Over the past four years the number, size, and frequency of banking mergers have increased sharply. During the last four months of 1995 alone several large mergers in excess of $1 billion were announced, including the much publicized merger between Chase Manhattan Corp. and Chemical Banking Corp.

The drive to reduce costs and provide higher returns to shareholders is a clear motivation behind many of these transactions. Despite the fact that history tells us this efficiency does not always occur in mergers or acquisitions, there is still a widely held perception that in the case of banks, there are significant cost savings that can be achieved by such combinations.

Analysts frequently point to the technological revolution as a basis for these assumed efficiencies. For example, computers today are so much more powerful, faster, and less expensive than they were 10 years ago that ever increasing amounts of data can be processed with very little incremental expense.

At the same time, the merging of large financial institutions has and will continue to produce dislocations among customers and employees alike. Although the level of dislocation will vary, people and organizations will be affected by these combinations.

One such group will be middle-market businesses that have established borrowing relationships with local banks that are being merged into larger banking entities. Unfortunately, this middle-market segment is one of the most ill-defined and poorly understood in American business. And yet, at the same time, it increasingly appears to be the driving engine behind much of America's growth in jobs.

Everyone seems to know what a middle-market company is until asked to define the concept. For present purposes, we will define a middle-market business as one that is too large to qualify for financing through a Small Business Administration guarantee program and too small to qualify for or justify the expense of a public debt offering.

For the most part, these types of businesses tend to be sole proprietorships, closely held companies that operate in niche businesses supplying goods and services to a limited geographical area.

For most companies in this segment of the economy, commercial banks and finance companies are the most frequently used sources of capital. Over the past 20 years, banks have moved more aggressively to serve the middle- market customer through formula-based secured loan programs.

Typically, these types of facilities are made available to companies by calculating the estimated loan value of "hard" assets such as receivables and inventories. Although these types of facilities are readily available from larger commercial banks and finance companies, there are several drawbacks which may be very important to a growing company in the middle market:

* Such facilities tend to be very expensive. Lenders frequently charge prime plus two to three hundred basis points on borrowings.

* Commitment fees, facility fees, service fees, and transaction expenses can frequently add another point or more to the effective borrowing cost.

* Such facilities tend to be paper intensive since the movement of collateral requires careful monitoring by both borrower and lender to ensure that compliance by both parties is maintained within the confines of commercial law.

* And while an asset-based loan facility may be suitable for financing the day-to-day operations of a business that is centrally located and does not have multiple manufacturing facilities or distribution points, it may be unsuitable for financing long-term growth.

Using a short term, asset-based facility to finance the introduction of a new product, a new production line, or warehouse is likely to violate the old adage of the perils in borrowing short to invest long.

Over the past two years, commercial and industrial loans have increased by approximately $70 billion. Although there are no readily available numbers which can tell us how much of the increase has gone to middle- market companies, credit appears to have become more accessible to such companies during this period. At the same time, however, consolidations among commercial banks has gathered steam as well.

Such consolidations can threaten middle-market companies' access to capital. There are several reasons for concern. First, the current bank may have made a point of soliciting lending relationships from small to midsize businesses while the merger partner may not. This is particularly true if the merger partner is seeking to merge for the purpose of acquiring deposits and not assets.

Thus, to the extent the merger partner dominates the management of the combined entity, the solicitation of such borrowing relationships may be deemphasized or even abandoned.

Second, to the extent that the current bank and the merger partner both have aggressive business solicitation efforts in the market, concerns may arise over market concentration or segment concentration within the lending area of the bank. Bank examiners and outside auditors frequently look for such concentrations. To the extent these concentrations appear before and after the merger, customers may be approached to move their relationship to another institution.

In those situations where financial performance and financial condition might be of some concern, steps should be taken to identify and implement remedial action.

Preservation of existing financing relationships is enhanced through a proactive style rather than a wait-and-see attitude that may result in the economic survival of the business being put at risk unwittingly and unnecessarily.

Mr. Harris is founder and president of Seneca Financial Group Inc., a merchant banking firm based in Greenwich, Conn.

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