The financial services market in North America has entered a merging frenzy in the past three weeks with eight companies unveiling a total of $176 billion (£126 billion) in deals. In most instances, technology was the driver. First, on April 6th, there was the $70 billion Citicorp/Travelers Group deal which caught everyone by surprise. It only took about three weeks for the two chairmen and chief executive officers, John Reed of Citicorp and Sanford Weill of Travelers, to negotiate creating one of the world's largest financial services conglomerates, now called Citigroup. Not even staff at the commercial bank, the insurance underwriter or the securities firm, knew of the plans. But it certainly proved a windfall for those employees who had stock options. Shares of Citicorp and Travelers soared by double-digit percentages after the deal was announced and it is expected that Citicorp stock could reach $200 within the year - it is currently trading at $160. Wall Street analysts liked the idea of dealing with one company for banking, equities and insurance. Flying in the face of federal regulations, (which still adhere to the 1933 Glass-Steagall Act which separates commercial and investment banking) the deal calls for Travelers to acquire Citicorp and then convert to a bank holding company. As a newly converted holding company, Travelers automatically qualifies for a two-year exemption from laws that bar banking companies from underwriting insurance.
On the technology front, Citicorp is an electronic payments pioneer. It was the first bank to introduce automated teller machines in the 1970s and has successfully reached economies of scale around the globe. The merger actually calls for over 8,000 job losses. However, according to a Citicorp spokeswoman, the technology restructuring initiative which the bank announced last year will not be affected and neither will year 2000 plans. Citicorp has said it will spend $600 million over three years to make sure its computers are year 2000-compliant. Travelers has put its cost at $200 million to $275 million over four years.
"They will be able to afford research and development in financial technology that few, if any, institutions have," said Diogo Teixiera, president of the Tower Group research firm. In the back-office, no one underestimates the management challenge. They are going to have to merge customer information files, data warehousing functions, co-ordinate customer interfaces and link modern client/server systems with older "legacy" systems, many still running on mainframe computers.
Integrating systems is yet another challenge facing NationsBank and BankAmerica which, one week later on April 14th, announced they were merging in a $60 billion deal to create a bank stretching from the east to the west coast of America. Technology and back-office consolidations may be difficult. Although there are unlikely to be as many overlaps as there were when NationsBank of North Carolina acquired Barnett Banks in the nearby state of Florida last year. This time, with BankAmerica headquartered in California, the two banks only overlap in two states, Texas and New Mexico. And NationsBank has some experience in integration. It has already proved its mettle in the 1996 merger with Boatmen's Bancshares of St Louis, Missouri.
"These guys are familiar with the process," said Thracy Varvoglis, vice president of solutions at IBM's global consulting group in New York. "NationsBank has done a good job of acquiring and integrating and I suspect it will follow this methodology," he said.
Management is projecting cost savings of about $2 billion, 60 per cent from combining retail operations and resulting in 5,000 to 8,000 job cuts.
From past experience, merging banks have to have a well defined governance project to manage the merger, said Mr Varvoglis. Each bank also has to set out an inventory of its infrastructure assets by taking a look at where there are clear overlaps in their data centres and networks. Applications are other technical considerations in a bank merger. According to the IBM consultant, a selective process to decide which systems survive needs to be carried out. This is generally not a "democratic process" said Mr Varvoglis, but is based on clear product and business overlaps. "You need to select a suite of applications as the target site for conversion and have teams working around clearing gaps in functionality," he explained. This, as an approach, is gaining more acceptance in the industry, he said, in order to accelerate mergers.
The NationsBank/BankAmerica merger is seen as accelerating revenue growth and, within two years, producing growth in earnings per share in the 18 per cent range. That compares with 12 per cent if the companies had continued separately. The same day and at the same hotel, the Waldorf-Astoria in New York, Ohio-based Banc One announced a $30 billion merger with First Chicago. The resulting company will become the leading bank in the Mid-West and the number two credit card issuer nationally. The most overlapping of branches will be in Indiana. Although the deal is structured as a merger of equals, observers believe the Banc One culture will survive.
And still a few days later, last Friday, across the border in Canada, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank, Canada's number two and number five banks respectively, reached a $15.9 billion agreement.
Their merging will result in the fifth largest bank in North America and was announced three months after Royal Bank of Canada and Bank of Montreal said they were creating Canada's largest bank with assets of $333 billion. The deals were spurred by consolidation of banks in the US and Canada, rapidly evolving technologies and shifts in consumer needs.
And the merger frenzy is unlikely to end soon. Other candidates mentioned in merger rumours include Chase Manhattan Bank pairing with Merrill Lynch and US Bancorp acquiring Wells Fargo & Co.
