Dear Chairman, Now That You're Merging, How About...

To the chairman of a merging bank:

Congratulations on your recent announcement of MegaTrust's proposed merger with MaxiBank. The resulting institution, MegaMax Bank, should certainly enjoy a dominant position in its market and great potential for further growth.

In our experience, many bank mergers fail to achieve their maximum potential for efficiency, productivity, and value. Therefore, we thought we'd offer a few words of unsolicited advice:

* Aim high. You are probably estimating that operating costs can be cut by 10% - or even 15% - of the combined cost base by eliminating duplicative functions, closing overlapping branches, and so forth.

You may be overlooking a far more profound earnings boost that could come from a fundamental reordering of activities and processes to create significantly higher cost savings. This can be coupled with revenue enhancements from the rethinking of your noninterest income pricing policies.

|A Fantastic Opportunity'

Even well-run institutions can reduce their costs by 25% to 35% over 12 to 18 months - before mergers of acquisitions. Your combination with MaxiBank presents a fantastic opportunity for incremental improvements well above and beyond this 25% to 35%. But you'll never know unless you challenge your people to aim high.

* Focus on revenue generation, not just cost reduction. By creating the features and product structure that best fit customers' perceptions of value, you will be able to enhance revenues - and keep doing so long after the merger is consummated.

Consider how planned cost cuts, especially branch closings and changes in procedures, will impact customer retention. Your competitors are waiting to pick off customers who may be dissatisfied with a change in policies or a snag in service during a transfer between branches or transition of account officers.

A coordinated revenue/cost-improvement effort can raise your market share position beyond the sum of the two merged banks. Done correctly, the effort will let you pick off your competitors' customers.

* Spend more time on plan execution and less on plan development. Everyone wants to be thorough, and no manager wants to start off life at the new bank with a misstep.

However, the "planning paralysis" this attitude often leads to can be very damaging: Until specific, firm plans are announced, employee uncertainty - and anxiety - skyrocket. Work slows and the rumor mill heats up.

Quickly Choose an Organization Model

An example is the process of choosing delivery systems. A team of senior managers often studies for months - and sometimes longer - whether the bank should organize under geographic lines, line-of-business lines, functional lines, or some other model.

In fact, several organizational formats will work very well for your bank. You will be better served by picking one model and working to implement it well than by spending a great deal of time, effort, and money finding the one that wrings the last penny from your investment.

* Pick key decision makers early. While the top officers of the new bank have been named, you probably haven't yet chosen department heads.

You may even be thinking that middle managers from each of the two banks can work in tandem until one emerges as the "best" manager.

Fostering Accountability

Instead, appoint one executive to run each key business line or department from the start. This eliminates a lot of uncertainty, stress, and political competition. It also creates personal accountability for decisions made in implementing the merger.

Remember: "Merger coordination teams" are great for identifying issues to study, but are rarely effective at taking definitive action.

Don't let the magnitude of this merger intimidate your executives. Be decisive, move quickly, and rely on your top managers. The same skills that have enabled you to run a successful bank are equally applicable to completing a productive merger.

If you do this right, you will build a cadre of skilled managers for later restructurings, as further consolidation opportunities present themselves. Good Luck!

Ms. Tandon and Mr. Allen are the founders and co-chairmen of ALTA Limited Partners, a bank investment and restructuring firm based in New York.

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