Some bank mergers and acquisitions don't realize all of their potential increased profits and shareholder value. These foregone benefits are substantial and can exceed the scale economies that are immediately realized.

These are the conclusions of a commercial bank study recently completed to examine the impact of mergers and acquisitions on service quality and productivity.

Though mergers are rife with opportunities for synergistic increases in profitability, delays in consolidating operations are costly and prevent merged banks and their shareholders from benefiting from these opportunities.

This may be one reason that two-thirds of bank mergers generate disappointing shareholder returns-a finding of the Mitchell Madison Group study reported in American Banker on March 6 of last year.

If consolidation of operations is overlooked as a source of added value, then new questions arise:

Why don't managers seek these foregone economic benefits?

Should shareholders demand more value creations?

Is this a hidden asset that will be undervalued by management in setting a selling price if this bank becomes a target for an acquiring bank?

Observers of large bank mergers readily identify some of the very substantial economic benefits realized in these mergers. For example, BankAmerica Corp.'s acquisition of Security Pacific Corp. and the combination of Chase Manhattan Corp., Manufacturers Hanover Corp., and Chemical Banking Corp. led to cost reductions by closing branches and reducing personnel. (About 12,000 jobs were reported to be eliminated at Chase).

Reports on retention of customers after these mergers are somewhat mixed, but the banks generally report success in keeping customers, with no comment as to whether they are retaining the high-value customers.

Merger benefits extend to many areas, including the ability to acquire more effective information technologies at lower cost-a benefit realized in the First Union-CoreStates bank merger.

Though there is clear evidence that scale economies are achieved, evidence of costs and unrealized potential benefits is not as well documented, perhaps because measuring opportunity costs is a more difficult and sometimes esoteric process.

When one visits the corporate offices of merged banks, it is not unusual to find management layered with a mixture of personnel from each of the merged banks.

Do these managers enthusiastically try to merge their former employer- bank into the larger entity to achieve the greatest overall performance? Or do they retain allegiance to their former colleagues and their bank's way of doing things?

If the latter is the case, it can slow or even prevent the bank from developing a unified, more efficient and effective way of delivering customer services.

Do merged banks fail to realize the advantages of size? Observing management in these settings suggests that the combination of different banks' cultures, allegiances, and management philosophies prevents or at least delays realizing potential economic benefits.

This may contribute to disappointing returns found in many bank mergers.

We recently completed a study of one bank that acquired three other banks. These banks have been operating as a single bank corporation for more than four years.

The study indicated:

The bank delayed consolidating its branch network for more than four years, allowing each set of branches to maintain its former operating procedures.

Substantial benefits were achieved by consolidating and unifying the management practices among these banks, leading to increased profits and customer service quality-a result that could have been implemented four years earlier;

Beyond immediate economic benefits realized at the time of the mergers, the combined banks could achieve operating cost savings and service improvements by unifying their management practices. These added savings are more than three times what the four banks could have achieved independently-a compelling economic reason for banks to continue to consolidate.

Mergers generated real benefits soon after the banks were combined, but management overlooked other substantial merger benefits for more than four years. One result was lower accounting earnings than could have been achieved, Also, investors may have undervalued the bank's common stock.

The banking company in our study initiated a process under which all its branches adopted uniform best practices. Management applied a powerful benchmarking technique. High performance was defined as good service and high productivity.

This was the first time the entire branch network, including all four banks' branches, had been subjected to a rigorous comparative evaluation. Management identified a set of best-practice branches-those at which quality was high and costs low. Also identified were the practices that achieve such status for various kinds of branches-urban, rural, seasonal, and so on.

These studies generated a set of benchmarks, and operations of all the other branches were revised in some measure to achieve them. Service improved, and personnel and other costs were reduced.

To determine the value of the merger in the branch network, we applied the same benchmarking process individually to each of the four banks-as if they had not merged.

Best practices were developed within each bank. Its branches were benchmarked only with the others that belonged to the same bank before the merger. Consequently, different best-practice benchmarks were identified within each of the four banks.

The results were very different. The companywide exercise identified opportunities that could reduce branch operating costs by 22%. The figure would have been only 7% if each constituent bank had used only its own best practices.

Beyond cost savings, service improvement methods were identified that also exceeded what could have been achieved if the banks had not merged.

The profitability and service improvements achieved through this consolidation process had remained unrealized for four years.

These results are based on one banking company. Implementing mergerwide benchmarks will not always yield 22% savings and will not always exceed three times the nonmerger savings.

Yet when one visits BankAmerica branches in Arizona, Washington, and California, or Chase branches in New York and New Jersey, the differences in the operating methods suggest that unrealized profit gains may be substantial.

Our study demonstrates that mergers do indeed provide significant operating cost advantages. And a key finding is that managements sometimes overlook them, or defer realizing them.

Though the study focused on branch networks, similar results would be likely in areas such as information system management, call centers, and product marketing.

More aggressive realignment and rationalization of control and operating systems into a single bankwide system can substantially increase profits and shareholder value. Ignoring this potential may result in undervaluing a bank, making it a bargain purchase for an acquiring bank.

If shareholders demanded faster transformation of these hidden assets into real earnings and market value, more mergers would prove economically successful. Mr. Sherman and Mr. Rupert teach accounting at Northeastern, which is based in Boston.

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