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The employment impact of mergers and acquisitions
in the banking and financial services sector

Report for discussion at the Tripartite Meeting on the Employment Impact of Mergers
and Acquisitions in the Banking and Financial Services Sector

Geneva, 5-9 February 2001

International Labour Office   Geneva

Copyright ©2001 International Labour Organization (ILO)

Report in pdf format Report in pdf format

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Contents

Acknowledgements and sources

Introduction

1.       The banking and financial services sector

2.       Obstacles to success in financial services M&As

3.       Employment effects of M&As

4.       Managing downsizing related to M&A restructuring

5.      Impact of M&As on working and employment conditions

6.       Social dialogue in the context of M&As

7.       Summary and suggested points for discussion

Tables

1.1. Bancassurance market share in western Europe (1997)

3.1.  Japanese bank mergers

3.2.  Pre- and post-merger employment levels in New Zealand

3.3.  Total number of banks in 15 EU countries

3.4.  Shares of total banking assets in 15 EU countries (%)

3.5.  Number of banks in Nordic countries, 1985 and 1998

3.6.  Number of employees and banking units in the banking sector of the Czech Republic, 1994-99

3.7.  Concentration in non-bank segments of financial services, United States

3.8.  Total number of branches and bank personnel in 15 EU countries (1993-97)

3.9.   Chartered bank employment in Canada and British Columbia (permanent, full-time and part-time)

3.10. Bank employment patterns in European Union countries

3.11. Financial sector employment in Australia

3.12. Bank employment in Canada and British Colombia, 1995

3.13. Proportion of female employees and managers in European banks, 1995 (%)

3.14. Occupational groups by gender in British Columbia in four banks proposing to merge, 1996

Boxes

Box 3.1. Deregulation and financial liberalization in Thailand

Box 3.2. Major mergers and acquisitions in the banking sector of the Czech Republic

Box 3.3. Union views on the effects of M&As


Acknowledgements and sources

The information for this report was derived from a wide range of sources, although it should be emphasized that few statistics related to employment impacts of mergers and acquisitions in the sector under review were available. Extensive use was made of publications, press articles, websites and “grey literature”. In addition, valuable information was supplied by a number of employers’ and workers’ organizations. The report was prepared by Claude Duchemin and John Sendanyoye of the Sectoral Activities Department, on the basis of contributions from Michael Mesfin Gabre of the InFocus Programme on Strengthening Social Dialogue (Chapter 6) and Emily Sims of the ILO Equality and Employment Branch. Tan Peng Bo of the Bureau for Employers’ Activities and Robert Kyloh of the Bureau for Workers’ Activities reviewed and commented on the report, while John Myers and William Ratteree of the Sectoral Activities Department provided initial editorial assistance.

The report is published under the authority of the International Labour Office. It goes without saying that any attempt to identify the precise relationship between employment and mergers and acquisitions is complicated by other concurrent processes under way in the financial services sector. It is hoped nevertheless that this report will provide a basis for more detailed research and reflection on a phenomenon that is increasingly attracting the attention of policy-makers, employers, workers, researchers and other interested parties in the world of work.

Introduction

This report has been prepared by the International Labour Office as the basis for discussions at the Tripartite Meeting on the Employment Impact of Mergers and Acquisitions in the Banking and Financial Services Sector, to be held at the ILO in Geneva from 5-9 February 2001. The Governing Body of the ILO decided to convene this meeting at its 273rd Session (November 1998) as part of the programme of sectoral meetings for 2000-01.

At its 274th Session (March 1999), the Governing Body decided that the meeting should be composed of 60 participants and that the following 20 countries would be invited to participate: Argentina, Belgium, Canada, Ghana, India, Japan, Republic of Korea, Luxembourg, Mauritania, Mauritius, Nigeria, Panama, Russian Federation, Slovakia, Spain, Switzerland, Thailand, United Arab Emirates, United States and Venezuela. A number of countries were included in a reserve list from which further invitees would be drawn in the event that a government in the first list declined the invitation: Chile, China, Costa Rica, Dominica, Dominican Republic, Ecuador, Finland, France, Germany, Honduras, Jordan, Lebanon, Malaysia, Morocco, Portugal, Singapore and Tunisia. Furthermore, it was agreed that 20 employers’ and 20 workers’ representatives would be selected on the basis of consultation with the respective groups of the Governing Body.

The Governing Body decided that the purpose of the Meeting would be to exchange views on the impact on employment of mergers and acquisitions in the banking and financial services sector, using a report prepared by the Office as the basis for its discussions; to adopt conclusions that include proposals for action by governments, by employers’ and workers’ organizations at the national level and by the ILO; and to adopt a report on its discussion. The Meeting may also adopt resolutions.

This Meeting is part of the ILO’s Sectoral Activities Programme, the aim of which is to assist governments and employers’ and workers’ organizations to develop their capacities to deal equitably and effectively with the social and labour problems of particular economic sectors. The Programme also alerts the ILO to specific sectoral social and labour issues – primarily through tripartite meetings, which bring together a cross-section of government, employers’ and workers’ representatives from countries that are prominent in a given sector. In line with the reorientation of the ILO around strategic objectives since 1999, these meetings also set out to strengthen tripartism and promote social dialogue at the international level.

1.  The banking and financial
      services sector

Background

Mergers and acquisitions (M&As) are a global phenomenon, with an estimated 4,000 deals taking place every year.[1] However, they are not a recent development; four periods of high merger activity, also known as merger waves, occurred in the United States (1897-1904, 1916-29, 1965-69 and 1984-89) before the current one that began in the early 1990s. This latter wave has attained exceptional levels in terms of sheer value and volume of transactions. In the United States, M&As have been instrumental in the decline in the number of banking organizations – between 1980 and 1997 they decreased from 12,333 to 7,122. Europe has also experienced similar M&As; examples include: Unicredito/Credito Italiano and Generale Bank/Fortis in 1998; and UBS/SBS, ING/BBL, Crédit Suisse/Winterthur Group and Vereinsbank/Hypobank in 1997. Between 1980 and 1995 the number of banking establishments in Europe fell, particularly in Denmark (-57 per cent) and France (-43 per cent).

Proponents of financial sector consolidation argue that institutions need size to spread growing information technology and processing costs over larger revenue bases. Another key factor is the need for greater market capitalization, with governments and financial sector regulators accepting financial operators’ arguments that greater size is crucial to cost-cutting and strong national institutions. Smaller countries are also encouraging consolidation to counter growing competition from larger institutions in neighbouring countries.

According to UNCTAD,[2] the value of worldwide M&As has grown dramatically during the past two decades (1980-99), at the rate of 42 per cent a year. In 1999, their completed value was about $2.3 trillion, representing 24,000 deals.

Developed countries are the most important sellers and buyers in cross-border M&As, accounting for close to 90 per cent and 95 per cent of sales/purchases in 1998-99, respectively. Of the 5-10 per cent of sales/purchases involving developing countries, the bulk (70 per cent) originates in Latin America and the Caribbean. The value of cross-border M&A sales by developing countries increased from $12 billion in 1991-95 to $61 billion in 1996-99. M&A purchases by firms from developing countries rose from an average of $8 billion in 1991-95 to $30 billion in 1996-99.

Acquisitions are considerably more important than mergers in developing and transition countries. In developing countries, cross-border M&A sales fell in 1999, largely caused by reduced privatization activity in Latin America, where the value of cross-border M&As fell from $64 billion in 1998 to $37 billion. In developing Asia, they continued to grow, including in the countries most affected by the 1997 financial crisis. The value of cross-border M&A sales in Central and Eastern Europe doubled between 1998 and 1999 from $5 billion to $10 billion.

This M&A-driven consolidation is raising important public policy concerns, notably with respect to employment. Indeed, the announcement of a merger is usually accompanied by an announcement of cost-cutting redundancies in the merging organizations, often on a massive scale. To gain full merger benefits, two overlapping organizations are compressed into one, trimming duplicated operations which entails redundancies at all levels. It is nevertheless difficult to disentangle the employment effects of M&As from those of other factors such as increased competitive pressures, automation or the introduction of information and communication technologies which are similarly inciting organizations to restructure even in the absence of M&As.

The Director-General’s report, Decent work, noted that: “Policies of economic liberalization have altered the relationship between the State, labour and business. Economic outcomes are now influenced more by market forces than by mediation through social actors, legal norms or state intervention. International capital markets have moved out of alignment with national labour markets, creating asymmetrical risks and benefits for capital and labour. There is a feeling that the ‘real’ economy and the financial systems have lost touch with each other.”[3] A key element of the “creative destruction” hypothesis advanced as a necessary precondition to full exploitation of the possibilities of the “new economy” is widespread rationalization and restructuring in all sectors. Finance is a key facilitator in this process.

In view of the rapid development in M&As worldwide, some information in this report (all received before mid-October 2000) will be outdated when the Tripartite Meeting is held in February 2001. Nonetheless the report provides an overview of the sector at a given time and pinpoints the principal forces shaping its performance and driving the consolidation process; it is designed to serve as a basis for discussion of employment trends in the banking and financial services sector.

The financial services sector: Characteristics,
role and general trends

Financial services support employment in two ways: as a source for high-quality employment and through a pivotal role in providing credit to other sectors. A well-functioning financial sector is essential in financing the operations of an economy through both intermediation (borrowing money from one sector to on-lend to another) and through auxiliary services such as securities broking and loan flotation, where financial enterprises arrange the processes of funding but do not step between the borrower and lender.[4]

The institutions, services and products that comprise the financial sector vary from country to country, but generally include: the central bank; depository organizations such as banks, building societies or mortgage banks; credit unions or cooperatives; insurance and pension funds; general financiers; cash management firms; and others engaged in financial intermediation. The last category might include securitizers, investment companies, leasing companies, hire purchase and the provision of personal and consumer credit. In some instances, a wider perspective needs to incorporate not only the finance sector but also the business services that support its operation.

The financial system in any country has three overlapping components – financial enterprises (such as banks) and regulatory authorities; the financial markets (for instance, the bond market) and their participants (issuers and investors); and the payment system – cash, cheque and electronic means for payments – and its participants (e.g. banks). The interaction of these components enables funds for investment or consumption to be made available from savings in other parts of the national or, increasingly, international economy. Financial institutions mainly engage in intermediation and provision of financial services – for example, by taking deposits, borrowing and lending, supplying all types of insurance cover, leasing and investing in financial assets. Banks in most countries are the largest deposit-takers and financial services providers, but the market shares and power of other organizations like insurance companies is increasing. Banks and insurers are also among the largest and most profitable enterprises in both domestic and global markets. This is hardly surprising, since money, the business of financial services, went global before “globalization” became a buzzword; however, liberalization and technological advances are increasingly pushing the sector towards greater globalization in which M&As are both a cause and a consequence. Sixty-four banks and 53 insurance companies figure among Fortune Magazine’s Global 500.

Observers believe that cross-border M&As in the financial services will be the next phase once internal consolidation is complete and the drive towards higher concentration will only end when there are no more acquisition targets. Jacques Attali, former President of the European Bank for Reconstruction and Development, says that “in 20 years, there will be no more than four or five global firms in each sector. Alongside, there will be millions of small temporary enterprises subcontracted by the large ones”. David Komansky, CEO of Merrill Lynch, also believes only six to eight global banks will soon be competing on the world’s financial markets, with regional entities, notably in Europe and Asia, existing side by side with these big international players. Others believe M&As will continue given that companies restructure for various reasons including poor performance or changes in business strategies. Rapid Internet development makes medium-term predictions regarding the nature and pace of M&As in the financial services particularly risky as technology is increasing the ability of newcomers to contest certain “niche” markets and intensifying the competitive pressures that are contributing to sectoral consolidation.

A 1999 KPMG survey of company directors whose companies had participated in major cross-border M&A deals between 1996 and 1998 found that 82 per cent of respondents believed the deals they had been involved in had been a success. However, this was a subjective estimation as only 45 per cent of the companies had undertaken formal post-deal reviews. Benchmark analyses based on comparative share performance one year after deal completion found that only 17 per cent of deals had actually added value to the combined company, 30 per cent had produced no discernible difference and 53 per cent had actually destroyed shareholder value. Companies focusing attention on finance or legal issues (to the detriment of other areas) were found 15 per cent less likely than average to have a successful deal.[5]

Factors driving M&As

Academics and other observers advance value-maximization,[6] managerial ego, mimicry, the need to reduce uncertainty and defensive considerations (acquire to avoid being acquired; ensure that growth keeps up with that of competitors, etc.) and high levels of corporate reserves and share valuations among the motives behind consolidation in financial services.

Supporters of M&As allege that they facilitate synergies between merged organizations, generate efficiency improvements and increase competitiveness. Indeed, they hold that mergers, by increasing economies of scale and spreading costs over a larger customer base, enable financial operators to provide services at lower prices. Demonstrating that M&As improve efficiency is thus central to making the case for the consumer benefits of mergers and in assessing their potential impact on consumers.[7] If mergers improve efficiency, then larger, combined firms may be expected to pass some savings on to consumers through lower prices or improved service.

If mergers are primarily cost-cutting exercises, involving job cuts and branch closures, the impact on consumers is most likely to be a lowering in the quantity and quality of services; individuals are affected by branch closures in rural regions and low-income urban neighbourhoods and have to bear the brunt of a generalized decline in quality resulting from reduced effort in certain product lines or service modes (e.g. teller service, cheque-cashing, transaction and other basic services). Those opposing financial sector M&As strongly contest their consumer gains and maintain that they only result in employment losses and diminishing access to services. Claims that small businesses – generally agreed to generate most employment worldwide – also benefit from mergers have met with considerable scepticism among those businesses themselves. Studies have indeed revealed that larger financial institutions tend to charge more and higher fees than their smaller counterparts and note an inverse relationship between the sizes of financial institutions and their loan portfolios to small businesses. Assertions that size generates economies of scale essential to compete in global markets have similarly been disputed on the grounds that size is irrelevant to international competitiveness and cross-border mergers (so far rare among financial M&As outside the Nordic region) would be more logical to international competitiveness. It has been argued from a pro-merger perspective that, rather than size problems, banks have “excess capacity in their domestic markets, which drives up their costs, making them uncompetitive both domestically and internationally”. According to this argument, mergers enable rationalization of networks and associated cost reductions.

Whatever the arguments, many countries’ competition policy in the financial sector is tending towards an easing of regulations and the elimination of obstacles between different market segments to promote greater competition among financial institutions. A paradox of these policy changes is that they seem to be encouraging concentration and formation of oligopolies, rather than increased competition, although the ability of technology to lower entry barriers to new types of financial service providers somewhat reduces the power of concentration. Furthermore, United States and European case studies suggest that despite the fact that M&As in the financial industry may be partly driven by potential efficiency gains, managers and governments, who appear to have more influence over consolidation decisions for financial institutions than for non-financial firms, may have other motives.[8] Empire-building is included among possible non-value-maximizing motives given that executive compensation tends to increase with firm size, although part of the higher compensation of managers of larger institutions rewards greater skill and outcomes. Banking organizations may overpay for acquisitions when corporate governance structures are insufficient to align managerial incentives with those of owners; what is more, management teams with large ownership stakes often block outside acquisitions.

Many financial executives argue that preventing consolidation and the efficiency gains M&As make possible would be tantamount to forcing enterprises to engage in “social policy” through retaining unnecessary levels of employment and preserving distribution outlets that would be redundant in the event of a merger. They therefore believe that M&As are part of necessary restructuring to improve efficient use of resources – which can only be beneficial for long-term employment. But opponents stress the fact that financial sector operators lack transparency and accountability with respect to the social and economic impact of sectoral consolidation. They argue that privately owned financial institutions perform essential public functions and so government regulation is the corollary of the rather privileged and profitable positions these companies enjoy.

