Lorton banking on happy union of TSB and ACC in 2000

On May 2nd, 2000, TSB chief executive, Mr Harry Lorton, hopes to be able to smile for the cameras and watch the shares of Ireland's newest bank begin trading on the Irish Stock Exchange.

He is under no illusions that the next 13 months will be other than challenging, but is confident that a merged TSB and ACCBank will create a formidable player in the Irish banking market.

The flotation will be a unique event. While both banks have plighted their troth this year, they cannot formally tie the knot until the shares begin to trade. Newbank - the internal code name for the merged entity - will have a balance sheet of close to £5 billion (#6.35 billion). Together the banks employ more than 1,600 people and operate 130 branches.

Over the next 13 months, the focus will be to design a long-term strategy for the development of the bank. Before the end of the year, the management team expects to have come up with a brand name under which the merged entity will trade and customers of ACC and TSB can expect to see joint branding of their products from early next year. The most immediate focus though will be the rationalisation of the banks' combined operations.

The 48-year-old chief executive has considerable experience to draw on when it comes to implementing mergers, having overseen three at TSB. And he is very optimistic that this project will also be a success.

"These are very challenging times. Obviously we believe by putting these two banks together it will lead to a new and very viable entity that will be a real force in Irish banking," he says.

The proposal to merge the two institutions had been broadly accepted by management and staff at both ACC and TSB. Trade unions representing staff at ACC had enjoyed a good relationship with Mr Lorton and his management team to such a degree that full-time union officials were excluded from much of the talks. In the past couple of weeks though these relations have soured with staff at ACC now refusing to co-operate with the merger.

Mr Lorton says the industrial dispute is unfortunate but can be resolved. "In any merger there will be misunderstandings on issues. We are at a very delicate stage at the moment, but I am optimistic that it will be resolved quickly within the industrial relations procedures."

TSB has enjoyed a good relationship with its workforce throughout its history. Its business has never been disrupted by industrial disputes and it was the first Irish bank to introduce longer working hours. Mr Lorton suggests that its track record should provide some reassurance for ACC staff. "In all mergers, human issues must come before processes and technology," he says.

Within two years, the bank aims to substantially reduce its cost base. At the moment, TSB's cost to income ratio stands at around 67 per cent, which is high by industry standards. Mr Lorton says it's target ratio for Newbank is in the mid 50s, which he contends is very acceptable for a small clearing bank.

To achieve this the bank will have to be innovative on the income and cost sides, he says. "Overall staff costs will have to be reduced. We have already indicated to the unions in both banks that there will be no compulsory redundancies as growth in the bank's business will lead to new opportunities for staff. We have indicated that up to 250 positions may have to go but with a generous severance package and given the high turnover of staff within the industry, we believe this can be achieved."

The viability of its combined 130-branch network will also be reviewed. In some cases this will mean closure, he admits. "There will be some duplication. Where there are two branches beside each other maybe we will just knock a hole in the wall and where there are two branches in the same town maybe we will relocate one of them, say to the nearest shopping centre or industrial estate. While in other cases branches will be closed."

The two banks have radically different cultures and the board and management of the enlarged group will have to work hard to reconcile the workforces. Mr Lorton believes that despite these differences, both banks have in some ways managed to build their success using the same formula.

"Both banks have flourished using a relationship strategy with their customers. Neither have gone for gimmicky pricing or fancy deals and have taken the view that the longer a customers has been with us the better for us and for them."

Similarly, the banks have never really dealt with large corporates and have no plans to do so in the immediate future, he adds. ACCBank and TSB will be focusing on the core markets in which they are already well established - personal banking and providing facilities for the small business and agribusiness sectors.

"It will be critical to the success of the bank to come up with a differentiated business strategy. We are not trying to create another mini associated bank. This won't be a smaller version of AIB or Bank of Ireland. If it is, it won't survive," he says. "We will take the skills of the two banks, look at them in a fairly radical way and bring them to the marketplace."

Employees of the new bank will contribute greatly to its future success and stand to benefit from strong trading through an employee share option scheme (ESOP). Staff will be granted options over 14.9 per cent of the total share value of the bank on terms which are still to be negotiated with the various trade unions. Mr Lorton believes the bank will end up with a very focused workforce whose personal interests will be very much in line with the bank's.

Newbank will be protected from a takeover for a period of five years in a move which is similar to the provisions of legislation governing building society flotations. This embargo, which effectively prevents any individual shareholders from holding more than 15 per cent of the bank's total share capital over that period, will give the board and management sufficient time to create the bank it desires, he says.

"We need a period of time to actually implement the merger without having to look over our shoulders at predators. Our objective is to build a bank that will survive. There will undoubtedly be speculation that at the end of the five-year period someone will make a bid for us. The reality is that they might, but our job is to make sure that the bank is as well run as is humanly possible and that's how we will ensure its survival. At that stage we will be as vulnerable to takeover as AIB or Bank of Ireland."

And where will this leave Mr Lorton? On his own long-term ambitions, he insists he is completely focused on seeing through the merger and creating the new bank. "That will be a big challenge that will take quite a number of years to achieve. Once that is done I will have to sit back and take stock."