You cannot stand still. If you are not constantly leaning into the wind, you soon will find yourself being blown backward.
A rising foreign bank executive arrived in New York. His mission was to manage the U.S. portfolio that had just produced record profits. A quick review revealed little latitude to increase revenues.
Merely echoing last year's performance was not going to keep him on track. His conclusion? Consolidate locations, reduce personnel, and keep a keen eye on out-of-pocket expenditures. Cutting costs increased profits and kept his star in ascendancy.
A profitable, well-capitalized superregional hired a consultant to help reduce expenses. Executives were encouraged to recommend changes - even when they knew it might mean the elimination of their own jobs.
The rationale for the bank's timing? Trimming down in a healthy environment was an exercise to which they could devote their energies more objectively. Managemers were able to make difficult decisions when they were not under intense pressure to do so. The consultant's assignment has been completed. This does not mean the bank has stopped looking for ways to save money.
The premier bank yardstick no longer is return on assets. Efficiency ratio, the current buzzword relating overhead to revenues, was not even in our vocabulary a few years ago.
Commercial banks and thrifts currently total over 13,000, according to Federal Deposit Insurance Corp. data. However, this includes the subsidiaries of multibank holding companies. There are only 10,000 independent institutions. With the advent of interstate branching by 1997, projections call for this number to fall to 3,000 - or less - over the next decade.
In this context, every bank should position itself to acquire or be acquired (nor should acquisition targets be restricted to other banks). The exercise is much the same for both eventualities. Indeed, the bank that is not being reviewed as a merger candidate is the one which most should look inward and ask, "Why not?"
Taking steps to become leaner also increases the barriers to being taken over. A low efficiency ratio improves market valuation, which means a higher price/earnings multiple. It reduces the potential to eliminate duplication costs, which often are used to justify a merger.
It even can render the target the ultimate victor, if it proves the stronger operating entity over time. Remember it was Phibro Inc. which acquired Salomon Brothers.
Start by formulating your strategy for growth. Even should this appear intuitively obvious and your bank already has a multiyear business plan, when was the last time it was updated? Are there adequate short-term marketing plans in place to implement your objectives pragmatically?
Key issues include: geographical positioning, market share objectives, and products and services to offer in each market. Do not neglect to look up-market to larger competitors as well as to smaller ones.
Evaluate each possibility in terms of strategic fit. Consider the likelihood of receptivity based on personal knowledge of senior management of your prospective merger partner. While friendly deals are always preferable, this is a function of the personalities at the top.
Ultimately, it is the meshing of the personalities below that really counts. Bank of New York has benefited from its hostile takeover of Irving Trust six years ago.
Review the trend of historical precedents and use this to project a reasonable cost range. Then be disciplined about confining your bid within objective parameters. The candidate pool will still be large but a weakened balance sheet can quickly convert a predator into prey. Citizens and Southern learned the hard way.
Beyond fundamental financial analysis, merger evaluations focus on projected cost savings via elimination of overhead overlaps and the sale or closure of less than profitable services. A combination which truly strengthens the links of the chain creates a more viable entity overall. It will be more competitive in the marketplace. It also can serve as a platform to enter new markets or to launch additional products which a higher threshold of market penetration now can sustain.
The real gauge of success is how well post-merger integration occurs in relation to what has been anticipated. While there is a natural tendency for the stronger entity to impose its corporate style onto the acquiree, there clearly are longer-term advantages in accommodating the cultures of the two partners. This will expedite combination of the surviving personnel.
Systems consolidation generally is the most complex aspect of a merger. Each entity's technology must be thoroughly understood to determine which configurations should be dedicated to the new larger entity. Parallel testing to ensure an orderly transition will greatly facilitate the transition for all operating personnel.
The most positive bottom-line reflection of a successful merger is high customer retention. The two elements which maximize this are a seamless systems conversion and a well-articulated and communicated promotion program. This is critical. Retaining the customer base can be accomplished only by identifying challenges before they become problems, exploiting subtle opportunities, and getting it all done on time.
Streamlining for productivity must be a continuous process. Growth by acquisition should be viewed as an ongoing complement to internal growth: It is the classic "build or buy" scenario.
We do not live in a static environment. Anti-takeover devices are tools to ensure stability, not to entrench management at the expense of shareholders. Plans require constant review. In a world of accelerating change, what does not appear viable today well may become so in the not too distant future.