In most countries, the scope of regulation relative to M&As is narrowly focused on financial probity and competition issues; however, in some countries – such as the United States – a degree of socio-economic accountability exists. The Community Reinvestment Act (CRA) provides benchmarks under which bank performance on loans, investment and consumer service is measured whenever banks apply to expand their operations. Critics of mergers among financial service companies believe that an adaptation of this approach is needed to ensure consideration of the employment effects of organizational changes and to enhance transparency and accountability. Similarly, systematic tracking of banks’ transactions with the small business community may now be timely.

Deregulation, liberalization, market
integration and financial crises

The financial industry used to be highly regulated and compartmentalized even within domestic markets. With changes spurred on by advances in information and communications technologies and the expansion in international trade, this type of market organization was considered an obstacle to economic modernization. In December 1997, 102 countries signed an agreement to free trade in financial services under the auspices of the World Trade Organization (WTO). As in many other sectors of the economy, M&As in the banking and financial services sector are a driving force behind and a consequence of globalization. Global consolidation is accompanying and strengthening the internationalization of capital markets, as institutional investors and pension funds increasingly demand rapid access to worldwide financing sources and investment opportunities. Dramatic advances in technology, facilitating easier and faster access to information, mean that investors are almost instantaneously aware of corporate performance in different markets.

Nimble newcomers armed with a tight business focus and strong consumer brands are harnessing the power of technology to take advantage of deregulation and liberalization and gain a market share, thereby increasing pressure on profit margins of established institutions. Some have argued that financial services giants, especially banks, should emulate these new entrants, breaking themselves up and focusing on their constituent businesses; others believe this would overlook the real advantage of incumbency: scale, reach and enduring relationships with huge numbers of customers.

In Europe, integrating financial service markets and facilitating cross-border provision of financial services are a primary objective of the European Monetary Union (EMU). Mergers have so far been overwhelmingly domestic, directed at creating national champions. However, with the completion of the single financial market in the European Union (EU), consolidation across the whole area is expected to speed up. While wholesale banking services to large corporations are already global, retail banking has been, until recently, overwhelmingly domestic, with cross-border transactions accounting for only 1 per cent of total volumes. Some banks have chosen the Internet rather than mergers or the opening of branches as their route into cross-border retail business. Introduction of the euro and European Commission moves to speed up harmonization of EU regulation and the supervision of financial markets are expected to accelerate market changes and increase competition and efficiency. But many bankers are concerned that, with entry costs greatly reduced because of the Internet, monetary union opens national financial markets to competitors who can cherry-pick profitable segments – with the result that banks with low returns on capital increasingly risk being taken over by predators focusing solely on shareholder value. Nevertheless cross-border M&As in Europe are inhibited by national differences in customers’ financial service needs and how they are met. British and Spanish consumers, for example, roll-over credit card debt each month while Germans typically get credit through overdrafts, using debit cards for purchases; and German and Netherlands mortgages are at a fixed rate, whereas 80 per cent are variable in Spain.

According to Heikki Koskenkylä, head of the Financial Markets Department at the Bank of Finland, various segments of the EU financial markets are, to different degrees, already experiencing the effects of the euro. Since its launch, the idea of a single money market has gained momentum with short-term money markets, three-month interest rates and even long-term government bond rates converging rapidly. With the consolidation of national financial markets well advanced, many expect that the next stage will shift M&As towards creating pan-European institutions.

Financial crises, often a result of badly executed liberalization programmes, have given a boost to M&As. Deregulation has intensified competition via two mechanisms: by opening the sector to new entrants (foreign banks and non-banks) and easing the rules previously preventing expansion into various financial segments (retail banking, investment/merchant banking, etc.); and by encouraging development of new products and convergence in services provided by different types of financial operators. These developments have intensified competition, thereby reducing operating margins and profitability. Financial institutions compensate for the erosion in margins through a scramble for volumes and easing of credit standards which leads to a deterioration in loan portfolios. Property bubbles often form through this sort of sequence.

Given the importance of the financial sector to any country’s economic well-being, the risk of a sectoral meltdown usually has governments scrambling to intervene; sometimes they encourage sound institutions to merge or acquire distressed rivals to reduce sectoral capacity, increase margins for surviving institutions, thus hoping to restore some health to the financial system.

Many industrialized countries experienced such crises in the mid-1980s. Ten years later, it was the turn of the newly industrialized countries of Asia and Latin America to feel the crunch. The common factors in these crises are threefold: the extent and rapidity of regulatory change; overvalued property markets; and supervisory deficiencies. In the United States, approximately 1,500 commercial banks and 1,200 savings and thrift funds were liquidated, restructured or sold off under the aegis of the Federal Deposit Insurance Corporation (FDIC) between 1984 and 1995. In Japan, the entire economy was destabilized by the crisis in its financial services sector. The crisis in Asian emerging markets, where Japanese financial institutions were highly exposed, further increased the impact.

State intervention may also be a factor in financial sector consolidation, with governments acting as sellers in privatization. In Latin America and Central and Eastern Europe, privatization has been an important channel for attracting foreign capital; and in Africa it is the favoured means for transferring the expense of running burdensome financial institutions to private operators. In France the privatization of financial institutions in the 1990s allowed banks to engage in M&As or strike up partnership arrangements. In 1999, the scenario was different in Japan: the Government became a shareholder in several banks with a view to consolidating their capital and preparing strategic alliances. In return for this injection of public funds, Japanese banks committed themselves to liquidating 10 trillion yen of bad loans and to cutting 20,000 posts over three years.

The race for size, efficiency,
synergies and profitability

Global corporations today expect their bankers to have the expertise, products and presence to serve them anywhere. Many bankers believe that a greater resource base and presence across a wide range of markets is necessary to satisfy their corporate customers and argue that restrictions on M&As, including among major domestic financial institutions, should be relaxed to enable the development of institutions with the size and resources to compete globally. Consolidation for size and increased efficiency is for many the chosen strategy to stay alive and remain competitive. Economies of scale (size) and scope (product mix), long part of economists’ theoretical jargon, are now everyday topics in the financial community. In a radically consolidating industry, banks are also convinced that size is not only an effective defence against being taken over, but that M&As provide the springboard to increase profitability through greater economies of scale and improved operational efficiency. They argue, in addition, that M&As provide the necessary resource base for investments in such high-cost areas as product development and believe sufficient regulatory provisions not involving restrictions on mergers already exist to protect consumers from the increased concentration M&As might encourage.

There are those who believe that efficiency-based arguments in favour of M&As confuse size, cost-cutting and efficiency. Stephen Rhoades, United States Federal Reserve Board economist, explains the distinction between efficiency improvements and cost-cutting thus: “Reductions in operating expenses may result from cutting employees, closing branches, consolidating headquarters offices, closing computer and back office operations and so forth. Such reductions in expenses, however, do not automatically translate into improvements in efficiency as measured by an expense ratio, such as expenses to assets or revenues. Reductions in expenses may be accompanied by corresponding reductions in assets and revenues, which simply represent shrinkage of the firm rather than efficiency improvements. An improvement in efficiency requires that costs be reduced by more than any decline in assets (revenues).”[9] Rhoades maintains that the failure to distinguish between cost-cutting and efficiency gains may partly explain the continuing disagreement between bankers “who emphasize the cost reductions to be achieved through mergers” and researchers “who generally study the efficiency effects of mergers”.

Synergy, achieved by combining the forces of two companies with complementary strengths, is another rationale advanced to support M&As. Some academics have questioned synergy as a justifiable basis for M&As – and post-merger experience of most firms would seem to support their doubts. One author has maintained that dreams of synergy lead managers to pay lofty acquisition premiums that are tantamount to making charitable contributions to random passers-by, never to be recouped by the buying company no matter how long the acquisition is held. In the case of most acquisitions, achieving significant synergy is unlikely; when it does occur, it usually falls far short of required performance improvements priced into the acquisition premium. Putting together two profitable, compatible, well-managed businesses is not enough to create synergy as competitors are ever present.

Whatever the motives driving M&As, many fear that the quest for size is leading to the unhealthy creation of superbanks. Sectoral consolidation and reduction in competition suggest no immediate benefits for customers or staff who find themselves in the front line of rationalization and having to bear the brunt of its costs. Consistent with the findings of many others, a study by the Bank for International Settlements (BIS) reports the experience of the majority of mergers as “disappointing”, with organizational problems almost inevitably underestimated and most acquisitions overpriced, noting the creation of banks “too big to fail”. The superbanks’ sheer size and unwieldiness can encourage complacency and offer no more protection against failure. However, the failure of such huge banks would be of such consequence that host governments may be forced to use taxpayers’ money to bail out any which encountered difficulties[10] because of the serious implications for the financial system; consequently, this “virtual insurance policy” allows large financial institutions to pursue imprudent credit and investment policies. It has been suggested that international comparisons over a 100-year period show how changes in the structure and strength of safety net guarantees may affect financial institution risk-taking – and, by extension, the motive to consolidate to increase the value of access to the safety net, if financial market participants perceive very large organizations to be “too big to fail”.[11]

Other critics contend that the rush to size and scale through M&As is rarely about market success and satisfying customers or investors, but more the product of the ambitions of chief executives and the need of investment bankers for ever-spiralling transaction fees. They compare the contemporary process with conglomerate mergers of the 1970s and asset plays of the 1980s, many of which were eventually unbundled. They stress that it is rare for the market power and scale economies associated with market dominance not to fall victim ultimately to hubris, insulation from the market and sheer bureaucratic inefficiency that goes with such size. Size creates greater complexity in terms of bureaucratic controls, slows the ability of organizations to respond fast to changing market conditions and leads to complacency.

Given the importance of credit access by small businesses to employment creation, it is essential to highlight the findings of a report[12] on the impact of bank M&As on small business lending. The report stresses that the weight of evidence points to more negative than positive effects of banking industry consolidation on small business lending. Small firms can expect some difficulties in obtaining bank credit as the banking industry undergoes structural change and resultant adjustments in competitive market conditions. Whether the negative effects are short-run or long-run was impossible to discern from the data reviewed and the report recommends further research on the effects of consolidation on small business credit.

Information and communications
technologies (ICTs)

Technology presents both an opportunity and a threat to the financial services industry, especially banking. It enables enormous efficiencies in transaction costs and allows financial companies to reach a broader range of clients. Indeed, ICTs have had an impact on all aspects of financial services provision; they have helped reduce costs and modified the channels through which customers access services and products. According to data from the United States Office of the Comptroller of the Currency, the cost of average transactions at bank teller windows was four times higher in 1997 than the cost of transactions on automatic teller machines (ATMs) and a 100 times more than over the Internet. Computer and information management systems reduce operational costs by facilitating: the development of standardized products; automation of procedures; development of new credit-scoring programmes; organization of internal data transfers; and centralization of processing tasks away from branch networks. They enable the assembly and analysis of large quantities of information about customers, moving that information rapidly over long distances and providing remote access to banking facilities. All this provides the possibility of diversifying into additional business areas and improving tools for information and risk management. Competition is affected from both the demand and supply sides. Customers can more easily compare prices of services and shop around; barriers to entry into the retail banking market are lowered, allowing small and perhaps specialized banks and “niche” institutions to become competitive. Apart from the costs associated with developing and maintaining large-scale information management systems which place additional pressure on bottom lines, technology generates its own challenges. There is, for instance, understandable pressure on financial institutions to seek alternative, cheaper methods for delivering services than traditional brick-and-mortar branches. However, as remote banking turns from a supplementary to a core service in the longer run and branch networks are pruned, customers may also defect as information on financial service prices becomes fully transparent, overcoming the traditional inertia on which banks have long depended to retain customers. These developments are intensifying sectoral competition even more and exerting such pressure on profits that many observers believe many traditional financial firms may not survive. Increasing technological costs affecting banks’ viability are a factor usually mentioned for M&As.

Another technology-related problem for service providers involves the mix between self-service and personal contact in branches. Although technology contributes to higher productivity and cost reductions in a work-intensive industry, failing to strike the right balance between self-service and personal interaction with clients can result in a loss of clients, a clear majority of whom continue to prefer branches and personal contact despite the growing importance of ATMs and home and telephone banking. Computer-based access to banking poses its own set of problems. The technology is expensive, creating a barrier for low- and medium-income customers. To use the Internet, a consumer must have a phone, modem and Internet provider, which many low-income people (whose community branches are most likely to be axed first in cost-cutting programmes) cannot afford.

While Internet banking clearly has a potential to provide services for rural and remote customers, its use is not widespread in many countries. An Australian survey found that although 30 per cent of rural, regional and remote respondents had a computer, 90 per cent had never used the Internet; of those who had, only 4 per cent had used it several times. ABS statistics show that only 8 per cent of those outside capital cities had household access to the Internet and, from December 1997 to February 1998, only 0.3 per cent of those adults using the Internet paid bills or transferred funds via the Internet.[13]

A PriceWaterhouseCoopers annual survey of customer attitudes to financial services over the Internet lends direct support to the above findings, [14] revealing that in 1998:

Consumers have other concerns. Although the Internet offers a wider choice and flexibility to access new products and conduct business at any time, some fear the risks of depersonalization in financial relationships. The chance of plunging into hazardous operations in the absence of traditional personalized professional guidance has increased tremendously – and it is easier to fall victim to fraudulent services providers. The British Banking Code Standards Board has released a report condemning online banks for giving “unacceptably low” levels of information to customers.[15] A report compiled by the Foundation for Information Policy Research concludes that, unlike those with conventional accounts, the United Kingdom’s 2 million Internet bank customers may not be adequately protected from fraud,[16] raising questions not just about stand-alone online banks but also about web services offered by the high street banks. In 1997, European Union Bank, registered in Antigua, collapsed – with its founders disappearing with the depositors’ money; it had marketed itself by claiming that “since there are no government withholding or reporting requirements on accounts, the burdensome and expensive accounting requirements are reduced for you and the bank”.[17] Examples such as these discourage even those who might otherwise be attracted to online financial services. Thus, the general trend in industrialized countries towards a sharp reduction in the number of branches and staff to achieve cost savings parallel to the increase in alternative delivery channels may be a high-risk strategy.

There are growing predictions, however, that the financial industry is on the verge of a revolution inspired by the Internet and e-commerce. The Internet – and associated technologies such as digital television, smart cards and advanced mobile telephones – bring a number of challenges for financial services. Because set-up and transaction costs are low it makes it easy and cheap for Internet-only banks to be created from scratch and to offer very competitive products. The power of Internet-only banks, for instance, is illustrated by Egg, the direct banking arm of Prudential, which has persuaded a large number of customers to do their banking online although the bank offers a loss-making interest rate. Alliances, joint ventures and cooperative arrangements between financial institutions or other actors are springing up daily with the aim of starting online operations. In April 2000 the British bank HSBC announced an alliance with the investment bank Merrill Lynch to launch a global online banking and investment service. The scramble not to be left behind in online banking is accompanied by massive investments in marketing and communication facilities. The linkage between financial sector M&As and Internet expansion is best illustrated by the alliance between Telefónica, Spain’s biggest telephone operator and Banco Bilbao Vizcaya Argentaria (BBVA), the largest bank by capitalization on the Madrid Stock Exchange; they have taken shareholdings in each other, increased cooperation among some of their subsidiaries, announced intentions to develop joint Internet-based banking and have a joint subsidiary, Uno-e, offering mobile phone-based Internet banking services. Uno-e recently merged with the United Kingdom’s First-e to create UnoFirst Group. In the same manner, the French-Belgian bank Dexia announced the launch of mobile phone banking in association with Nokia. These link-ups between banks, telephone operators or manufacturers are already common in Scandinavia, where the Swedish-Finnish MeritaNordbanken operates mobile phone banking services.

Some bankers predict that banks from different countries will soon team up to develop alternative Internet-based distribution strategies to bypass the need for domestic branch networks. They believe an institution with the right strategy could leapfrog the domestic competition, much as the outsider Royal Bank of Scotland (RBS) achieved a dominant share of the English insurance market through its telephone subsidiary Direct Line. M&A advisers are therefore preparing for a new wave of consolidation, this time with European banks buying smaller outfits – not using their own equity but that of their Internet start-ups, just as BBVA and Telefónica did when they bought First-e.[18]

New market entrants

Commercial bank operations cover a wide range of activities that can, a priori, be carried out independently of one another. There are, however, advantages in bundled delivery (for economies of scope) and in a one-stop service centre for consumers. This has a direct impact on the number and nature of M&As in the sector. But there is no reason why each service could not be generated by different producers, particularly as globalization and technology facilitate profitable market segmentation.

