.W35 2004 332.1'068'1—dc22 2003015483 9 8 7 6 5 4 3 2 1 PrintedintheUnitedStatesofAmerica onacid-freepaper 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.
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