Merger Mania Taking a Toll on Vendors
Vendors of professional and other services to banks are reeling from the wave of consolidation sweeping the industry.
"Some of these companies are going to take a whack in the chops," said Jack Kyser, a former bank economist now with the Los Angeles Economic Development Council.
Merger Victimizes Peat
Take KPMG Peat Marwick, for instance. Three years ago, the accounting firm lost Irving Bank Corp. as a client when Irving was acquired by Bank of New York Co. It now risks losing Security Pacific Corp. and Manufacturers Hanover Corp. as major clients in the wake of their respective mergers with BankAmerica Corp. and Chemical Banking Co.
Peat Marwick is not alone.
Law firms and advertising agencies also are expecting to lose lucrative business. Marketers of computers, automated teller machines, copiers, and myriad other items will soon find some of their best customers gobbled up by other financial institutions.
Other potential losers include armored car services, janitorial companies, messenger services, and art consultants.
The loss of business could not have come at a worse time. Many of these vendors are already reeling from the recession and a contraction of other activities.
Mergers Among Professionals
In the 1980s, four of the Big Eight accounting firms themselves merged. Law firms have closed, merged, or cut staff. Los Angeles legal powerhouse Latham and Watkins announced in late August it was laying off 43 of its 650 lawyers.
Each bank and thrift has a different policy about suppliers when it makes an acquisition.
Banc One Corp., Columbus, Ohio, for example, gives Coopers & Lybrand its entire auditing business. The company also has master contracts for copiers, advertising, automated teller machines, and other products.
"It encourages the [affiliated] banks to buy from these suppliers because it is so much cheaper," said a spokesman. But he added that local decisions prevail in hiring janitorial or armored car services.
Meetings of the Minds
Partners in law and accounting firms are huddling in heated strategy sessions. Bankers are said to be playing off one firm against another, inviting each to make presentations for the business of newly merged institutions.
Accountants probably will be the hardest-hit among service providers. Banks tend to spread around legal work, and advertising agencies come and go. But a bank has only one auditor, and that relationship often was forged decades ago.
"There will be accountants on the street," predicted Martin Mertz, chairman of the executive committee of Manhattan Savings Bank, New York, and a former national banking partner at Peat Marwick.
The loss of revenues from a big audit can be huge. Security Pacific's audit is worth about $7 million to Peat Marwick, according to sources close to the banking company. Peat partners wouldn't comment. Irving's annual audit bill was several million dollars.
After the Irving merger, Bank of New York did give Peat some accounting work in the trust department, accounting sources said, but that fell far short of the audit revenues lost. Tom Keaveney, Peat's national director of banking, declined to discuss the Bank of New York merger but said that, so far, Peat's financial services group has not had to reduce staff.
"We may have some layoffs," Mr. Keaveney said. But he added that they would be likely to involve accountants who don't want to relocate to handle expanded assignments resulting from existing clients' mergers with other companies.
BankAmerica, San Francisco, and Chemical, New York, are inviting several accounting firms, including Peat Marwick, to make presentations, according to sources. Most observers are betting that BankAmerica's auditor, Ernst & Young, and Chemical's, Price Waterhouse, will get the nod.
BankAmerica executives declined to comment. Chemical executives did not return phone calls.
Broadening the Business
To lessen the sting, accounting firms are trying to broaden the scope of their business with banks and thrifts by promoting such things as the outsourcing of internal audits.
Law firms are also anticipating some loss of revenues, at least in the short term.
"There will be fewer clients, less demand, and it will probably result in some consolidations," said Robert Shafton, a partner in the Los Angeles office of Strook, Strook and Lavan.
Most banks select a single advertising agency after a merger. For example, C&S/Sovran Corp., which has agreed to merge with NCNB Corp., announced in late August that it would switch to NCNB's ad agency, Bozell/Dallas. C&S/Sovran had previously selected GSD&M, Austin, Tex. "It will really hurt some of these ad firms," said one advertising expert.
Meeting Changing Needs
Companies that sell hard goods to banks will also be hit, and many are scrambling to market to the changing needs of their bank customers.
"In general, there will be less purchases of all types of equipment," said William E. Storts, a partner at Andersen Consulting. He was quick to point out that those technologies that help banks save money and make merger transitions more easily will be an easy sell to penny-pinching financial institutions.
NCR Corp.'s biggest customer segment is financial institutions, but the company claims it does not expect a big drop in business. The Dayton, Ohio, concern expects to sell about 3,600 automated teller machines this year and even more in 1992, said David A. Sacco, marketing director of self-service systems. It sold 3,850 ATMs in 1990.
Cost savings drive the current mergers, said Mr. Sacco, and he expects a lot of new NCR ATMs to be sold to replace older models as the consolidation continues.
A Shrinking Call List
However, mergers will mean each contract is more important. "We used to have 10 big calling opportunities in New York," Mr. Sacco said; "now, we have six. Whether you win or lose, each piece of business becomes more important."
Xerox Corp., Stamford, Conn., expects greater sales to banks as a result of the industry's consolidation because the resulting bigger banks will need larger suppliers to handle their accounts, said Dominick A. Vietri, manager of named account customer marketing.
Still, Xerox is changing its marketing tactics. In a reorganization prompted by many factors, it is moving to market by industry rather than by product and territory. Financial services will be one of 18 industry segments.
At International Business Machines Corp., Armonk, N.Y., Martin Beyer, national manager of consulting for financial institutions, said the company's $3 billion in sales to domestic banks should increase over the next five years. Financial services is IBM's second-largest customer segment.
Although the consolidation will produce "short-term distractions," Mr. Beyer said, he feels sales will grow because of the savings banks can realize using IBM products.
Some companies refused to discuss their expectations. Brinks Inc., Darien, Conn., for example, declined to talk about how the armored car business might be hit.
But all bank vendors are planning, reevaluating budgets, and trying to grab business in this time of uncertainty.
Said Peat Marwick's Mr. Keaveney: "There is danger here. We have to be prepared to deal with change."