Globalization has made a difference in three ways. First, global capital markets make it easier for any reputable company – big or small – to raise capital. Physical size is no longer a precondition for attracting capital and the advantage of size is thus diminished. Second, the removal of barriers to geographic competition gives companies access to millions more customers, so those companies can build big customer bases even if they focus on just one narrow product. Finally, the digital revolution means that a business can be built on much narrower specialities for several reasons. For example, it used to make little sense for a bank to outsource credit card processing; it was cheaper in-house, even if the bank was not very good at it. Now the marginal costs of interacting with other firms are falling rapidly, enabling specialists to work together more easily. Thus new entrants unburdened by expensive fixed-cost investments may build big businesses just on what they excel in and outsource the rest. Companies that do not specialize will not be as good as competitors that do. Analysts argue that these companies in effect earn more by using less physical capital and their market capitalization rockets as a result; they suggest replication of such success by operating in more than one speciality, thus increasing size without lowering returns. Straying into areas where they do not have strong intangible capital – knowledge, brands, relationships, skills, etc. – risks the fate of the old conglomerates.

New service providers, such as insurance companies (e.g. Prudential, Zurich), stockbrokers (Schwab), distributors (Virgin, Carrefour, Quelle) and even manufacturers (General Electric, Volkswagen) are thus competing for provision of banking products. The multiplicity of new entrants and the competitive power the Internet provides have altered traditional market rules. The impact of these new entrants on some of the richest financial markets is very dramatic. Although their market shares may still be small, effects on margins have been significant with, for example, pressure from competitors such as British Gas’s Goldfish and MBNA causing British credit card margins to shrink from nearly 20 per cent to an average of 12 per cent.

Consumer issues

Consumer benefits in terms of better price and higher quality service are commonly advocated in support of financial sector M&As; since M&A-related cost savings should be viewed as efficiency gains, banks and other financial services providers could pass these on to consumers in the form of lower service costs. It is therefore advanced that denying mergers creates opportunity costs to consumers, equal to the size of the projected cost savings. But there is another side to the argument: a Euro-FIET (now UNI-Europa) survey reports consumers have little or nothing to gain from M&As, apart from a few cases of improved or slightly cheaper products and services. More usually they lose personal services to which they were accustomed and find “a strange face at the door”.

Although technology is providing alternative delivery channels that enable finance companies to rationalize their traditional distribution channels, the future of branch networks is a major issue for communities in almost all bank mergers. Branches and their personnel, play a critical role in the economic life of communities. Historically, branch personnel have also been the “eyes and ears” of banks, gathering highly localized information about businesses and other clients to understand the community’s specific needs so as to serve it better. The more bank personnel are thinly stretched out over larger and larger geographic areas, the harder it becomes to gather in-depth information and manage relationships with the community. Branches are also symbolically important because they bear witness to the fact that the bank believes in the economic and social viability of the community. Banks contribute to economic vitality and employment and their branches offer convenient access with a personal touch to retail customers, many of whom may have little or no prior experience with banks. A branch in the neighbourhood signals that the bank is interested in doing business with the community and these intangibles can make an important difference when it comes to meeting local credit needs.

Bearing in mind the difficulty of disentangling the impact of other factors such as increasing global competition or technological change in assessing the impact of M&As on consumers Andrew Leyshon argues that, in general, the number of products on the market has increased significantly in recent years, offering more choice at reduced prices – at least for larger and wealthy clients – as most new market entrants are seeking to compete on the basis of price. They are able to do this because information and communications technologies (ICTs) allow them to save costs by operating with fewer – or indeed without – a traditional branch network. It is also claimed that new product providers are able to offer time flexibility to many clients who no longer have to rely on branch opening hours to conduct their business. Traditional providers have responded to this trend – to meet consumer need and cut running costs – by closing branches. This has had a detrimental effect on a significant minority of individuals lacking access to the technology or the knowledge to use it, which increases social exclusion as such groups tend already to suffer from educational, social and economic disadvantages. Sometimes the disappearance of mainstream alternatives has opened the door to predatory financial service providers offering lower quality, more expensive services to those most in need. As restriction of competition is very often the raison d’être of merger activity, more mergers are, in the long run, likely to be a disservice to consumers.

The reaction of corporate clients should also be disturbing to many banks, given the importance of this market in merger calculus. According to a Treasury Management Association survey carried out at the peak of the merger boom, three-quarters of North American treasurers had experienced some service disruption, account errors or more bureaucracy following mergers.[19] It found that 40 per cent of the respondents felt service quality had declined when banks were integrated, 43 per cent felt their organization’s business had become less important to the bank as a result of the merger, almost half said relationship officers lacked adequate knowledge of the bank’s capabilities and 47 per cent perceived banks as less loyal after the merger. More positively, 37 per cent of treasurers said the banks offered a broader array of services following consolidation and 61 per cent of respondents conceded that the banks were financially stronger as a result.

Creating shareholder value

Increasing shareholder value is generally held to be the paramount objective of most M&As today. However, experience from most M&As in the mid-1980s is not very encouraging in this regard. At that time, many newly merged banks and insurance companies found their cost structures increased, resulting in duplication of structures and costs rather than predicted savings. The much slower growth levels in the 1990s and the high premiums usually paid to shareholders of target companies, mean that the restructuring needed to achieve satisfactory cost savings from mergers can only be obtained with much deeper cost cutting, imperilling the ability of merged companies to achieve the higher levels of sales revenue required to repay merger-related debt and increase shareholder value.

According to Professor Laurence Booth of the Rotman School of Management, University of Toronto, the economic justification for creating shareholder value as the overriding objective of the firm primarily comes from an assumption implicit in most of the finance literature that all the markets in which the firm operates are perfectly competitive. Employees are indifferent if the firm’s employment is increased or decreased; they get market wages if they are hired and can immediately obtain equivalent jobs elsewhere if they are laid off. Similarly, suppliers and consumers can switch to other firms and government taxes will be the same regardless of the firm’s operations. As a result, the welfare of all other stakeholders in the firm is unaffected by the firm’s operations, so that maximizing the welfare of stockholders causes no loss to other stakeholders. The implicit assumption underlying most of the shareholder-value literature is that there are no other stakeholders in the firm, except the stockholders. The reality is that such hypotheses are questionable, at least for large businesses. In many of the less diversified European economies, the impact of certain large firms is critical for the functioning of their economies – as a result of which there is usually “worker” representation on the board of directors and the legal responsibility of the board is to take into account factors other than stockholders’ interests. At the other extreme, creating shareholder value has become the mantra of corporate United States, since this country has by far the most diversified economy and the most competitive markets.[20]

At its most basic, creating shareholder value means that the market favours firms that increase the productive use of their assets by increasing turnover ratios, margins and profitability.

Increasing sales growth adds shareholder value as long as reinvestment earns returns that exceed the firm’s cost of capital. Conversely, firms without such opportunities destroy shareholder value by reinvesting and should return the money to shareholders through dividend increases or share buy-backs. These are largely motherhood statements in finance, but are often not reflected either in managerial policies or corporate culture. The KPMG study cited above reports that shareholder value maximization is specified by only 20 per cent of executives polled in the survey as an objective of M&As.

The basic argument that M&As increase shareholder value through exploitation of synergies is based on the assumption that the combined organization can be operated in a way that generates greater value than would be the sum of the value generated by the “stand-alone” companies (the 2+2>4 equation). Potentially, synergies may be extracted from cross-selling products, increasing economies of scale, elimination of duplicated functions and premises and greater market capitalization – and therefore lower financing costs.[21]

Studies tracking shareholder returns for every large, publicly traded North American acquirer in the 1990s showed that only 44 per cent of deals initiated by these companies yielded superior investor returns. On average, acquirers underperformed their respective industries by 3 per cent. Banking deals in the United States performed even worse. Only 18 per cent of acquirers provided superior returns to shareholders. Consolidators underperformed the total return index for their industry by an average of 13 per cent during the three years following deals – their shareholders were 13 per cent worse off than if they had simply held a bank industry portfolio mirroring the index. According to a 1999 Mitchell Madison Group study, bank acquirers in North America lagged the market by an average of 13 per cent in the three years following their transactions. It was found that mergers typically rewarded only the target’s shareholders, disserving investors in the acquiring entity.[22] Observers have given different reasons for the failure in successful exploitation of synergetic potential, including the fact that while firms have been skilful at post-merger cost cutting, achieving revenue synergies is a fundamentally different and more challenging task. When pursuing cost savings, a company mostly confronts internal decisions which, though often difficult, are nevertheless within the acquirers’ power to make. Managers can decide whom to fire, which headquarters to abandon, which branches to close, which systems to use and so on. Achieving revenue synergy, by contrast, requires decisions from powerful external constituents – the customers. They must be offered an attractive value proposition in order to keep their accounts at the merged entity and expand their business with it. Branch rationalization models typically do a good job assessing the likelihood of customer attrition, but fail to take into account a branch’s value in attracting future customers so that managers who wield the cost-cutting axe too heavily may inadvertently truncate future growth and the very same shareholder value the deal was supposed to increase.

In 1999, the European Central Bank (ECB) expressed concern regarding the possibility that some banks might be forced into high-risk strategies, defined as those of “the rather short-term oriented shareholder value philosophy”. Shareholder value was an important element in the failed merger attempt between Germany’s Deutsche Bank and Dresdner Bank in 2000. The attempted merger, justified on shareholder maximization, would have represented a break from the post-war consensus – shared in much of Europe – that saw companies as accountable not only to shareholders but also to other stakeholders such as workers, suppliers and the wider community. Early adopters of shareholder-value goals include Lloyds-TSB and banks in Scandinavia, Spain and the Benelux countries. In 1999, ABN-AMRO of the Netherlands announced a policy shift to shareholder value, requiring greater focus on the expansion of highly profitable activities like asset management, private banking and corporate finance, all of which require only relatively limited capital. Such a shift in management focus involves breaking down the business into smaller units designed around products or groups of customers and analysing the return on capital employed by each unit. Managers are expected to allocate shared costs and put valuations on capital assets, with a view to identifying and discarding activities determined to be making less than the firms’ internal rate of return. Business units not yielding sufficient returns on capital are either sold or closed, or restructured to produce higher returns on less capital, while low-margin but necessary parts of the business, such as payments-processing, are pooled between several banks or contracted out to specialists under the rationale that such parts may be the necessary price to pay to hold onto customers who may purchase other, higher return, services.

Bancassurance

“Bancassurance” (the selling of pensions and insurance products by or through banks) covers diverse economic activities. In the same way that consumer credit is very different from money management in banking, life and property insurance activities are also extremely dissimilar. Insurance companies and banks look like adopting bancassurance as one of a range of multi-distribution options in the Internet age, although some analysts doubt the viability of M&As between banks and insurance companies on the grounds that their core occupations remain very different despite the growth and diversification of financial products. Similar M&As among companies in comparably different sectors, e.g. between chemical and pharmaceuticals enterprises, auto and aeronautical companies, have frequently failed. Nevertheless bancassurance has been a key consideration in some recent European financial sector M&As as increased control over bank branch networks is considered to provide expanded distribution channels for insurance products. This development partly reflects rapid convergence between banking and insurance.[23] Had the merger between the Deutsche Bank and Dresdner Bank succeeded, Allianz, a major shareholder of both, would have taken a substantial stake in the banks’ retail operations to secure access to their branch networks and counteract the domination of the insurance market by sales agents. Allianz’s 14,000 tied agents and 35,000 non-tied agents handle 80 per cent of life insurance sales and almost all sales of property and casualty insurance. Equally, bancassurance was an important factor in the 1999 M&A contest involving France’s BNP, Paribas and Société Générale (SocGen). CGU, wanting to protect its position against Axa in France, unexpectedly intervened, taking a £500 million stake in SocGen to help it see off a takeover by BNP. CGU played a similar supportive role in the Royal Bank of Scotland’s successful hostile bid for NatWest in exchange for an agreement to buy 50 per cent stakes in NatWestLife and RBS’s own life assurance subsidiary. It will manufacture the products and invest the funds under management in the joint venture, which will give it access to about 2,000 bank branches. CGU also took over as RBS’s partner from Scottish Widows, the mutual life and pensions group that agreed to a £6.7 billion offer in 1999 from Lloyds-TSB, a direct competitor of its Edinburgh neighbour. Lloyds’s purchase of Scottish Widows marks the most ambitious attempt yet to make bancassurance work in a market where it has historically failed to thrive. CGU’s recent £20 billion merger with life assurance rival Norwich Union should increase the resources devoted to British bancassurance. Prudential had agreed to buy NatWest’s life assurance business if the Bank of Scotland had won the battle and with it exclusive rights to sell the group’s life, pensions and mutual fund products through NatWest branches.

Bancassurance is also a key priority for Banca Intesa, Italy’s largest banking group, which is poised to expand in Europe after completing its integration with Banca Commerciale Italiana (BCI). The expanded group wants to develop synergies with one of its large shareholders, the French bank Crédit Agricole. At the same time, the BCI acquisition reinforces the presence of Commerzbank in the Intesa group and increases the weight of Assicurazioni Generali, Italy’s leading insurer. Intesa has announced intentions to develop bancassurance with both Crédit Agricole and Generali. Fortis, the Belgian-Netherlands financial group, plans a bancassurance platform in the Benelux countries, with the highest market share in some segments.

Banking industry restructuring is often accompanied by a blurring of boundaries among different categories of financial intermediation and financial conglomerates have special prudential problems given that their composite units may fall under different supervisory agencies. The problem is aggravated when subsidiaries’ operations are spread over many countries. Since the mid-1980s, cross-shareholding and other forms of partnership between banks and insurance companies have grown both at the national and international levels. The trend is particularly striking in Denmark, France, Germany, the Netherlands, Spain and the United Kingdom.

Table 1.1.   Bancassurance market share in western Europe (1997)
 


 

Life insurance (%)

Non-life insurance (%)


Germany

10

5

Belgium

19

4

Spain

50

19

France

60

4

Italy

20

1

Netherlands

20

15

United Kingdom

22

1

Sweden

20

1


Source: Economic and Social Council: Panorama et évolution de la distribution d’assurance en Europe (Paris, 1997).

Bancassurance comparable to that in Europe does not exist in Japan because the banking law forbids credit institutions’ involvement in non-banking activities. Nonetheless, links exist especially in common membership of keiretsu, multipolar groups characterized by very close collaboration among members, usually organized around a bank, a manufacturing company, a trading firm, etc.

Bancassurance is also developing at a rapid pace in the United States, as evidenced by the creation of the largest bancassurance company with the merger between Citicorp and Travelers Group.

2.   Obstacles to success in
      financial services M&As

The 1993 ILO study on banking[24] noted that efficiency improvements through mergers were frequently overestimated. Contemporary research confirms this observation. Worldwide, two-thirds of mergers end in failure – some because of staff hostility and others because of insufficient preparation and inability to integrate personnel and systems. Even more failures are due to irreconcilable differences in corporate cultures and management. This chapter examines a number of obstacles to mergers and acquisitions in the financial services.

The race for size – An obstacle course?

Most retail banks try to obtain economies of scale by expanding – either by extending their networks or widening their range of products and services. However, there is no automatic link between size and profitability. In fact, this attempt to expand can often produce the opposite effect. The complexity of managing large operations can nullify the benefits and losses related to top-heavy organization are often underestimated. The lack of transparency of financial activities and the fragmented nature of debts and capital, especially for megabanks, prevent creditors, shareholders and regulators from imposing discipline. Internet banking is also a challenge with which large banks have to contend.

