The Morgan Stanley-Dean Witter, Discover & Co. merger has dominated talk up and down Wall Street-and also in bank executive suites-in recent weeks.
The banking industry has gained a powerful new competitor, according to some, and big banks interested in buying Wall Street firms may have to move quickly in response to the new development.
The questions "What does this mean?" and "How much should we be worried?" seem to be the common threads within such conversations.
Indeed, the financial services world as we have known it is being rapidly transformed, and the merger route is easily the fastest way to stake out a new business position alongside the current and new corporate and consumer finance giants.
But before management picks up the phone to join forces with the next available brokerage house, someone should have answered the baseline question, "How will this transaction create shareholder value?"
Among financial institutions, past mergers and acquisitions have for the most part created near-term shareholder value.
The classic in-market acquisitions, from Wells-Crocker in the '80s to Chase-Chemical in 1996, created value through cost elimination.
Value loss in these transactions from customer "breakage" has historically been assumed to be small (and not measured)-management believing that customers are, after all, reluctant to relocate their banking relationships.
Outcomes have been more mixed in the second category of transactions, the "get bigger" or market-acquisition merger. Some, like KeyCorp's "snow belt" assembly of banks across the northern United States, ultimately created value through specific line-of-business synergies, combining mortgage, insurance, and trust.
NationsBank's march west, First Union's march north, and Banc One's continued growth south and west are all apparently attractive to shareholders and analysts by market measures.
By stark contrast, many of the "get bigger" mergers within the thrift industry of the 1970s and 1980s led nowhere; "bigger but no more capable" of competing did not create value for shareholders, customers, or incumbent management.
Some of this is going on in banking today.
Repositioning or "creative" transactions, the third category, would appear to be what's intended in the Morgan Stanley-Dean Witter combination.
This approach, in the long term, holds the best promise of creating shareholder value.
First Union's expansion via acquisition into mutual funds-asset management and, most recently, Banc One's transaction with First USA, are two other banking examples that reflect major value creation for shareholders through capability acquisition and, derivatively, enhancement of competitiveness.
Both institutions saw customer needs that they could not meet, and they found, via acquisitions, new ways to create customer value around those needs.
And from capturing customer value comes sustainable shareholder value.
Many examples of all three categories of merger-acquisition will undoubtedly occur in the next few years as the financial services industry, particularly banking, undergoes massive fundamental transformation and consolidation.
Shareholders would be well advised to stay with companies on a cost- elimination or a creative path-and to stay away from those who merge merely to "get bigger."
