Multibank Holding Structure Looks Like a Dinosaur

Along with the signs of our economic recovery, we can now clearly recognize the dramatic beginning of the next meaningful stage in the consolidation of our major banks.

While this next evolutionary stage will continue to take many forms, it is quite clear that many big banks will become even bigger. And some of the current major regionals and superregionals will effectively become national banks - with or without any significant changes in banking legislation or regulations.

The Bank of New England will not be the only large banking company to be acquired during this decade because of the need to improve the financial stability of a geographic region. C&S/Sovran will not be the only multibillion-dollar super-regional to merge with a more efficient one. And companies like Ameritrust can expect to be courted -- even pursued more aggressively.

Money-Centers Everywhere

The pending merger of Chemical Banking Corp. and Manufacturers Hanover Corp. brings into reality the previously open speculation about a major merger among two or more money-center banks. Does anyone want to bet that this recent combination will be the only one we will see during the 1990s?

Incidentally, the term "money-center banks" will no longer have any usable meaning by the end of this decade, as money will become more computer-mobile than geographically located.

Change has already taken place so rapidly that this article, which was originally submitted for publication only a month ago, required up updated introduction. What had originally been projected as likely to happen soon has already begun happening.

The asset size of the top 20 banks will at least double by the year 2000. All one has to do to appreciate the inevitability of this projection is to reexamine the growth in asset size among major banks from 1970 to 1980, and again from 1980 to 1990.

To remain in the top tier, our major banks will be forced to "bulk up," just as offensive linemen in the National Football League have had to grow in weight by almost 50% over the past 40 years. Banks with assets under $20 billion will no longer be considered major banks: The real "game" will begin at $50 billion in size.

It is too late to ask: "Will our big banks get bigger?" The real question is: "What form or structure will our larger major banks assume by the 21st century?"

|One Bank' Versus |Multibank'

Will most of them become "one bank" holding companies -- sharing one central identity, even though there may be several legal entities within each state's jurisdiction? Or will they be "multibank" holding companies, with many different names in each of their states of operation or major geographic marketing areas?

In the 1970s and 1980s, we saw banks that took both of these paths. Both one-bank and multibank holding companies have been successful over this period.

We have also seen both kinds of bank holding companies fail. As a result, the choice of a one-bank or multibank structure has not yet been seen as a crucial decision for our major banks.

During the past 20 years, we have even seen some banks move with great fanfare to a coordinated single identity, then make additional acquisitions and become a multibank holding company once again.

Some bank holding companies adopted a "partnership" form of the multibank holding company. They did not select one of the lead bank names for their parent company, and they did not develop a completely new name.

Instead, they adopted a hybrid name for the parent company, retaining the individual bank names for marketing purposes. Among such hybrid holding-company names were First Wachovia, C&S/Sovran, Fleet/Norstar, and SunTrust.

This "partnership" approach is, in reality, the multibank approach. This reality is clearly revealed when the third or fourth bank is acquired. Only the first two banks to merge are considered when naming the parent company.

Now that First Wachovia has changed to Wachovia, pressure will mount for all of these brid-named banks to select the best possible path from their "branch in the road."

Conventional View of Names

Exactly what to do with their acquired bank names has apparently become the major marketing and communications issue for leading banks.

To maintain the acquired bank's name and identity clearly seems to have been conventional wisdom over the past two decades, since most acquirers kept their acquired bank names (at least for a meaningful period of time), instead of changing a bank's name during the year after acquisition.

Since negotiations with the acquired bank's management introduce many emotional difficulties, lawyers and investment bankers have been consistently advising bankers to retain the acquired bank's name for at least the following reasons:

* Finessing the name issue during negotiations enables both parties to focus on the exchange ratio, which should clearly be the key decision for both the acquirer and the acquired.

* Retaining the acquired bank's name makes it possible to present the acquisition as a "merger of equals."

* Last, but certainly not least, retaining the acquired bank's name enables the acquired bank's management to retain their bank's structure and their executive titles.

Some companies have carried this principle to the point of referring to all of their acquisitions as "mergers" -- even though it is difficult to consider it a "merger of equals" when an elephant marries a grasshopper.

Often, either the customers or the local community was cited as the primacy reason for retaining the names of acquired banks. It is true that most people prefer to avoid change.