Moreover, public policy requires banks, as well as other financial institutions, to be closely supervised because their activities have such impact on the financial system and the economy as a whole. Strong, efficient and profitable financial institutions are vital to economic success, especially as an engine of economic vitality through their role in creating and maintaining credit systems for other sectors, not only nationally but globally. In this framework, regulation is essential to avoid system failures that have devastating consequences, as was the case in South-East Asia in 1997. National regulatory frameworks are therefore being revised to ensure financial services adhere to prudential principles and competitive imperatives.

Regulation

During the 1990s, financial system controls in many countries were strengthened and initiatives were taken to increase transparency of institutions’ financial statements and their risk management practices. For instance, the central banks of the Group of Ten adopted a report in 1994 on procedures for communication on market and credit risk; in 1995, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) published guidelines on the subject; and in 1997 the Basel Committee adopted 25 core principles for effective banking supervision widening the areas for international harmonization. In more general terms, central banks wanted to make firms assume greater responsibility for managing liquidity and credit risk in payment and settlement systems. When financial difficulties were widespread in some cases, the authorities opted for a rationalization of the banking sector.

Trade union organizations, such as the International Federal of Commercial, Clerical, Professional and Technical Employees (FIET, now UNI), have recognized that with banking systems there is a need to “accommodate wider interests than the financial interests of the individual bank or even of banks collectively”, contending that there is a good public interest associated with systemic stability that affects the monetary system as well as national and international economies. They argue for a broad-based, independent commission to look at regulation of international financial markets, rather than the behind-closed-doors approach being adopted for the Financial Stability Forum (FSF) at Basel. FIET (UNI) believes that such a Commission should redefine the role of the key institutions (IMF, World Bank, OECD, Bank for International Settlements, Basel Committee on Banking Supervision) to create a global system of governance for international financial markets and seek to ensure that structural adjustment programmes also consider human rights, job creation and poverty reduction. Among the measures advocated to curb the damaging effects of short-term capital flows are: an international tax on foreign exchange transactions; minimum deposit requirements with stable dollar, euro and yen financial blocs; and open and transparent banking systems with effective disclosure and satisfactory minimum reserves.

In the United States, several federal banking agencies and the Justice Department have authority to review all bank merger proposals. Policy standards for bank consolidation were modified in the 1980s on the rationale that deregulation and market innovation had substantially made the structure of local banking markets more competitive. Their modified policy has resulted in approval of almost all bank mergers, including those of the largest banking organizations. Some organizations feel that there is little evidence that consumers and small businesses have gained from greater efficiency and competition. Even though carefully scrutinized for anti-competitive structural effects on local markets, they have had anti-competitive consequences; and the bank consolidation movement is producing new structural configurations that tend to restrain competition.[25]

The repeal of the Depression-era Glass-Steagall Act in the United States in 1999 lifted long-standing prohibitions on banks, stockbroking houses, security firms and insurance companies from venturing into one another’s businesses. These constraints had already been eased in 1997, allowing a number of important acquisitions during the period 1997-98. These reforms are expected to result in the emergence of financial services giants, with United States consumers able to obtain financial services and products from banks, stockbrokers or insurance companies.

In the Caribbean, an important issue has been regulation of near banks. Until recently, these were either unregulated or subject to less stringent regulation than commercial banks as they were considered outside the responsibility or supervision of the central bank. Within a framework of liberalization and deregulation, changes have been made to strengthen supervisory capability in the region. In Jamaica, the Financial Sector Adjustment Company (FINSAC) was formed in 1997 to oversee the restructuring and consolidation of problem institutions. The restructuring exercise consisted of three phases of operations: intervention, rehabilitation and divestment. The intervention phase involved the negotiation of agreements with troubled institutions with the aim of either closing, supporting or acquiring them – in some cases involving the Minister of Finance who would put the institution under temporary management under the powers provided in banking laws. Intervention sometimes involved the negotiated acquisition of the group for a token amount, with FINSAC thereafter assuming its assets and liabilities. The extent of intervention is reflected by the fact that FINSAC now has investments in over 150 companies, including 15 banks and 21 insurance companies.

The banking system in the Republic of Korea has been undergoing extreme declines in balance sheet quality since 1997. To some degree, the problems of the banking industry stem from longer term structural problems, such as low profitability, relatively undeveloped credit analysis systems and lack of independence on the part of bank management. Owing to the complex corporate structures of chaebols and extensive cross-guarantees, the number of insolvencies mounted rapidly in the late 1990s. The Government has introduced measures to reconstruct the financial system in line with practices in other OECD countries, including a thorough overhaul of institutions and practices to supervise institutions and markets. Consolidation of existing supervisory bodies led to the creation of a new agency – the Financial Supervisory Commission (FSC) – to supervise all financial markets and take charge of restructuring the banking system in 1998. Foreign ownership of up to 100 per cent became possible. As foreign owners reach the thresholds of 10 per cent, 25 per cent and 33 per cent of total equity, they will be subject to increasingly strong review by the FSC.

In May 1999, the European Commission published an action plan for implementing the framework for financial markets[26] The document notes that, although considerable strides have been made since 1973 towards providing a secure prudential environment, the Union’s financial markets remain segmented and business and consumers continue to be deprived of direct access to cross-border financial institutions. The Commission underlines the necessity of creating a common framework to guarantee the transparency and fairness of public acquisition bids which protect minority shareholders. The proposal for a 13th Company Law Directive (takeover bids) is intended to harmonize legislation among Member States. In June 2000, European leaders were on the verge of launching a sweeping review of how to manage a single market in financial services, reflecting concerns that the supervision and regulation of financial services in Europe could not cope with radical change in the banking and insurance sectors caused by the launch of the euro, cross-border mergers and the impact of globalization. Many banks and financial services providers have urged the EU to move towards a more integrated European capital market. But banking supervision and regulation remain mostly the responsibility of national authorities. European banks argue that the rise in Internet banking will highlight the discrepancies in national legislation and that new rules for electronic commerce will leave physical banks subject to a different set of rules from their online competitors.

At the national level in Europe, bank mergers are subject to review by the banking authorities and often may even require prior government approval. In European countries such as Italy and France, all takeover bids must obtain the approval of the respective supervisory authority, which is not always forthcoming. In 1999, applications by major banks in both countries were blocked. In France the supervisory authorities often base their decision on an appreciation of the effects of the merger on the future health of the banking system, after reviewing each institution’s accounts to ascertain whether prudential rules would be respected, especially regarding the ratios between debt and capital levels. The exercise is thus focused on avoiding risk to the system and often does not concern itself with the probability that the merger might result in excess concentration. Responsibility for reviewing the competitive aspects of important non-Community mergers in France lies with the Economic Affairs Minister who may undertake an evaluation on the recommendation of the Competition Council.

In other European countries, various supervisory authorities exercise similar roles:

Bank regulation poses another obstacle to M&As worldwide. Although some current de-mutualization of previously mutual banks and insurance companies was driven by the need to expand access to capital and financial markets, many banks are unable to tap the loan and bond markets to finance acquisitions – partly because they cannot borrow as freely as industrial companies. Limits on banks’ capital ratios mean they cannot leverage their balance sheets to buy competitors.

Competition policy

Banking and financial M&As are horizontal (between competitors) and not vertical (involving supplier and customer which are frequent in industry). While there might be occasional conglomerate mergers when, for instance, a financial institution specializing in the development of products integrates with another specializing in distribution, few financial M&As result in the creation of conglomerates, which occur when the companies are not competitors and do not have a buyer-seller relationship.

The last few years have seen a number of “megamergers” between companies headquartered in different parts of the world, resulting in truly global enterprises. M&As, just like any other potential or actual anti-competition behaviour (cooperative agreements, abuse of dominant positions) are no respecters of borders. It is therefore clear that international cooperation is necessary to deal effectively with cross-border competition problems. The agreement signed in 1991 and put into effect by 1998 between the European Union and the United States is a good example of such cooperation. The agreement particularly facilitates the exchange of information and a transatlantic cooperative regime between the competition authorities and is applicable to M&As, including in banking. An example in 2000 involved telecommunications and resulted in the withdrawal of merger plans between WorldCom and Sprint. In 1999, a working group was set up to extend the areas of cooperation, especially concerning the transmission of confidential information and timely consideration of M&As. Because of laws on commercial confidentiality, European competition authorities still need the consent of the companies involved before they can communicate to their United States counterparts certain types of documents that might contain sensitive information. The aim is to eliminate the need for such consent. Similar agreements on international cooperation exist, for example, between the United States and Canada and between Australia and New Zealand. There are growing calls in various countries – including from academics, economists, trade unionists and NGOs – for strengthened international competition rules to discourage excessive sectoral concentration and to provide a counterweight to enterprises, financial or otherwise, which exploit the absence or gaps in international regulations. EU Member States have called for a multilateral framework on basic competition rules and the linkages between trade and competition policy, including on M&A policy, have been under review at WTO, UNCTAD and OECD for many years.

One issue deserving attention is ascertaining the extent to which current national competition legislation sufficiently safeguards the soundness of the international trading system in case of violation or M&A-created dominant positions on international markets. It is clearly in the international community’s interest that countries, especially the major economies, have effective competition laws that take this into account. However, uncertainty remains as to whether the ways in which they have been applied always reflect all countries’ common interests. This uncertainty arises from the fact that national competition laws, as currently applied, primarily reflect consumer-based anti-competition effects (or, sometimes, producer impacts) which fall within each country’s jurisdiction, rather than practices which affect other countries. Mergers may be approved if the resulting efficiency benefits in the country undertaking the review sufficiently offset the likely damage, but the loss for consumers and other producers outside national borders will not necessarily be evaluated. In practice, it seems that in many mergers, small countries feel constrained to accept the rules of major countries or systems, especially those of the EU and the United States.[28]

In practice, M&As are often a product of market shocks (for example in the financial services sector, privatization or sectoral deregulation), sharpening competition and attacks on established market positions. Higher profitability after M&As can provide not only the sought-after synergies, but eventually, in horizontal combinations of previously competing interests, increased market power. According to UNCTAD, cross-border M&As can be used to reduce or even eliminate competition, thus posing challenges for maintaining effective competition in host economies by increasing market concentration at the time of entry. Like all firms, affiliates resulting from cross-border M&As can engage in various forms of anti-competitive behaviour once established, when conditions permit. As a result of large-scale mergers among transnationals in general, these firms could end up controlling increasingly large market shares and global distribution channels, thus making it difficult for smaller-scale enterprises in developing and transition economies to compete on equal terms. In financial services, abuse of a dominant position, whether or not as a result of a cross-border M&A, can also be subject to prosecution in a country where such abuse has occurred, or within the context of international cooperation when the anti-competition effects affect other countries. Considering the inherent risks in the appearance or strengthening of dominant positions, especially in finance, attentive regulation of M&As is integral to public competition policy.

The development of Internet-based financial services poses new challenges to national and international regulators. Competition authorities must decide whether traditional yardsticks of monopoly power still apply or whether – as some companies argue – the competition issues have changed. Companies argue that the regulators do not understand that the low barriers to entry make it a very competitive environment that cannot be examined in terms of classic market shares. The fast-moving environment of the new economy means that regulators’ conclusions about the effect of a merger could be proved wrong within 18 months.[29]

Examples in Europe include the Bank of England, which reviews banking M&A applications to ensure that they will not have negative repercussions on the operations of the institutions involved, their balance sheets or the safety of depositors’ funds. As in other sectors, the Government might also intervene if a proposed merger or acquisition could create competition problems. In Germany, banking mergers involving more than 1 billion Marks in worldwide net income or 50 million Marks on the domestic market require Federal Cartel Office approval. The Federal Office for the Regulation of Credit Institutions reviews all the prudential ratios of institutions applying for M&As.

Within the European Union, the authority to approve the most important mergers, including those in finance, is vested in the Commission under Council Regulation (EEC) No. 4064/89. The Commission must be informed if the combined aggregate worldwide of the companies involved is more than ECU2,500 million (5 billion euros) and if the aggregate turnover of each of the companies in the EU is more than ECU25 million (250 million euros), unless each of them achieves more than two-thirds of its aggregate community-wide turnover within one and the same Member State. The Commission has noted in some decisions that these thresholds have not been reached (e.g. its 1997 authorization of the merger between Crédit Suisse Group and Winterthur even if Switzerland is not an EU Member). Another example is provided by the Allianz/AGF case where, in a 1998 decision, the Commission judged that credit insurance constitutes a distinct market and that the two companies’ proposal posed the risk of creating a dominant position in it, resulting in AGF’s agreement to divest itself of a subsidiary in the same market as a condition for approval.

In the United States, since the adoption of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the proportion of market-share in terms of deposits held are taken into consideration in cases involving bank holding companies in one state acquiring banks located in another state. The law prohibits M&As resulting in deposit concentrations of more than 10 per cent at the national level or 30 per cent in the same state. In addition, federal and state anti-trust laws are also applicable in M&As.

Following review of the financial services as a preliminary step to reforms, Canada has adopted a comprehensive sectoral policy, including the sensitive and related issues of ownership and M&As. Under this policy, the Government accepts that M&As can be a legitimate and viable business strategy for growth and success, but each merger proposal must be assessed on its own merits and those with over Canadian $5 billion in equity include a formal mechanism for public input. In addition to reviews by the Competition Bureau and the Office of the Superintendent of Financial Institutions, merger proponents have to prepare a Public Interest Impact Assessment (PIIA) for examination by the House of Commons Standing Committee on Finance. In addition to the business case and objectives of the merger, the PIIA must identify: possible costs and benefits to customers and small-medium businesses; timing and socio-economic impact of branch closures or alternative service delivery measures at regional level; international competitiveness of the sector; direct and indirect impact on employment and quality of jobs in the sector (both transitional and permanent effects); ability to develop and adopt new technologies; remedial or mitigating steps on public interest concerns, such as divestures, service guarantees and other commitments; and the impact of a transaction on the industry structure. The PIIA would also cover additional issues that the Minister of Finance or the parties deem relevant in particular transactions. Public interest remedies to address concerns raised during the review process would be negotiated with merger applicants, following which the Minister of Finance would approve the transaction with the terms and conditions reflecting those remedies.

In Japan, the Fair Trade Commission is mandated with guaranteeing anti-monopoly laws. Its competence covers the whole economy, including banking and financial services. Japan has traditionally been seen as a hostile environment for M&As, such activity being considered almost immoral, with the result that previous M&As in Japan were invariably friendly, often resulting from third-party initiatives such as those of government agencies interested in bringing about sectoral adjustments. Following its “Big Bang” drive to deregulate the financial markets, Japan’s enterprises, including banks and other financial services operators, have developed a taste for M&As. Restrictions on M&As, takeover bids and business transfers are nevertheless included in the country’s Commercial Code, the Anti-Monopoly Act and the Securities and Exchange Law. The Stock Exchange and the Securities Dealers Association have their own self-regulatory controls on takeover bids.

Resistance at the national level

There have been long-standing predictions – so far unrealized – that the present wave of in-country consolidation, mainly in Europe, would be followed by regional consolidation in which big banks would buy institutions in other countries. In 1999, only $50 billion of $225 billion in European financial institution deals represented intra-European mergers.[30] So far, cross-border consolidation has taken place only along Europe’s periphery, in regions with close historical and cultural links – Spanish banks buying banks in Portugal, Belgian and Dutch groups linking and pan-Nordic consolidation. At Europe’s core, no German bank has bought its way into the Italian market and no French and Spanish banks have merged.

Cross-border M&As are sometimes seen as eroding the national enterprise sector and, more broadly, economic sovereignty. Concerns of this kind are not new and, in the past, were particularly associated with the natural resource sector. Although banks are cross-border, moving outside their home base involves sensitive cultural issues and such moves rarely produce comparable cost-savings as in-market consolidation. Indeed the promise of minimizing job reductions and maintaining significant local autonomy are often the price foreign bidders have to pay to succeed in cross-border acquisitions. However, there may be economic gains from cross-border M&As if they help to strengthen the capabilities and competitiveness of acquired firms, or simply save them; the risk of “denationalization” may therefore need to be balanced against possible gains in economic restructuring and competitiveness.

