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Thursday, November 15, 2001


Mergermania or Survival of the Fittest?

The proposed merger of the National Bank of Greece, the country’s largest commercial bank, with Alpha Bank, the second largest, will create a bank big enough by European standards to show up on the radar screens of foreign institutional investors. However, the success of the merger will not be judged by the size of the new entity but by its ability to enhance shareholder value.

“Everybody is talking about market share and size but few people seem to understand that P&L (profit and loss) is the real test,” says a member of the executive committee set up by the two banks to manage the merger. Theodore Karatzas and Yiannis Costopoulos, chairmen, respectively, of National Bank and Alpha Bank, head the seven-member executive committee. National’s deputy governors, Andreas Vranas, Apostolos Tamvakakis, and Theodore Pantalakis, as well as Alpha’s executives, Constantine Kyriakopoulos and Dimitris Mantzounis, are also on the committee.

The proposed merger will create a bank with an estimated domestic market share of 46% in loans, 56% in deposits, and 52% in total assets, ranking it among Europe’s 25 largest banks in terms of assets, according to UBS Warburg. Although the new entity will enjoy a large market share domestically, the Greek competition committee is expected to approve the merger. Nevertheless, some analysts say that it might ask for “symbolic measures,” such as a limited number of branch closings. The merger is not subject to approval by the European Union because neither bank earns a third of its revenues outside Greece.

The government’s new finance team, headed by finance minister Nikos Christodoulakis, favors mergers and acquisitions (M&A) as a means to create large companies better equipped to compete against their peers in the Eurozone. It plans to enact legislation to encourage M&A by giving merged companies tax breaks and other benefits as partial relief for anticipated restructuring costs.

Consolidation, however, is not new to the Greek banking sector, which has one of the highest degrees of concentration in the Eurozone after years of consolidation. Just a few days prior to the announcement of the Alpha-National Bank merger, Piraeus Bank bought a majority stake in state-owned ETBA Bank, a development bank. In March 2001, EFG Eurobank Ergasias, a member of the Latsis family group of companies, announced the acquisition of Telesis Investment Bank. The National Bank of Greece itself absorbed its subsidiary, National Mortgage Bank, a few years ago, while Alpha Bank bought a 51% stake in in state-controlled Ionian Bank in March 1999, and subsequently merged it into its operations.

Executives of the new entity refer to National’s and Alpha’s mergers and acquisitions in order to make the point that “the two banks have gone through mergers in the past and therefore have the experience required to succeed in this one,” as one executive put it. Nevertheless, the mere size of the proposed merger cannot be compared to any previous one. A number of analysts and employees working for the two banks are concerned over a possible “clash of cultures,” as National’s more state-oriented corporate culture meets that of Alpha’s private-sector orientation.

But executives at the two banks, and even an aide to Greece’s prime minister, Kostas Simitis, play down these concerns, saying that the two corporate cultures may differ but have much in common. “I think Alpha’s culture is not that different from National’s despite perceptions to the contrary,” says the prime minister’s aide. And a high-level official at National Bank seems to agree: “It is two years now that we have been cultivating this culture, that is, preparing our people for the day that the bank would embrace another banking institution. We are ready.”

Even if the merged entity succeeds in bringing together the two corporate cultures, there are still lingering doubts as to whether it will successfully tackle other potential problems. Dimitris Spanodemos, an analyst at UBS Warburg, identifies two such key risks in the potential loss of market share and the difficulty of realizing cost savings through staff reductions due to strong labor unions.

“The risk of losing market share is material due to the significant overlapping of the two entities,” he says, adding that both banks depend mainly on the Greek market and have no other markets to offset that revenue loss. Analysts at Deutsche Bank also stress “the risk of revenue disruption and market share losses,” pointing out that both National Bank and Alpha have similar retail networks concentrated in major cities such as Athens and Thessaloniki, “which in theory could lead to staff cuts and branch closures.”

A member of the new bank’s executive committee seems to disagree, however: “Why should we close profitable branches even if they are located in the same neighborhood,” he asks. “We can achieve considerable cost savings through attrition, voluntary retirement, and other means.” He admits that National Bank and Alpha have overlapping branches but adds that “we have found out that the degree of customer overlap is much smaller.”

Shutting down some overlapping branches may prove easier than firing staff. The new bank’s top management has already ruled out layoffs in a bid to quiet the banks’ powerful trade unions. Instead, it has set out to reduce staff through voluntary retirement and attrition. “It is stupid to fire people and collide with the unions. There is no reason for that. This is done when firms merge in the US or perhaps in Great Britain, but not in continental Europe,” says a member of the executive committee.

Nevertheless, staff reductions through voluntary retirement entail an initially high restructuring provision. Based on the experience of Portuguese bank mergers, Deutsche Bank estimates cost savings at 7% of total costs. Assuming the cost per redundancy at €150,000 and given that the new bank group has about 30,000 employees, the total provision amounts to about €315 million. This amount could be smaller in reality if the government passes, as expected, the legislation on tax and other financial benefits for merged corporations.

Deutsche Bank analysts seem to take a hard line on the cost-savings issue, writing in a recent note on the proposed merger that, “Such a merger is not justified in our view unless significant cost savings are realized. That could be achieved through aggressive reduction in the number of employees.” Deutsche Bank, of course, has a 10% stake in EFG Eurobank Ergasias. In any case, this assesment does not seem to bother a member of the new bank’s executive committee. He claims that the new entity will save lots of money by having a single information-technology and telecoms system instead of two, and by reducing its marketing budget.

At the same time, he refers to the immediate benefits for Alpha, which will slash its cost of funding by borrowing at National Bank’s lower rates. “Do you know what that means for Alpha in terms of cost savings right from the beginning? How many people have understood the significance, the potential, of Alpha’s sponsorship of the 2004 Olympics,” he asks. The same executive points out that the merged bank will have €4-4.5 billion at its disposal to go after a mid-sized Eurozone bank fitting its expansion plans. “This is much more than National’s current firepower of €2.5 billion,” he adds.

No one doubts that the merger of National Bank with Alpha Bank will be a long and even difficult task. Calculating the cost savings or revenue enhancements might look easy right now, but might turn out to be quite inaccurate later. Consultants point out that a lot depends on the merged bank’s first moves. “It is critical for the success of the merger that it be executed in the right way,” says one consultant who has played an active role in the current deliberations. “It is imperative that clear goals are set as soon as possible, not less than two months from the announcement of the merger, and communicated effectively. If this does not happen, uncertainty sets in, leading to a beauty contest among employees that undermines the whole process.”

He says that the benefits of a successful merger between National and Alpha Banks “will be tremendous, both for the banks and Greece.” He quickly points out, however, that most bank mergers fail to produce what they intent – enhanced shareholder value – because they make critical mistakes at the outset.

The proposed merger of National Bank and Alpha Bank has the potential to succeed, but it will not be easy. The shaky international economic and market environments make things even more difficult since both banks, especially National Bank, derive a good deal of their revenues and profits from capital-market operations. Cost savings are essential for the merger’s success, but it will be even more difficult to realize them in an unfavorable economic environment. Does that mean that the proposed merger is doomed to fail? Not really, if the quality of execution is high and the Greek economy grows at satisfactory rates, surpassing the Eurozone’s projected average economic growth rate by a wide margin this year and next. After all, size matters – but earnings growth matters even more.

Dimitris Kontogiannis is a financial columnist for the Greek daily, Eleftherotypia.
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