But it is also important to note that bank customers and local communities have readily accepted new bank names with a minimum of difficulty over the past 20 years -- particularly when the acquired bank's name was phased out in a professional fashion.

Short-Sighted Policy

Almost always, it seems, an available nonacquired local bank will mount an advertising campaign against the acquired bank's new "outside our community" management.

We have now learned, however, that after acquisition the reality of how and where management decisions are made has little, if anything, to do with whether an acquired bank's name is retained.

Important indicators now make it clear that this conventional wisdom -- to keep the acquired bank's name -- will prove to be both short-sighted and ineffective policy. More and more signs indicate that multibank holding companies are becoming much less efficient to operate.

Effects of Media Markets

Media-market coverage was among the first conditions to indicate significant operating efficiencies, as well as greater marketing effectiveness, to the one-bank holding company approach.

Some bank holding companies operating in more than one state found that their local media (television, radio, and newspapers) crossed state lines, making it crucial to have a shared identity in these states.

Many media markets cross over state lines. For a long time, most New England states have been a single, overall media market.

New York television and radio reach into northern and central New Jersey as well as Connecticut. Washington media also cover much of Maryland and Virginia. And Philadelphia media include southern New Jersey and eastern Pennsylvania.

However, banking remains primarily regulated and oriented along state lines. And although they are located within the same state, there has certainly been no significant media overlap between Philadelphia and Pittsburgh, or between Roanoke and Norfolk.

Bank holding companies with operations in states covered by a single media market quickly found that it was inefficient and ineffective to maintain multiple identities within that market.

If they maintained more than one bank name, it became almost impossible to do a good job of advertising their banks, particularly on radio and television.

Patterns of commuting from homes to jobs also crossed these state lines, as they almost always do within a single media market. In such cases, the major bank holding companies wanted to attract customers who could bank with them in either or both states; sharing a common bank name and identity facilitated this marketing objective.

Even during the 1980s, however, this media-market issue was not crucial across the entire United States. In many regions where distances are great, media markets have been more intrastate than interstate. And banking across all adjoining state lines was not always a legal possibility.

Into the '90s

Both banking regulations and media markets are changing much more rapidly as we enter the 1990s.

The growth of cable television and its superstations has brought the Atlanta Braves and Chicago Cubs to a much broader customer base. Almost all national magazines now offer regional advertising "networks."

We have passed many of the deadlines for reciprocal banking between neighboring states. Finally, the recession has accelerated the acquisition of banks across state lines.

As major banks continue to grow in geographic scope, and as media continue to offer new marketing opportunities, advertising and communications efficiencies will become an increasingly significant factor.

These changes all favor operating under one name across the entire range of a holding company's operations. The maintenance of a multibank holding company will become increasingly inefficient from the marketing and communications perspective.

Several other factors are also increasing the benefits of operating under the one-bank holding company structure.

Reducing Redundancy

It often requires an economic downturn to highlight inefficiencies in the staffing of business operations, since many bankers are loath to cut personnel when times are good.

When operating margins began to disappear, with the early signs of this recession, the first line entry that ail bankers were forced to examine was personnel costs: How they could lowered.

Banking, as a service business, is inherently labor intensive. As the scale of a major bank's operations increases, it becomes necessary to examine carefully which people are required, what functions may be redundant, and how economies of scale projected for the larger bank can actually be realized.

Major banks have been scrutinizing their practice of maintaining parallel staffs for each of their operating banks. During the past two years, most major banks have been consolidating functions aggressively.

Centralized staff functions have emerged across more and more major banks. These central staffs are asking the natural question: "Why are we retaining all these banks and all these separate identities?"

"Centralization" is, and maybe always will be, a somewhat disliked and dangerous concept in banking. But it is clear that consolidation of all major functions is the correct path for lowering costs, increasing operating economies, and, potentially, for achieving higher operating margins.

So whether it is called consolidation, coordination, or centralization, we will see more and more of it -- with the resultant pressure on large bank holding companies to re-examine moving from a multibank structure to the one-bank approach, using a shared identity.

One-Name Data Processing

Another important trend during this recession has been the strong emphasis on increasing the consolidation of the data-processing operations of major banks. People and processing have occupied a large portion of the waking hours of bank holding company managements over the past few years.

These bankers have adopted a variety of routes, including outsourcing, to reach a higher level of operating efficiency for their management of information.