Ultimately, banking analysts suggest that the lack of synergies across borders means that pan-European institutions are likely to be created through big mergers of equals. Banks will merge when they are so big that no one else can intervene to break up the deal.[31]

With increasingly nomadic capital, countries are torn between the necessity of mergers or partnerships between financial institutions beyond national borders and the maintenance of the independence of domestic financial organizations. In 1999, Portugal opposed a merger proposal between its largest financial group, Champalimaud and Spain’s BSCH, the parameters of which had to be renegotiated after European Commission intervention. Scandinavian countries are similarly strongly reluctant to allow foreign institutions to take substantial interest in national banking institutions, even though the region has seen the highest number of consolidations. The Norwegian regulatory authorities have not supported several M&A operations, including that proposed by the Finnish-Swedish group, Merita Nordbanken for Christiania Bank.

Legal status of financial institutions

Mutual and cooperative banks continue to play an important role, especially in continental Europe. A product of national social and economic history, their legal status, which prevents stock exchange listing, constitutes an obstacle to M&As. These institutions, which generally include savings funds or agricultural banks, have resisted adopting purely capitalist structures and thus modifying the balance of internal power for fear of losing their historical and local rationale. While consolidation has happened among this category of institutions at the national level, cross-border tie-ups are much more difficult because the purchase of a foreign institution of comparable size could only be envisaged through market financing or the exchange of shares. Nevertheless, the status of this type of institution does not prohibit them from minority holdings – sometimes quite considerable – in foreign financial institutions. Neither does it prohibit alliances and other partnership arrangements, including in bancassurance. The merger announced in October 1999 between mutual banks in the Netherlands and Germany, joined by a major credit cooperative in Italy, will serve as a trial run in this type of consolidation.

Inadequate assessment of
cultural aspects of M&As

Interest is concentrated almost exclusively on the economic benefits of M&As, with scant attention being paid to “soft” cultural and organizational considerations. Though merger proponents and some research in the United States and the United Kingdom argue for increased efficiency gains and employment generation throughout the economy resulting from domestic mergers (thereby compensating in some measure for immediate job losses), as well as increased pricing power which the institution can translate into improved margins, augmented domestic market power does not automatically transform the merged organization into a global force. Influence at the global level requires a corresponding global presence. Although the sector easily lends itself to globalization, cultural differences have often been the root cause in the disappointing experience of extracting efficiencies in cross-border M&As. Following its acquisition of the United Kingdom’s Morgan Grenfell Group, Germany’s Deutsche Bank at first allowed the company to maintain its autonomy, but had to revise the strategy as the arrangement would not permit efficiency maximization. Deutsche’s attempts to imbue its acquisition with its own organizational culture and ways of work almost totally nullified the value of the acquisition. Examples of similar problems in cross-cultural integration are legion and few financial services organizations have found the model approach to overcoming them. The wider the cultural divide, including distinctly different languages, the greater are the sometimes insurmountable barriers to effective integration into transnational M&As.

According to the KPMG study cited in Chapter 1, M&A deals were 26 per cent more likely than average to be successful if they paid satisfactory attention to cultural issues and those acquirers who left cultural issues until the post-deal period severely hindered their chance of deal success, compared with those who dealt with them early in the process. Early emphasis on cultural assessments and communications plans are particularly important. The results also underline the challenge acquirers face in undertaking cross-border deals where there is a significant cultural and linguistic disparity between participants. The authors note that full integration requires the best aspects of both legacy organizations to be incorporated into a single new company culture focused on achieving future business growth. Where the companies are to be run as two separate entities, close links to ensure mutual cooperation between two separate cultures will be essential. The survey results also suggest that a company increases its chances of success if it uses reward systems to stimulate cultural integration or cooperation, as opposed to more informal methods.

Cultural aspects therefore constitute a significant obstacle to cross-border combinations even though the differences continue to ease with time, education and training. Any merger or acquisition is a complex process taking up more time than usually expected: it requires integrating very different organizations, blending often very diverse cultures and dealing with complex questions of dissimilar work organization. This requires high levels of managerial capacity in change management, the constitution of effective teams and network integration – all demands for which many managers are ill-equipped but which can lead to an accumulation of critical errors and misunderstandings and ruin what, at least on paper, might look like a highly promising deal.

Neglecting the human factor is
a frequent cause of failure

Cultural and symbolic elements in M&As are typically framed in terms of the distinction between the merging firms, thus leading to an “us versus them” dualism. The creation of formal, internal communications mechanisms as early as possible in the process is necessary to limit the anxiety that will otherwise be fuelled by rumour, the grapevine, or even outside news reports. Employees complain that their first knowledge that their employer is involved in a merger or acquisition is often from the morning news before setting off for work.

According to a Hewitt Associates executive, the fact that the human factor is taken into account in only 5 per cent of M&As explains why more than half of them in all sectors fail. Teams are usually put together to oversee merger and acquisition operations. These teams almost always comprise specialists in legal and financial issues as well as experts in strategy but rarely do they include human resource directors. One possible explanation is the fact that speed is generally considered of capital importance for success. While the integration phase of merging enterprises may cover between three to five years, the first 100 days after the announcement of the transaction are the most crucial for success or failure. It has become common practice to prepare and communicate to staff and shareholders a programme of integration activities to cover this period, when the feelings of fear, apathy, demotivation and the classical “victor” and “vanquished” syndromes are at their highest. Since a majority of mergers end up with the elimination of overlapping functions and positions, the first 100 days are likely to be those when staff are most uncertain about jobs, career prospects and the disappearance of their own corporate culture.

To reduce the possibilities of failure in M&As, some management experts have recommended that human capital be placed at the centre of the process, or at least be given equal attention to that assigned to economic and financial considerations. According to this school of thought, such a redirection would enable acquirers to select the most compatible acquisition targets from a human resource perspective and make integration that much easier.

Frank communication on a daily basis between management and staff helps to dispel some of the uncertainties of M&As and avoid organizational drift. Employees should be informed in good time about the manner in which redundancies, if there are to be any, will be decided and about the role of their trade unions or representatives in the process. It is also important for staff from the acquired organization to be assured that the rights and entitlements they had with their previous employer are to be respected; otherwise there is a high probability of conflict. Merger uncertainties are also frequently blamed for the loss of talent from target companies, which can destroy the very basis for the merger. The failed merger plans between the Deutsche Bank and Dresdner Bank in April 2000 demonstrate how staff resistance can undermine corporate strategies and management wishes. Integration of teams from the respective investment banks of the two parent banks posed a risk to the balance already achieved between staff in Deutsche Morgan Grenfell and the previously acquired Bankers Trust.

3.   Employment effects of M&As

Regional overviews

Africa

Financial market liberalization in Africa has often outpaced the reform of weak financial institutions. Years of liberalization, restructuring and other reforms have strengthened the sector. However, many observers believe making the sector competitive will require further privatization and consolidation. Bank privatization has been slow although some large divestures are planned once the banks have been restructured, troubled loan portfolios provisioned for and staffing and branch networks re-evaluated. Most M&A activity in the 1990s was implemented in a reform context.

The Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) report that, of the 115 banks in operation in 1997, 47 were in varying states of distress, with an average ratio of non-performing assets of around 82 per cent. The restructuring of distressed banks starts with their being put under joint control through “acquisitions-in-trust” by the NDIC and the CBN for eventual sale to private operators. Six mergers between 1996 and 1998 resulted in 88 net job losses out of a total workforce of 1,860. Without the mergers, many of the banks would have been closed by regulators with the loss of all the jobs involved. Bankers warn that, although the worst of the crisis may be over, only 30 of the 82 remaining banks are serious operators. Recovery does not mean an end to restructuring as the industry is expected to shrink in both the number of institutions and active branches, although the latter already declined from nearly 2,500 to 2,200 between 1997 and 1999. Employment in the sector dropped from 78,514 workers in 1990-91 to 54,292 in 1999-2000, though this can be attributed to bankruptcies and closures and not wholly to M&As.

Given the preponderance of its economy in Africa and its financial operators’ relatively substantial resources, South African interests have been active in acquiring banking and other financial sector enterprises from governments. The four big South African banks (Absa, Standard Bank, Nedcor and First National Bank) are not huge by global standards but tower above rivals in other African countries. In efforts to reduce costs and improve profitability, most major South African banks are examining possibilities of merging with assurers or other banks, while many others are expanding into other African countries. Standard Bank (Stanbic) expanded into 14 African countries in the 1990s, believing this would allow it to be the financial services provider for industries wishing to tap African markets. An attempted hostile takeover of Stanbic by Nedcor was blocked by the Minister of Finance in 2000, partly because of competition concerns, fears of increased systemic risks and the possible loss of up to 10,000 jobs in a country with extremely high unemployment. In arguing its case to the regulatory authorities, Nedcor advanced the need for South Africa to have a “national champion” to compete on a global scale. It claimed the merger would result in enhanced revenues, risk mitigation and cost reduction. These arguments were disputed by Stanbic which highlighted the failure of similar mergers elsewhere and noted that 70-80 per cent of mergers in financial services did not deliver the efficiency touted. Among the reasons it stressed for merger failures were the loss of talented staff, low employee morale, unrealistic estimates of synergy benefits, underestimation of revenue losses and unexpected difficulties in integrating back office functions and systems.

Banking analysts believe there is room for still more consolidation in South Africa, arguing that the sector is overcrowded with too many small institutions, several of which lose money. Certain non-banking entities, such as retailers and car manufacturers, are now competing to offer financial services, which is expected to squeeze margins even further.

In Uganda, the Government is looking for international investors to take over state-owned banks. In 1997, it sold the country’s premier financial institution, Uganda Commercial Bank, to a Malaysian property developer, but the sale was subsequently voided after irregularities in financing the operation came to light. Mass retrenchments and branch closures, especially in rural areas, were envisaged in the deal.

In Tanzania, the sale of NBC (1997) Ltd. (following privatization) to Absa of South Africa proved controversial and was the subject of a parliamentary inquiry. The privatization/sale, in conjunction with the countrywide computerization programme of NBC’s 35-branch network,[32] is expected to result in the redundancy of two-thirds of NBC staff – 730 of 1,100 employees. Staff were offered individual voluntary redundancy packages comprising all statutory retirement benefits, termination of service awards and lump-sum payments based on years of service and salary scale. The redundancy offer circumvented management/TUICO negotiations; the trade union viewed the bank’s unilateral offer as intended to divide the workers.

In the face of overseas competition, economic reforms and growing links with Europe, North African banks are moving from sheltered environments and diversifying their lending instruments as privatization continues. In 1997, Morocco’s Wafabank acquired Uniban, and Banque Nationale pour le Développement Economique took control of Banque Marocaine pour l’Afrique et l’Orient. A product of the recent BNP/Paribas merger, Société Marocaine de dépôt et de crédit is expected to ally with Banque Marocaine pour le Commerce et l’Industrie, a BNP subsidiary. In the absence of suitable local merger partners, Moroccan firms are looking to attract major foreign banks as merger partners. The Banque Commerciale du Maroc, in addition to the local Ona Group, through Financière Diwan (19.65 per cent) counts BSCH (20.27 per cent), Corporación Financiera Caja de Madrid (4.98 per cent) and Credito Italiano (3 per cent) among its shareholders. In insurance, Axa Al Amane and Compagnie africaine d’assurances are to merge as Axa Assurances Maroc, one of two companies expected to lead the sector with over 20 per cent of the market. The second is the Benjelloun Group, currently in the process of merging, which will hold a 23.9 per cent market share.[33]

In Tunisia, state-owned companies dominate with their 60 per cent share of financial services. Tunisian bankers believe they should merge in order to compete regionally and better prepare for foreign competitors following liberalization. The Government has already formulated plans to combine Société tunisienne de banque with BDET and BNDT and another merger involving Union internationale de banques and BTEI is nearing completion. The authorities hope these operations will stimulate similar consolidation in private banks.

Asia and the Pacific

Until recently, cross-shareholding traditions among friendly Japanese companies discouraged M&As, especially those involving foreign buyers. However, the financial crisis has meant that banks, around which company groups are organized in keiretsu, can no longer support weak companies indefinitely. In 1998 Japan recorded 834 M&As across all sectors. The 1993 ILO Report submitted to the tripartite meeting on banking[34] stated that “The financial crisis in Japan has already begun to push smaller banks into forced marriages with big groups and the Bank of Japan has done its utmost to arrange mergers to prevent even a single bank failure” and this trend has continued. Stabilization measures included the injection of 7.5 trillion yen of public funds into the sector and state supervision of failing establishments (e.g. the Long-Term Credit Bank). Greatly simplified M&A procedures were also introduced, effective as from 1999. Analysts believe the number of large banks may eventually decline from 15 to four. Meanwhile a number of foreign financial operators, mainly American, have gained substantial positions in the Japanese financial services market with GE Capital concluding a joint venture in 1998 with Toho Mutual and taking over its business following its failure in 1999. GE Capital also took over Japan Leasing for $6.5 billion. Other financial sector deals in Japan include the acquisition of LTCB by Ripplewood of the United States, Citigroup’s acquisition of Nikko Securities and Merrill Lynch’s holdings in Yamaichi Securities.

The weakening of the Japanese stock market in 2000 exacerbated the problems of the banking sector. The big banks had generally returned to profitability in 1999-2000, largely due to gains in their considerable equity holdings.[35] However, these gains also indicate the extent of the banks’ exposure to Japan’s highly leveraged corporate sector. Interest rate increases could swell corporate failures, further eroding bank assets. Banks are responding to these pressures through M&As to enable rationalization and to benefit from synergies. Eleven large Japanese banks have announced plans to merge into four new banking organizations, three of which will figure in the world’s top five by asset size, with Mizuho (combining Fuji, Dai-Ichi Kangyo and Industrial Bank of Japan) becoming the world’s largest bank.

Table 3.1.   Japanese bank mergers
 


Group

Merging banks

Combined assets,
March 2000,
yen trillion


Mizuho

IBJ, DKB, Fuji

142   

Sumitomo Mitsui

Sumitomo, Sakura

 98   

UFJ holdings

Sanwa, Tokai, Toyo Trust

 78   

Mitsubishi-Tokyo
Financial Group

Tokyo-Mitsubishi, Mitsubishi Trust,
Nippon Trust, Tokyo Trust


91   


Source: The Economist (London) and OECD, op. cit.

The markets have not greeted this news with enthusiasm; bank shares have plummeted 30 per cent since the fourth quarter of 1999.

Meanwhile, the shake-up of insurance is gathering pace in Japan. Discount insurers, among them foreign firms, have put pressure on margins, especially in the car insurance business. Banks will soon be allowed to compete with life insurers to sell certain types of insurance and as from 2000 life and non-life insurers will be able to compete with one another and sell their products directly. In 2001, the Finance Ministry plans to deregulate the industry’s “third sector” of hybrid products, including accident and cancer insurance. Growing competition is thus impelling insurance companies to become bigger and more diversified. In August 2000, Yasuda Fire & Marine announced an alliance with Dai-Ichi Mutual Life to sell old policies and develop new ones. Dai-Ichi plans to demutualize and list on the stock exchange, a likely first step towards a full merger. The non-life subsidiary of Nippon Life also announced it would merge with Dowa Fire and Marine by April 2001. Third-ranked Mitsui Marine and Fire started talks with fourth-ranked Sumitomo Marine on a merger in which Mitsui would be returning to its parent keiretsu led by Sakura Bank, a new partner of Sumitomo Bank, which leads the keiretsu to which Sumitomo Marine belongs. Some believe Mitsui’s move highlights the difficulty of consolidating the non-life sector independently of the keiretsu framework, where ties remain strong despite companies’ efforts to unravel cross-shareholdings. Leading Japanese banks are expanding into non-core financial businesses, as “Big Bang” reforms sweep away barriers in the financial sector. Four bank-led groups have emerged around new alliances including brokerages, trust banks, non-life insurance and life assurance companies, planning eventually to offer one-stop shopping for financial products. Sanwa Bank announced plans to offer one-stop shopping through Financial One, an alliance of non-keiretsu companies, and spent 1999 strengthening its securities operations. Mizuho Financial Group intends to consolidate the bulk of its trust bank and wholesale and retail securities operations.

