| Beyond Mergers
By Steve Klinkerman
Rising demands for efficiency
don't necessarily dictate a spin down M&A lane.
2002 marked a special year in the annals
of bank-related mergers and acquisitions, posting the
lowest level of activity seen in a decade. In contrast
with the peak year of 1998, when 411 deals worth $265.3
billion were announced, 2002 produced just 165 deals valued
at $8.4 billion, according to SNL Financial LC, Charlottesville,
Va.
There are many reasons to think, perhaps
even hope, that this signals an end to merger mania. The
evidence is overwhelming that customer relationships are
disrupted in the course of combining companies, often
to the point that defection-driven revenue losses offset
gains from expense reductions. It often takes years to
combine systems, infrastructure and cultures. And from
an investor perspective, mergers certainly do not guarantee
the creation of lasting value, either for the acquirer's
or the target's shareholders.
Yet, the question keeps surfacing as
to whether the market can support all of the companies
still out there vying for a piece of the action. The cheap
deposits that flooded into the banking industry following
Wall Street's three-year slowdown cushioned the industry
as it dealt with the recession and related credit-quality
problems. But peering into the economic future, there
are concerns about the permanence of these funds; about
shrinking margins; about the health of the brokerage and
investment management businesses; and about what constitutes
a "normal" growth rate in the wake of the dot-com
bust and U.S. recession.
If the screws tighten, cost control
will grow in importance and merger pressures will climb.
But back-breaking corporate combinations aren't the only
option. There are at least three powerful tools at management's
disposal, one involving an expanded definition of innovation;
another involving strategic focus; and a third involving
strategic role-playing.
While efficiency has gained a reputation
as a mean-spirited operational exercise, it actually might
constitute the better part of innovation if tight conditions
continue. Every business requires capital reinvestment
to keep it going, and every dollar sunk back into the
business presents an opportunity to make something work
better, be it through technology, or an improved process,
or a refined understanding of a customer value proposition.
The enlightened approach to cost control includes development.
Reinvention is enhanced when the organization
has clarity of purpose, and that is why many banking companies
are retreating from the "all things to all people"
approach and trying instead to organize around a smaller
cluster of major business activities. One offshoot of
focusing more attention on fewer things, in the hands
of the right team, is increased efficiency.
A stronger medicine, advocated by former
Comerica Inc. CEO Eugene Miller back in the '90s, is to
analyze the company from an acquirer's perspective and
proactively perform the surgery that otherwise might come
at an acquirer's hands. Understandably, managers tend
to shy away from this because they become lightening rods
for all of the transition stress. But there's arguably
no better way to either avoid a merger or fetch the best
price if a takeover materializes.
Whatever the future may hold, these
approaches serve as a reminder that rising demands for
efficiency don't necessarily dictate a spin down M&A
lane.
Mr.
Klinkerman is editor-in-chief of Banking
Strategies.
Copyright © 2003 by Banking
Strategies, published by BAI.
back
to top |