As banks have consolidated their data-processing systems, the convictions of even the staunchest advocate of the multibank holding company concept have begun to waver.

One shared name enables commonality of both the procedures used for specific banking functions and the forms management for each of these functions.

It is even more costly to maintain separate names for each bank within the holding company, after operating procedures have been rationalized into a shared approach.

It takes more time and effort to print forms and to produce reports for a multibank operation than it does for a one-bank operation.

The advantages of having one shared name for all banks within a holding company appears to be making increasing sense to data-processing managers. They are becoming internal advocates for simplifying their bank's structure and becoming a one-bank holding company.

Change Costs Less

More and more bank senior staff members are pressuring their chief executive officers to beat major competitors in the move to a one-bank holding company structure.

And more and more of these chief executive officers are not the same people who arranged the original mergers or acquisitions. Consequently, they are not the ones who promised: "Your bank's name will stay the same."

Now, more and more bankers are concluding that the trend is clearly toward the one-bank holding company. Yet, a residual reluctance prevents some from biting the bullet and beginning the process of change during the upcoming year.

Which Name to Use?

Part of this reluctance focuses on the problem of which name to use for the shared identity. The choice is usually between the best existing name or a completely new name. Selection of a name for the shared central identity will always be a difficult and emotional decision, but continual postponing of this decision will become increasingly painful.

Moving through the 1990s, the pressure will mount for an immediate action plan to move to a one-bank holding company.

The operating inefficiencies of a multibank holding company may have been easy to avoid because, during the 1970s and 1980s, they have been "hidden costs" or "silence inefficiencies."

Increasingly, these operating inefficiencies will be onerous, as more and more major banks eliminate them by moving to the one-bank structure -- achieving lower operating costs and higher operating effectiveness.

The operating inefficiencies of the multibank holding company are similar to those of a leaking tire. A leaking tire will continue to run in an apparently satisfactory manner, until it becomes completely flat.

For bankers who would rather put off this decision until later, it is important to examine carefully what has been happening to costs over the past two decades.

A major factor in changing a bank's identity is the hard-dollar, nonrecurring cost of changing signs. Costs of paper and advertising, on the other hand, remain constant even through an identity change.

The emotional costs of change can be managed with careful planning and good internal communications. The other nonrecurring costs of an identity change are much less significant than the costs of changing signage. Therefore, they can be managed more easily.

While signage costs may be amortized over a longer period of time, they are the one significant nonrecurring cost that banks must address when moving to a shared identity. A close look at trends in signage costs over the past 20 years indicates that signs will surely cost more to change in 1994 than in 1992.

Banks that aspire to remain in the top 20, or that plan to grow into this top tier, will have to address the issue of moving to a one-bank holding company during the current decade.

It is not a question of whether the one-bank approach is preferable to the multibank structure. Sharing one identity is clearly more efficient and more effective than maintaining many bank names. The inherent differences between the two approaches are becoming more and more apparent every day.

Some bankers have wavered, thinking that the multibank holding company could insulate their other banks and their holding company from problems that one of these banks may be experiencing.

However, we have learned that bad news travels much faster than good news. Whether names are shared or different, operating problems will affect the images of the parent company and all of its operating banks.

The multibank holding company clearly offers no "downside protection" -- and it lacks the "up-side potential" of the one-bank holding company.

Instead of debating the issue of whether to change to one shared name for your banking operations, the operative questions should be when and how to change.

Sooner Better than Later

When to change? Sooner, rather than later, since every day you delay will raise the price of changing to a one-bank holding company.

How to change? Start now to develop a carefully conceived plan and an achievable timetable that will minimize your risks and manage the process of change in an effective manner.

By waiting until most other major banks have made the change to one-bank holding companies, your bank risks becoming a dinosaur by the year 2000.

Delay could prove to be a very dangerous strategy, since it will provide your competitors with the opportunity to achieve lower operating costs and higher marketing effectiveness.

Survival and self-perpetuation in a rapidly changing environment is based on the ability to adapt to changing conditions in an enlightened and rational manner.

Evolve or face possible extinction: That was the lesson for both human beings and the dinosaurs. During the 1990s, it will be the choice facing our largest bank holding companies. Dr. Lefkowith is president of Lefkowith Inc., a communications consulting firm based in New York.

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