Elsewhere in Asia, the fallout from the 1997 crisis continues to be felt. In July 2000, the Korea Federation of Bank and Financial Labour Unions (KFBU) called an indefinite strike over government plans to force failing banks to merge, calling it off after guarantees there would be no lay-offs even in the event of mergers. The Government has also tabled legislation to authorize the financial holding companies to facilitate bank mergers and trade unions fear many more weak banks will be forced to close with further massive job losses to add to those already recorded in the immediate aftermath of the crisis. Between 1997 and 1999 five commercial banks closed while four other institutions merged – Commercial Bank with Hanil Bank to form Hanvit Bank and Kookmin with Long-Term Credit Bank. The number of commercial banks fell from 26 to 17 and about one in seven branches (a total of 1,100) closed, resulting in the dismissal of a quarter of all banking staff (34,000 of a total of 145,000). Measures to encourage the establishment of foreign banks were also introduced, and their market penetration, mainly through acquisitions, is expected to increase. The Government recently sold Korea First Bank to a consortium led by Newbridge of the United States, but efforts to sell SeoulBank to HSBC collapsed

Insurance is undergoing similar restructuring. Following the closure of several small companies in 1998, the authorities decided to merge six others in 1999 and to sell Korea Life, the third largest life assurer.

The Government has expressed its determination to reform the huge bankrupt conglomerates – chaebol – which have saddled the financial sector with about 47.4 trillion won ($42.4 billion) in bad loans, nearly 10 per cent of total outstanding bank credit. The financial sector trade unions argue that banks should not be used to keep weak companies afloat and hold inconsistent government policy responsible for the banking system’s instability. The Government and the social partners are aware that clubby relations between chaebols and banks were a key factor in the 1997 crisis. The ILO’s Progress report[36] confirms this analysis, noting that some chaebols’ belief in their invulnerability encouraged them to undertake very risky investments.

Malaysia plans to merge its 54 financial institutions into ten banking/financial services groups by December 2000. A carrots-and-sticks approach involves tax sweeteners and threats that recalcitrant institutions would otherwise not get their operating licences renewed. The rationalization of branches and retrenchments are envisaged to limit post-integration operating costs and maximize the viability of the new groups.

Thailand, where the Asian financial crisis started, has experienced the most extensive and prolonged negative employment repercussions as a result of sectoral consolidation. An ILO-commissioned report noted over 26,000 lay-offs of a total of 50,000 sectoral workers between the beginning of the crisis and December 1999, although only a quarter of the lay-offs could be attributed to merger-related rationalization. In the merger between Bangkok Bank of Commerce and First Bangkok City Bank, two-thirds of 9,109 employees were laid off. Similar, though smaller, job losses were recorded in 2000 with the mergers of KTB and Bank Thai, and the acquisitions in 1999 of both Radhanasin Bank and Nakornthon Bank, by the United Overseas Bank of Singapore and Britain’s Standard Chartered, respectively. Standard Chartered instituted downsizing measures in Nakornthon immediately after the takeover, reducing staff by 112 by the end of 1999. KTB initially retained all staff, including those from the acquired banks, but eventually restructured its combined operation, introducing incentives to encourage early retirement which have so far resulted in the departure of 2,372 employees. Following the merger of Union Bank of Bangkok with KrungThai Thanakit Finance and 12 other finance companies in 1998 into Bank Thai, 1,189 employees lost their jobs, out of a total of 4,571.
 

Box 3.1. Deregulation and financial liberalization in Thailand

In the early 1990s, Thailand embarked on deregulation and financial liberalization, starting with the acceptance of article 8 of the IMF agreement, phased in liberalization of capital flows, deregulation in the operational scope of financial institutions and a partial entry of foreign competitors. The liberalization and globalization of the financial system, in conjunction with inadequate and inappropriate safeguards, inefficient resource management, an inadequate supervisory and financial infrastructure and an underestimation of the scale of the crisis, led in part to higher unemployment and Thailand’s current problems; they also stimulated consolidation in the industry. The acceptance of the General Agreement on Trade in Services changed the industry’s structure. The oligopolistic power of commercial banks eroded as competition from foreign commercial banks strengthened. Thai financial institutions began to reorganize, but this reorganization and adjustment had not progressed enough by 1997 to escape the financial crisis, which affected the soundness of Thai commercial banks more than their foreign rivals. Some small banks and finance companies closed, while the rest were forced to recapitalize. With larger volumes of non-performing loans, due to a steep decline in property values, Thai banks had to increase provisioning, which at the end of 1998 amounted to 13 per cent of total credits, twice the 1997 level. However, some small and medium-sized Thai banks could not meet the stringent provisioning and recapitalization requirements. The economic contraction that began in early 1998, attributed to illiquidity in the economic system, aggravated the problem of non-performing loans. Restrictions on the foreign ownership of Thai institutions were relaxed, spurring an increase in M&As. In 2000, there were 13 Thai and 21 foreign banks. In 1999, four big Thai commercial banks accounted for almost 58 per cent of sectoral employment and a comparable proportion of total assets. The balance was distributed among nine domestic and 21 foreign banks. Despite changes following the crisis, banking remains oligopolistic, though its structure has gradually changed since liberalization.

Source: P. Chasombut and Y. Kongtong, Study for the ILO, 2000.

Since financial sector consolidation in New Zealand and Australia started in the early 1990s, sufficient time has elapsed to review its medium- and long-term employment effects. Data for New Zealand shows a combined employment decline in four merged companies of 13.8 per cent, with the biggest percentage drop seen in Countrywide/United following their 1992 merger. The similarities in the characteristics of merging institutions, such as size and business profiles, extensiveness of branch networks and type of customer base, usually indicate the extent of likely job cuts. In the Westpac and Trust Bank merger of 1996, roughly 40 per cent of branches closed with job losses of 28 per cent. New Zealand’s banking industry is dominated by Australia’s four big banks and pressure has been growing for the Australian Government to allow mergers between the dominant four. There are fears that potential efficiency gains could well be outweighed by a reduction in consumer choice and the possibility that the reduced competition might allow the remaining banks to increase their charges for financial intermediation. FinSec, the New Zealand financial-sector trade union, has noted post-merger employment losses in the country’s banks (see table 3.2 below) though it does not attribute these exclusively to the mergers, pointing to general rationalization strategies and the impact of technology as contributing factors.

Table 3.2.   Pre- and post-merger employment levels in New Zealand
 


Combined employers*

Pre-merger 1991

Post-merger 1995

% change 1991-95

ANZ/Post Bank (1984)

 6 876

 5 953

-13.4

Countrywide/United (1992)

 1 625

 1 189

-26.8

National/Rural (1992)

 3 952

 3 821

-3.7

BNZ/NAB (1993)

 6 498

 5 549

-17.1

Total

19 151

16 512

-13.8


* Date of merger in brackets.
Source: FinSec submission to the Inquiry into the Australian financial system, tables 7-10.

As elsewhere, the effects of mergers in Australia must be viewed in conjunction with rationalization motivated by other factors, but the effects of a takeover of State Bank of Victoria by Commonwealth Bank in 1991 involved a 20.8 per cent reduction in the staff of the merged bank in the state of Victoria alone, the disappearance of 8,000 jobs and the closure of 428 branches. Westpac Bank’s acquisition of Bank of Melbourne in 1997 involved more than 1,200 job losses and 119 branch closures, while the acquisition of Town & Country Bank WA by ANZ in 1995 was followed by the closure of 49 Western Australian branches and an indeterminate number of lost jobs. Westpac is also reported to be implementing a “performance enhancement plan” which aims to cut another 3,000 jobs nationally over two years, while Commonwealth Bank intends to develop its in-store banking services through its EzyBanking outlets and close an estimated 640 branches.

The Finance Sector Union of Australia (FSU) reports that the trend in rationalization, facilitated by M&As, will cause massive job losses should the federal authorities approve mergers among the four largest national banks which together employ 80,000 people. These institutions have already shed about 40,000 jobs and closed 200 branches since 1993, generating an increase in bank profits of 286 per cent. Because of the considerable overlap in operational areas between Colonial and Commonwealth, a merger between the two would lead to the disappearance of tens of thousands of jobs.

Western Europe

Banking overcapacity is considered a problem by financial service operators, who believe that new information technologies will enable efficiency-seeking companies to reduce both personnel and branches and that, if new distribution channels (Internet, mobile phones, etc.) are widely adopted while traditional networks remain, inefficiency and high costs will damage the profitability and solvency of banks. The importance of banking differs tremendously from one country to another, with shares of banking assets varying between 70 and 300 per cent of GDP. The income structure is also changing to resemble that of the United States, where the share of net interest income in total income has started to decline. Country differences in net interest margin are considerable, with the European Union (EU) average much narrower than the American margins. The focus of banking income and activity is gradually moving away from interest income to other sources of revenue as banks seek to become providers of a wide range of financial services. The borders between banking, insurance, securities and other financial services are blurring and may soon disappear completely. The composition of non-interest income also varies widely. The share of fees and commissions in total income is increasing, reflecting banks’ growing market share in the mutual fund and life insurance businesses and also the trend towards the fuller pricing of payment services, previously underpriced or even provided free of charge for tax reasons. There is no clear evidence whether net interest income or non-interest income is the more volatile or riskier component of total income. Net profit on financial operations (capital gains or losses) is, however, the most volatile income component.

Industry experts insist that before deregulation in the early 1990s EU markets were overbanked, with the number of personnel and branches continuing to increase until the mid-1990s. Restructuring has since advanced rapidly. Mergers have so far been mainly domestic, with the aim apparently being to create national champions before entering into cross-border mergers.[37] The current run of domestic market consolidation – increasingly large domestic retail banking mergers – may be in its final phase. Some banks seem to have chosen to enter cross-border retail business via the Internet rather than through mergers or physical outlets.

The number of banks in the EU has declined rapidly since 1990 (see table 3.3), with cooperative and savings banks contracting up until 1997, while the number of commercial banks has grown, although preliminary data indicate they too have declined as M&As have increased. The consolidation of small savings and cooperative banks enabled them to increase their overall shares of total banking assets, although these remain roughly stable as against those of the commercial banks, which still dominate. In a few countries, local savings and cooperative banks are dominant players, especially in retail banking.

Table 3.3.   Total number of banks in 15 EU countries
 


 

 1990

 1993

 1995

 1996

 1997


Savings banks

 1 650

 1 270

 1 120

 1 060

 1 010

Cooperative banks

10 600

 9 600

 5 640

 5 600

 5 100

Commercial banks

 2 390

 2 600

 2 640

 2 700

 2 710

Total

14 640

13 470

 9 400

 9 360

 8 820


Source: H. Koskenkylä: Threats and opportunities for today’s European banks (Bank of Finland, 2000), paper submitted to the Institute of Economic Affairs Conference on European Retail Banking, Geneva, 22-23 Feb. 2000.

Table 3.4.   Shares of total banking assets in 15 EU countries (%)
 


 

 

1990

 

1995

 

1998


 

 

 

 

 

 

 

Savings banks

 

14.6

 

15.7

 

15.8

Cooperative banks

 

12.0

 

11.5

 

12.3

Commercial banks

 

73.4

 

72.8

 

71.9


Source: Kostenkylä, op. cit.

M&As in Spain, while relatively recent, are now common and the entire sector has been radically restructured, starting with the 1988 Banco Bilbao and Banco Vizcaya merger into BBV, followed by the amalgamation of Banco Central and Banco Hispano. After the 1993 acquisition of near-bankrupt Banesto, Banco Santander merged with Banco Central Hispano to create BSCH, extensively represented in Latin America and employing 106,000 workers serving 22 million clients worldwide. Mega-banking group BBVA (with 91,000 employees) is the 1999 product of a merger between BBV and Argentaria, previously ranked second and third among Spanish banks. BBVA is also solidly implanted in Latin America, where it is considered the second largest financial services operator, with 2,200 branches and a key position in pension funds.

Following the privatization of state financial institutions, Banco Exterior de España absorbed Banco de Crédito Industrial, while Banco de Crédito Agricola was acquired by Postal Bank. In 1998, the two resultant banks merged and, together with Banco Hipotecario de España, formed Argentaria, Caja Postal y Banco Hipotecario SA. Subsequently, Banco Santander and Banco Central Hispano Americano combined in January 1999 to create Banco Santander Central Hispano Americano, among the top three in Europe in terms of market capitalization and number one in Latin American investments. Spanish authorities have supported financial sector consolidation as a way towards cost reduction and improving national financial sector competitiveness in the Euro-zone.

Even when the impact of new technologies is factored out, banking M&As have had a substantial negative effect on employment. According to the Spanish financial sector trade union, jobs in the banking sector declined from 180,000 to 129,000 between 1980 and December 1999, mainly due to merger-linked forced early retirements, sometimes thinly disguised as voluntary.

The first major M&A in Spanish insurance involved AGF acquiring La Unión y el Fénix Español. The resulting job losses were spread across countries in which the companies had overlapping operations, including France, Belgium, Portugal and Spain. Losses in Spain, mainly through voluntary redundancies, early retirement and attrition spread over three years, totalled up to 1,000 jobs.

In Greece, the 1998 privatization and sale of Ionian and Popular Bank to Alpha Credit Bank, within the Government’s wider economic restructuring programme to reduce the size of the public sector and facilitate Greek entry into European economic and monetary union, was contentious. Banking sector employees held a nine-day strike in 1998 to express their opposition, demanding that Ionian be merged with its public sector parent company, Commercial Bank of Greece, to allay fears of redundancies among the 4,100-strong workforce. The Government eventually prevailed but conditioned the sale to Alpha on the avoidance of large-scale redundancies.[38]

With 3,400 independent establishments in 1999, German banking remains fragmented and overbanked, with an average of over 830 branches and other distribution outlets per million inhabitants against an EU average of 528. The share of the five largest banks in total assets is 18 per cent, compared with over 80 per cent in the Netherlands and Sweden. The 1998 merger of Bayerische Vereinsbank and HypoBank created Germany’s second-ranked private bank, HypoVereinsbank or HVB, which in 2000 announced it was acquiring Bank Austria, with 280 domestic offices and a network in Poland, the Czech Republic and Hungary, where growth prospects are considered particularly strong.

The German “non-private” financial sectors have been undergoing slow but sustained consolidation for several years. The number of cooperative bank organizations fell by a third in ten years. While concentration is a sensitive subject in Germany, German banks have been expanding abroad. Commerzbank established extensive alliances (significant shareholdings in the Italian bank Comit, the insurer Generali, and cooperation arrangements in Spain and Austria), while Deutsche Bank took over Bankers Trust (then ranked eighth in the United States) in 1998, characterizing the cultural transformation of a German universal bank into an Anglo-American style investment bank. A report entitled “Concentration of forces. One association – one strategy” by the Federal Association of Popular and Raiffeisen banks concludes that concentration is accelerating and transforming the cooperative sector, arguing that while earlier mergers aimed to increase the size of companies and associated synergies, now synergies are the focus to be achieved systematically by M&As.

Reined in by the small size of their domestic markets, Dutch and Belgian bankers embarked very early on international acquisitions and mergers, with government encouragement. Banking restructuring in the Netherlands resulted in the birth of two giants – ABN-AMRO and ING – at the beginning of the 1990s. In 1990, a year after failing in its ambitions to merge with Générale de Banque of Belgium, AMRO combined with ABN to create ABN-AMRO, the premier Dutch bank. Its close national rival, ING Group, is the product of a 1991 merger between the top insurer Nationale Nederlanden and NMB Postbank, a bank and itself the result of a merger between Post Office Bank and Nederlandse Middenstandsbank. Since then, unable to expand further on a domestic market that had become too small for its ambitions, ING has adopted a sustained growth strategy based on international acquisitions. In 1995 it acquired Barings, close to bankruptcy due to a trading scandal in its Singapore operations and bought Banque Bruxelles-Lambert in 1997. The ING Group, an excellent example of European bancassurance, acquired Berliner Handels-und-Frankfurter Bank in 1999 and now has 83,000 employees in its 80 offices in 61 countries.

