Don't bank on a bank's acquisition

What are the ingredients of a successful bank merger? It is almost easier to answer the question by looking at what doesn’t make for a successful bank merger. For one thing, a ‘merger of equals’ is almost always a recipe for failure. Consider the Spanish case of Banco Santander’s merger with Banco Central Hispano (BCH). Touted as a merger of equals, it took a little more than two years for the curtain to come down on that operation, with a weak BCH management unceremoniously turfed out of the team and Santander squarely in the driver’s seat. Closer to home, look at Lloyds TSB. Lloyds was once the shining star of the banking industry; the developed world’s most profitable bank. But try to put together the commercial and savings bank cultures of two organisation of roughly the same size, and what do you get? Conflicting strategies, management and IT systems. The result is a lot of unhappy shareholders of a bank that has lost its direction.

Hong Kong and Shanghai Banking Corp’s takeover of Midland Bank was a different story. The Hong Kong bank saw the writing on the wall; it wanted to be regulated by the Bank of England and get a foothold in the lucrative UK market. So it looked around for a failed bank and found Midland, a pygmy by comparison, so there was no talk here of any merger of equals.

Nothing changed at Midland (except the name, which the Hong Kong people said they had no intention of changing) and HSBC, as it later became, used Midland as a local business. It’s quite a different affair from two banks with about 2,000 branches each trying to cut out the overlap.

Nearly 60% of all underperforming British corporates cited a failed merger or acquisition as the leading cause of their problems, according to a Deloitte & Touche survey. Most often, the problems arose from a failure to integrate the acquired business in time, or at all. In other instances, the acquisition rationale was ill-conceived, and this often led to overpayment and a poor strategic fit.

Royal Bank of Scotland was obviously aware of these pitfalls when in 1999 it launched its audacious bid for NatWest, an institution twice the size of the Scottish bank and one that was perceived as teetering on the brink. A sad irony of the NatWest saga was management’s attempt to expand through acquisition, the move that put the bank into play. NatWest’s bid for insurer Legal & General brought down the wrath of the bank’s shareholders, as well as its share price. In walked Royal Bank, kicking aside in the process an opportunistic raid on NatWest by rival Bank of Scotland, which nobody took very seriously.

Three years down the road, Royal Bank’s chief executive, Fred Goodwin, says the merger is history, with all integration targets achieved or surpassed.

“The highlight for 2002 was the completion of the NatWest IT integration, one of the largest integration projects ever undertaken worldwide,” Goodwin said at the presentation of the bank’s annual results. Royal Bank claims to have achieved revenue benefits of £590m from the merger in the last financial year, and the market would broadly agree that Goodwin and his team pulled it off with panache.

“Royal Bank did a sterling job and the merger looks like a great success,” says John Reeve, a partner at Deloitte Consulting. “They had a clear vision that the new banking group was going to look like the Royal Bank of Scotland and proceeded with that sharp focus in mind.”

James Longsdon, an analyst at rating agency Fitch, says Royal Bank showed its ability to put the merger together effectively, within the promised time scale and driving through the synergies it had outlined at the time of the transaction. “It worked very well indeed and fulfilled or exceeded all their expectations,” he says. “At the same time, Royal Bank hasn’t taken its eye off organic growth, so it wasn’t a combine-and-slash operation.

They put together two powerful high street brands and very sensibly decided to keep the NatWest name.”

Lloyds and TSB were basically two armed camps smiling daggers at one another over the table, and the crucial IT issue was a near disaster.

Both banks brought different IT systems to the party and, in fact, stodgy old TSB had the more advanced Unisys platform, whereas Lloyds worked mostly with bolt-on technology. Goodwin began swinging his scythe round the NatWest corridors from day one, starting with the top execs. Lloyds and TSB had an overlap of senior management that never worked very well together.

“With Royal Bank, there was never any doubt who was in charge,” says Reeve.