Beyond Mergers
By Steve Klinkerman
Rising demands for efficiency don't necessarily dictate a spin down M&A lane.
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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.