In Belgium, KBC is the result of a 1998 merger between Kredietbank, Cera (a cooperative) and ABB (an insurance company). The bancassurance company Artesia also acquired France’s Banque Vernes in 1998, while Fortis, a Dutch-Belgian bancassurer, bought Générale de Banque in 1997. The total number of banking sector employees in 1999 was 76,432 compared to 77,028 a year earlier, 76,112 in 1996 and 76,541 in 1995, reflecting an average of just over 76,000 employees for the period. The numerous M&As do not therefore seem to have affected overall sectoral employment. According to the Belgian Banking Association, there is continuing strong growth in the employment of executive and professional staff. Similarly, women workers’ share of jobs in commercial banks rose from 38.5 per cent in 1990 to 42 per cent by 1998, most significantly in management where it rose from 6.6 per cent in 1990 to 17.2 per cent by 1999 and at the executive and professional level (17.8 per cent in 1990 to 24.2 per cent in 1999).

Spain’s BSCH has entered into an agreement with Portuguese financial group Champalimaud for eventual joint control of Champalimaud by BSCH and Caixa Geral de Depósitos of Portugal. Two other mergers involving Banco Comercial Português and Banco Mello, and Banco Espíritu Santo and Banco Português de Investimento were announced in 2000.

In Italy, banking sector consolidation increased in the late 1980s with the pace further accelerating in the mid-1990s. The 111 combinations between 1980 and 1989 concerned only a very small part of the sector (3.4 per cent of the market), but between 1990 and 1998 there were 409 operations (of which 173 were in the Banche di Credito Cooperativo or BCC category), representing 23 per cent of the market share. In 1998 alone, there were 54 M&As involving banks, representing a total of 30.5 per cent of banking assets, with the three biggest operations – Credito Italiano and Unicredito, San Paolo and IMI, Intesa and Cariparma, then Banca Friul Adria – the result of friendly agreement. Meanwhile, Monte di Paschi acquired 60 per cent of Banca Agricola de Mantavona, while the 1999 blending of Banca Intesa and Comit (Banca Commerciale Italiana) formed the country’s largest financial group, Cuccia. Italian regional banks have not remained simple spectators; the Banca Popolare Vicenza Group, itself a product of six banks acquired in recent years, continues to rely on acquisitions for growth and Central Bank policy has encouraged northern regional banks to participate in stabilizing the banking system through the acquisition of distressed southern banks. In line with this policy, for example, Banca Popolare dell’Emilia Romagna has taken over control of Banca Popolare di Crotone. In cases of this nature, however, the acquirer is often obliged to preserve its target’s autonomy for several years after the acquisition.

In France, Crédit National absorbed Banque française du commerce extérieur to create Natexis, subsequently acquired by Banques Populaires, a mutual organization. Crédit Agricole, another mutual, took control of Banque Indosuez in 1996 and acquired 70 per cent of the consumer credit specialist Sofinco. Following the failure of its three-way merger plan with Société Générale (SocGen) and Paribas, BNP finally succeeded in acquiring the latter in August 1999, creating a bank with over 76,000 employees. Soon after, SocGen also acquired control of Bulgaria’s Expressbank, itself the result of a 1993 merger of a dozen small regional banks.

UBS, formed after the merger between Union de Banques Suisses and Société de Banque Suisse continues to face integration problems. The bank’s share price has yet to recover since the 1998 merger and there is speculation that despite its massive size (over $983 billion in private banking funds under management) it could itself become an acquisition target. The bank is nevertheless reorganizing its business groups again, and has purchased the fourth largest retail broker in the United States, PaineWebber ($485 billion in assets under management), specializing in asset management for the very rich. Following the $11.7 billion purchase – for a premium of 47 per cent over the acquired company’s share price – its share price tumbled more than 11 per cent on concerns it had overpaid. Shortly after the PaineWebber takeover, UBS’s Swiss rival, Crédit Suisse, acquired Donaldson, Lufkin & Jenrette (DLJ), another American investment bank, for $12 billion. Observers believe that these deals are likely to set off yet more M&As. Axa, the French insurer that had been DLJ’s main shareholder, is expected to use the proceeds from the deal to acquire the 40 per cent of its American financial arm – Axa Financial – that it did not already own. A combination of the new acquisition and Credit Suisse First Boston or CSFB (the product of an earlier acquisition) creates a powerful competitive platform in every profitable area of investment banking, from underwriting to advising on mergers.[39] DLJ is a veritable history of M&As: it first went public in 1970, sold itself off again in the mid-1980s to Equitable Life, a British insurance company, and then went public again in 1995. Shareholders expect huge gains from the merger price, which is three times book value.

Outside Scandinavia, branch and staff rationalization in Europe has been most extensive in the United Kingdom. By 1998, the number of branches had declined to less than 10,000 from a high of 14,000 in 1985. The City of London recorded the highest number of, and some of the largest, M&As in Europe in the 1990s, including the recent hostile takeover of NatWest by the much smaller RBS. This last acquisition involved a highly acrimonious three-way confrontation pitting NatWest against RBS and Bank of Scotland (BoS). Important factors in RBS’s success were its pledge to cut costs by more than £1 billion, mostly by eliminating 18,000 jobs, and substantial support from other financial institutions, such as Spain’s BSCH. Given a more extensive market overlap with NatWest, RBS convinced its shareholders that potential for job reductions, and thus synergy, was much greater than would be for BoS. The immediate trigger for NatWest’s loss of independence was its attempt to acquire Legal & General when the financial markets viewed NatWest as an industry laggard in returns on shareholders’ equity. In current market conditions, all British financial institutions are considered either potential takeover prey or predators. Almost all of the United Kingdom’s prestigious merchant banks (Warburg, Barings, Kleinwort Benson and Morgan Grenfell) have passed to foreign banking groups.

Other notable M&A operations involving British companies include the 1999 acquisition of Scottish Widows, an insurance company, by Lloyds-TSB and the 2000 acquisition of Crédit Commercial de France (CCF) by HSBC. This acquisition is not expected to involve retrenchments, as the French Labour Code[40] guarantees workers’ contracts even in the event of changes in the employer’s legal status (especially involving mergers, sales and recapitalization) and the management of staff reductions should be facilitated by the age structure of bank employees. In August 2000 Barclays also announced a takeover of Woolwich in a £5.4 billion deal, with the firm becoming the mortgage arm of the Barclays Group. The acquisition is projected to involve at least 1,000 job losses of the combined company’s 56,000 posts spread across 2,100 branches. Job losses will mostly come from integrating back office infrastructure and streamlining management structures, accounts administration and other financial dealings. Where the networks overlap, the new group will combine 200 branches, effectively closing half of them. Barclays recently closed 171 branches, many in rural areas, with the loss of 7,500 jobs in one day. The job losses at Barclays are representative of a trend which has seen the number of staff in major British banks peaking at 444,000 in 1990, then beginning a sustained decline to 430,000 in 1991, 382,000 in 1993 and 363,000 in 1995. It is estimated that between 1990 and 2000, British banks reduced their employees by 150,000 and shut a quarter of their total network of branches (over 4000).

M&As tend to accelerate the introduction of innovative technologies in financial service firms. According to trade unions, each telephone banking job destroys the equivalent of 1.4 to 1.7 branch positions within two years. The British trade union MSF classes 1999 as a peak for announcements of mass lay-offs resulting from restructuring or M&As. A total of 18,000 banking posts were eliminated, partly as a result of a 15 per cent cost reduction programme in merged Lloyds-TSB and partly in NatWest after its acquisition by RBS. The announcement of 3,000 job cuts following the merger between Commercial Union and General Accident to form CGU illustrates the type of change that is under way in the sector and the relationship between mergers and employment trends.

Since the 1995 merger, Lloyds-TSB has eliminated 16,021 posts, 4,823 by spinning off activities. By 1999, the new banking group had achieved its cost-cutting objectives in such centralized functions as treasury, cheque processing and rationalization in call centres and had closed 300 branches as part of its goal to cut costs by 10 per cent and double shareholder value every three years, resulting in 12 per cent staff reductions. The stated aim of M&As in retail financial services is to extract cost savings and the most effective way to achieve this is through branch closures which allow companies to save costs associated with staff, premises and equipment. Since the 1980s, financial services providers have embarked on a vast programme of branch closure, with British banks and building societies closing 20 per cent of their branches between 1989 and 1995. While these closures were unrelated to M&As, mergers tend to accelerate closure programmes. A reverse phenomenon has also been observed. For example, before Midland Bank’s acquisition by HSBC, it had started a vast branch closure programme in the late 1980s, essentially due to serious financial difficulties. Following the takeover and resolution of those difficulties in the early 1990s, the draconian reduction in the bank’s branch network stopped.[41]

Throughout Europe the insurance industry is undergoing similar turbulent restructuring and consolidation with the pressure to consolidate coming from various sources. Private savings and pension plans are expected to grow rapidly as governments in Europe shift more of their pensions’ responsibilities from the State to the private sector. Pressure from dissident (“carpetbagger”) policyholders is also growing on insurers to abandon their mutual status, unwind reserve positions, pay out profits to members, and list publicly to add new sources of equity capital, pointing towards further consolidation. According to one source,[42] three global brokers – Marsh McLennan, Aon and Willis Corroon – came to dominate the markets over the 1990s. The traditional function of brokers is to find insurance for corporate clients, negotiating the price and scope of coverage and to advise on the design of risk programmes. Most make their money on commissions from insurers on client premiums. In American, British and some relatively deregulated European markets, brokers dominate the distribution of commercial insurance and influence choices and terms. They have begun to gain a market share in deregulating markets such as Italy, Spain and Latin America. In 1989 the proportion of worldwide revenue generated by the top five brokers was about two-thirds of the market; by 1997, it was nine-tenths, with the three global firms accounting for more than 80 per cent. Brokers’ clout has helped drive down insurance prices, benefiting corporate clients but squeezing insurers’ profit margins. Market deregulation in many markets, such as the EU and Japan, has also increased competition among insurers and exerted further downward price pressure. Investment bankers, Internet companies offering financial services, and specialist risk consultants, etc., have entered the market, reinforcing competition.

Consolidation – already driven by overcapacity and slow growth – has accelerated as insurers counter the power of global brokers, becoming either very large to gain leverage, or specialized to be “category killers” in their niche. Many have opted for size – mergers among British insurers have followed the rapid consolidation of brokers, including Royal and Sun Alliance, Commercial Union and General Accident, Zurich UK and Eagle Star, and Norwich Union and London & Edinburgh. There is a trend among insurers to forward-integrate by taking stakes in distributors. A group of American and British insurers has bought part of Willis Corroon; a consortium of American institutions, including insurers, has invested in the broker USI; and XL Capital proposed an investment (eventually not made) in wholesale broker Tri-City.

For a scale-based strategy to succeed, insurers need critical mass in all their key markets. Consolidation is spreading from in-market tie-ups, now almost complete, to cross-border ones, particularly in Europe as the Single Market draws nearer – for example, between Allianz and AGF, Generali and AMB, and Axa Group and Guardian Royal Exchange. This is leading towards truly multinational operations serving global clients, developing global brands and helping in the acquisition and retention of customers, generating economies and skills in specialist areas and limiting the global brokers’ ability to negotiate terms. Should these opportunities not be properly exploited, the scale players could be left with unwieldy structures that destroy shareholder value.

The Spanish insurance industry is consolidating radically, driven on the one hand by legislation on the regulation and supervision of private insurance which requires a significant increase in the level of nominal capital a company must have to operate in the various branches of the insurance industry and, on the other, the establishment of a single European market, which has inspired multinationals to strive for the requisite size to enable them to compete in a suddenly enlarged “home” market, with the greatest employment impact. A single merger or acquisition often seems to trigger ripple effects, as competitors reposition themselves to avoid becoming losers in a high-stakes contest: “acquire or be acquired”.

Another marriage intended to create a British market leader, with a market value of £19 billion, involved CGU and Norwich Union. Despite its growth objectives, 5,000 job cuts are planned over 18 months for its combined worldwide 69,000 employees, to generate £250 million annual pre-tax cost savings. CGU is itself the product of a 1998 merger between Commercial Union and General Accident, which involved the loss of 6,000 jobs. Norwich Union had been seen as a takeover target since it demutualized and floated in 1997, but its strong share price had deterred potential acquirers. The combined company, CGNU, expects to strengthen its presence in fast-growing long-term savings markets in Ireland, Spain and Italy, using CGU’s life-operation in Germany as a platform with significant growth potential. CGNU will also operate in the emerging markets of Central and Eastern Europe. The 1999 acquisition of Nuts Ohra had already improved the position of Delta Lloyd, CGU’s Dutch subsidiary and an earlier acquisition. Holders and speculators purchasing Norwich Union stock before the merger announcement were disappointed by the absence of a merger premium, especially as the merger was defensive to prevent both companies becoming involuntary takeover targets. Jumping into the European insurance super-league at number five, the new company hoped to become a hunter, rather than prey, and to overcome the legacy of crises involving mortgage indemnity policies, pensions misselling and guaranteed annuities that have hit the British market recently. Investment bank analysts had vainly tried to promote rival bids from Allianz, Dutch insurer Aegon and Generali of Italy, among others, all of whom usually prefer agreed to hostile deals.

Scale has become crucial for insurance companies in home markets. Insurers employ thousands of people to collect premiums and process claims. Like banks they are vulnerable to competition from new, Internet-based operations unburdened with their historic cost base. British insurers face additional challenges in adapting to government plans for stakeholder pensions which authorize annual management charges capped at 1 per cent of funds under management and which yield poor profit margins. Analysts judge that of over 70 British life groups, only CGNU, Prudential, Legal & General, Standard Life, Axa and Scottish Widows enjoy scale capacities to compete in this market.

The current merger wave in insurance is truly pan-European, whittling down the continent’s estimated 5,000 insurers. Two of the five largest British composite insurers are already part of pan-European groups. The £3.4 billion purchase of Guardian Royal Exchange by Axa in 1999, followed Zurich’s acquisition of BAT Industries’ financial services arm – including Allied Dunbar – to form Allied Zurich. Europe’s biggest insurer, Allianz, acquired AGF to secure a strong market position in France and other Euro-zone countries; Allianz also owns Cornhill Insurance. GE Capital, the financial services subsidiary of General Electric, consolidated its European consumer insurance and investment activities into GE Insurance Holdings. The attempt at a hostile melding into a national champion of SocGen and Paribas by BNP, backed by Axa, was fended off by SocGen thanks to CGU support. The two have since been in discussions on cooperation to allow CGU to strengthen its position in French long-term savings.

However, in their drive to cut costs many financial institutions may have seriously jeopardized their operational capacities and thus set themselves up to destroy rather than create shareholder value. Erosion in profitability could push the institutions towards further cost reductions and a vicious circle of erosion followed by job cuts, with no end in sight. Prudential has seen its British sales fall by 6 per cent to £461 million in 2000, mainly as a result of axing large chunks of its sales force – 4,000 employees since 1998 – to concentrate on sales through independent financial advisers; sales through both channels fell nevertheless. A further 1,000 job cuts are planned, but the figure may increase should it acquire Equitable Life (on the market after a High Court decision increased its liabilities to policyholders in a misselling case).[43] United Assurance agreed to a £1.6 billion takeover by Royal London in February 2000, the largest takeover in Britain of a listed company by an unlisted mutual, with plans to cut jobs in the combined 6,100 staff, although exact figures have not been disclosed. United Assurance had, since its 1996 founding merger between United Friendly and Refuge Assurance, suffered a 26 per cent drop in sales in 1997 and a further 9 per cent drop in 1998. It had shed 1,200 jobs with the merger, mainly by withdrawing from its industrial branch business, where it collected cash from customers door-to-door and ceasing to underwrite general insurance.

Banking consolidation in the Nordic countries continues, as witnessed by the pending acquisition of Norway’s Christiania (4,000 staff) by Swedish-Finnish MeritaNordbanken. The combined entity would become the region’s largest, with 7 million customers and 900 branches in seven countries. M&A activity in insurance is also vigorous, notably with the recent merger of the non-life operations of Sweden’s Skandia Storebrand and the Finnish-Norwegian Pohjola to create a Pan-Nordic giant. Codan of Denmark recently purchased SEB’s non-life insurance business. A distinct feature of Nordic M&As is that all the region’s leading banks now define their strategies in pan-Nordic terms. Handelsbanken has built up a significant presence in Finland and Norway, while Den Danske has made big purchases in Sweden and Norway. The decline in bank personnel and branches between 1995 and 1999 averaged 30 per cent, with a 50 per cent fall for Finland. Overall, bank analysts estimate potential efficiency improvements of 20 to 30 per cent in Europe should consolidation parallel that of the Nordic countries. Current overcapacity and efficiency are comparable to those seen in Scandinavia in 1990 and, although this scenario for reductions in the branch and staff numbers of EU banks may seem dramatic, deeper cuts may occur if technology is adopted rapidly and the recent merger wave continues or possibly even gains speed.

In Norway, the 1999 merger between Den Norske Bank, the country’s premier bank and Postbanken, its fourth largest, created Norway’s largest financial organization which employs 7,500 workers. The resulting 400 job cuts were expected to correspond to voluntary departures.

Job losses in Denmark’s banking sector in the 1990s were substantial, with the number of banking employees falling from 51,000 in 1991 to 43,000 by 1995; this reduction coincided with declining numbers of financial establishments attributable to M&A-related activity. Three large banks – Den Danske Bank, BG Bank and Unibank (the product of a merger between Bikuben and Girobank) – controlled 85 per cent of the market. Very rapid development in telephone banking and in-store and highly specialized financial institutions constituted another specific facet. Denmark had no ownership restrictions between banks and insurance companies, which encouraged the development of bancassurance companies such as Skandia. Financial sector consolidation in Denmark between 1990 and 1995 involved a 20 per cent reduction in all staff. Comparable consolidation occurred in Finland, where the number of credit institutions declined by over a third between 1989 and 1995 and the branch network shrank from 3,500 to 1,950, with employment figures falling from 53,000 to 31,200. By 1995, three groups controlled an overwhelming share (92.5 per cent) of the Finnish deposit and loan market: MeritaBank, the result of the merger between Kansallis-Osake-Pankki and Union Bank of Finland, previously Finland’s principal banks; Okobank (cooperative); and Postipankki, the postal services bank. In 1990, the Swedish banking market was highly concentrated – four large institutions, including the two state-owned banks (Nordbanken and Gota Bank) which merged in 1993 after substantial recapitalization by the State, shared 85-90 per cent of the market. Table 3.5 shows sweeping consolidation, especially in Sweden. Finland’s high score relates to the presence of over 300 cooperative banks. The Nordic banking market has become highly concentrated, with three banks alone accounting for between 70 and 80 per cent of bank assets.

Table 3.5.    Number of banks in Nordic countries, 1985 and 1998
 


Country

 

1985

 

1998


Finland

 

   654

 

  359

Denmark

 

   166

 

  105

Norway

 

   150

 

  100

Sweden

 

   543

 

  121

Total

 

1 513

 

  685


Source: H. Koskenkylä: Threats and opportunities for today’s European banks (Bank of Finland, 2000), paper submitted to the Institute of Economic Affairs Conference on European Retail Banking, Geneva, 22-23 Feb. 2000.

Central and Eastern Europe

The consolidation and transformation of the banking sector in Central and Eastern Europe are continuing in line with economic changes. Developments in the Czech Republic are representative of trends in M&As and their employment impact in the region. Following the move from centrally-planned to free-market economies, the demand for banking services increased, with impressive growth in the number of small banks and bank employees – for example, 30 per cent growth between 1992 and 1993 in bank employees and a ratio of employees to the general population of around 1:190 throughout the 1990s. Such sudden expansion posed serious problems for the sector as a whole. The majority of Czech banks, especially those established during this period of rapid economic transformation, had weak and inexperienced management and staff – many took on risky low-quality asset portfolios and some were unable to cope with the strong competition and risky conditions associated with economic transformation. With a downturn in the economy, long-term performance problems led to liquidity problems and insolvency, prompting bank regulators to force them into liquidation or mergers with stronger institutions. This was aggravated by a currency crisis, increased interest rates and a general liquidity squeeze in 1997, which pushed the economy into recession, turning previously sound loans into non-performing assets and pushing small, weak banks into insolvency or deeper distress. The tightening of conditions to establish new banks restricted new entrants, particularly after 1996. Between 1989 and December 1999, 63 banking licences were granted and 20 revoked (16 because of the banks’ poor financial situation and failure to meet the prudential rules, three due to mergers and one because the bank did not start operations within the legal period). In 1998 several foreign bank subsidiaries operating in the country were merged following amalgamations of parent banks (see box 3.2); one new banking licence was granted to GE Capital Bank, which took over part of Agrobanka.

Together with the increased use of labour-saving technologies, these developments affected the number of bank branches and employees. Following growth in the number of banks as a result of liberalization, the sector entered harsh consolidation starting in 1994, accentuated by the increasing penetration of international financial institutions. In December 1999, there were 42 banks and foreign bank subsidiaries operating in the banking sector – three less than in 1998 following the closure of Universal banka and Moravia banka, their licences revoked after failing to meet prudential regulations; eight less than in 1997, because of the closure of troubled small banks, the sale of local firms to foreign investors and mergers of foreign banks’ parent companies. In 1999 the credit crunch continued, leading to further deterioration of the sector and the overall share of bad loans kept increasing, as businesses increasingly suffered from deep recession and high real interest rates.[44]

Box 3.2. Major mergers and acquisitions in the banking sector of the Czech Republic

Mergers

  • Postovni banka merged with Investicni banka to form Investicni a postovni banka (1994).
  • Bank Austria and Creditanstalt merged as BankAustria-Creditanstalt Czech Republic (1998).
  • HYPO-BANK and Vereinsbank merged as HypoVereinsbank CZ (1998).

Acquisitions

The Czech Government sold its stake in:

  • Investicni a postovni banka (49%) to Japan’s Nomura (1998).
  • Ceskoslovenska obchodni banka (65,7%) to Belgium’s KBC bank (1999).
  • Ceska sporitelna (45%) to Austrian Erste Bank Sparkassen (2000).
  • Komercni banka (60%) to strategic investors, in progress (2000).

Source: Janacek and Tomsik op. cit.

The privatization of banks was another factor in sectoral consolidation, stepped up since 1998 with the sale of some of the country’s largest banks (see box 3.2). Government plans envisaged the divesture of the rest – especially the major banks – in 2000 and 2001, through their sale to strong foreign financial institutions. M&A activity in the financial sector can be adduced from the share of foreign capital in the ownership of Czech banks, which had risen to 48.4 per cent by December 1999, even before the privatization of some big banks – partly greenfield investments, but more through M&A-related inflows. Many local financial institutions are undercapitalized. With increased foreign competition, many local institutions will be forced to close or seek foreign or local partners.

Table 3.6.   Number of employees and banking units in the banking sector of the Czech Republic, 1994-99
 


 

1994

1995

1996

1997

1998

1999


No. of employees

58 920

61 073

60 137

57 082

52 760

48 955

Employees per bank

 3 467

 3 411

 3 172

 2 467

 2 200

2 006

Employees per banking unit

  17

  18

  19

  23

  24

24

Population per banking unit

 2 981

 3 029

 3 252

 4 177

 4 639

5 134

Population per employee

 175

 169

 172

 181

 195

210


Source: Janacek and Tomsik, op. cit.

An analysis of the effects of consolidation is hampered because official data on bank employment are only published for the sector as a whole, while data for individual acquired banks or those which have been involved in a merger are not. However, statistics indicate a strong direct correlation between the numbers of institutions and employees. As with the number of banks, staff numbers peaked in 1995, declining thereafter. By December 1999, employee figures had dropped to 48,955, a decline of 7.2 per cent in a year, and 16.9 per cent from 1994, parallelled by that in the number of branches and other banking outlets – a spectacular 42.1 per cent fall (see table 3.6). Mainly affecting the large banks, this 1996-99 slump resulted in 1,405 branches or outlets being closed and 12,118 jobs cut. The shares of large domestically-owned banks are 10 and 40 per cent, for staff and banking outlets respectively. However, for foreign-owned banks, staff and outlet numbers increased from 1995 – staff grew by over 65 per cent between 1994 and 1999 to 4,831, while outlets rose by 90 per cent to 917. Employment growth in foreign-owned banks thus tempered, but did not fully absorb, job losses in local banks, partly due to differences in market orientation, staffing requirements and organizational structures. Foreign-owned banks are usually single-location operators, focusing on a wholesale/corporate clientele which is less demanding in terms of both staff and organization. The ratios of total assets per employee in foreign banks are roughly double those seen in big Czech-owned banks. The more rapid decline in banking units as compared to staff indicates that small banking outlets are closing, banking services are being consolidated into larger organizational units and the average staffing size of outlets is rising – going from 17 to 24 between 1994 and 1999 (see table 3.6).

Other Central and Eastern European countries are registering various degrees of financial sector consolidation. Although their employment effects cannot yet be ascertained, they will probably be comparable to those in the Czech case – Slovenia’s Government decided in 1998 that 20 banks were too many for a small country. The Finance Minister felt they lacked the resource base and financial strength to marshal the relatively big loans needed by large and medium-sized companies. Nova Ljubljanska Banka (NLB), keen to escape government-held reins, has increased stakes in and links with some of its five regional associate banks and recently engaged in a bidding war for Dolenjska Bank, a small regional bank, with Nova Kreditna Banka Maribor. SKB Banka, the country’s second-largest bank, 49 per cent foreign-owned, has taken over UBK, a regional bank.

Similar processes throughout the region are likely to end with a highly consolidated financial sector and a fall in sectoral employment. Romania, for instance, is actively seeking buyers to turn around Banca Agricola and the Romanian Commercial Bank (BCR). The Government liquidated Banca Agricola’s bad debts (injecting $1 billion), established a retrenchment programme in 1999 to reduce the workforce from 5,800 to 3,400, overhauled IT systems to shift about 50 per cent of its activities online – intended to be 80 per cent by the time of sale – and lined up support from the European Bank for Reconstruction and Development (EBRD).

Latin America and the Caribbean

Consolidation is under way in Latin America, mostly via M&As linked to the privatization and restructuring of financial services. Retrenchments sometimes precede the transfer of ownership to the private sector, as governments attempt to make enterprises more attractive to buyers and continue as the new owners replace staff by new technology and introduce other cost-cutting measures. M&As among private enterprises then continue to whittle down the number of firms. Argentina had over 200 banks in 1994 – by 1999, consolidation had reduced this figure to about 120, resulting in the disappearance of 22,000 financial sector jobs. Since deregulation opened the sector to foreign investors more European banks have established themselves and captured substantial – and sometimes dominant – market shares. In Argentina, of the surviving nine banks holding 67 per cent of deposits, six are foreign-owned, acquired by such Spanish giants as BBVA and Santander, by far the largest acquirers of financial institutions across Latin America. The Latin American economies, particularly Brazil, Argentina, Mexico and Chile, have received tremendous investment flows from European and American financial corporations, in search of outlets for excessive liquidity in developed economies and “exporting” European competition to other international locations.

In 1997, Brazil’s Banco Geral do Comércio was bought by Santander, while Lloyds acquired Banco Multiplic and Financeira Losango, moving towards the competition in the field of mass services. It opted, however, not to establish a large network of branches, concentrating instead on telebanking. The rate of transactions accelerated, to the point where the Central Bank warned that business among private institutions should not become public knowledge, or be considered completed, before being approved by the President of the Republic. However, from 1997 to 1998 the market opening process accelerated. Following the expansion of British and Spanish capital, Portuguese institutions moved in. The state-owned Portuguese bank Caixa Geral de Depositos bought the Bandeirantes conglomerate and Espíritu Santo (associated with Crédit Agricole and Dresdner) took control of two Brazilian financial groups. In 1998, following the Asian crisis, only Banco Sudaméris, under Italian control and Banco Garantia, the main Brazilian-owned investment bank since 1980, passed under the control of Credit Suisse First Boston following losses in Asia. Another major transaction consisted of GE Capital Services in the retail market acquiring Banco Mappin and Financeira Mesbla and establishing a position in the lucrative niche of consumer credit. Excel Econômico was sold to Banco Bilbao Vizcaya, which entered the Brazilian market after establishing itself in other Latin American markets.

Banking consolidation in Mexico reached a milestone in June 2000 with the acceptance by the board of Bancomer, the country’s largest bank, of an offer by Spain’s BBVA for a 32.2 per cent controlling stake. This capped unprecedented turmoil in Mexican banking as the successful bid beat that of Banamex, the second largest Mexican bank. BBVA plans to merge its new acquisition with BBV-Probursa, its local subsidiary. With the acquisition of Banpais by Banorte in 1997, and the acquisition of Confia by Citibank in 1998, Mexico’s banking sector is one of the most highly consolidated in the world, with six banks controlling 84 per cent of national assets.

M&As in the Caribbean, very limited in comparison with more developed economies, are largely the result of government divesture programmes aimed at enhancing financial sector efficiency and competitiveness, mainly among commercial banks, with some activity among insurance companies. Since 1991, the sector has undergone major restructuring, including mergers and acquisitions, in Guyana, Jamaica and Trinidad, among others. Although employment changes look modest in absolute terms, they should be seen in relation to the size of economies and labour forces. Banks have been involved to a greater extent as they are the dominant financial institutions. Merger activity has been influenced mainly by the need to avert financial sector crisis and has been promoted mainly by government, but some mergers have been on economic grounds.

Most M&As in Guyana resulted from a government initiative to sell financial institutions. In 1991 it sold 70 per cent of its shareholding in Guyana Bank for Trade and Industry and completed the divestment in 1994 – an industrial conglomerate gained majority control. In 1995, the Government merged Guyana National Cooperative Bank and Guyana Co-operative Agricultural Development Bank, which were performing poorly and were close to insolvency and the merger was seen as the only way they could be salvaged, if at all. In all three cases, retrenchments followed or employment conditions deteriorated. The insurance industry also experienced reform and privatization, resulting in the sale of Guyana Cooperative Insurance Society to a local private sector competitor; there had been downsizing prior to privatization and 47 of the 165 staff were made redundant. Following the sale, a further 21 staff members were retrenched. In 1997, Guyana witnessed its first cross-border sale when Republic Bank of Trinidad and Tobago acquired a controlling interest in its largest commercial bank, National Bank for Industry and Commerce.

The crisis facing Jamaica’s financial sector provided added impetus to the need for M&As, as the Government attempted to restore stability and confidence. Some mergers took place in non-bank financial institutions, some were the result of regulatory intervention and others were based on individual initiative. Between 1995 and 1998, 17 credit unions were merged or acquired, while the number of building societies also declined from 35 to eight through the same process of consolidation. While no staff were retained after the 1996 takeover of First Metropolitan Building Society by Jamaican National Building Society, when the latter merged with Hanover Benefit Building Society all staff were retained. The largest merger in Jamaica occurred in 1996 between National Commercial Bank (NCB) Jamaica and Mutual Security Bank (MSB). Both banks’ common parent, Jamaican Mutual Life Assurance, felt that an integration of the companies would increase their overall worth. At the time of the merger, NCB had 2,346 staff and MSB 1,004. By 1997, after the merger, the number of branches had been reduced from 19 to nine and in 1998 a further two branches and six agencies were closed. The reduction of branches and staff was associated with the introduction of information technology. By the end of the rationalization process, the number of staff had been reduced from 3,350 to 2,614. Similarly, in Jamaica Union Bank of Jamaica, the country’s third largest bank, is the result of a merger between four FINSAC-controlled commercial banks and three allied merchant banks which sought government assistance when faced with the risk of bankruptcy. Prior to the merger, the banks operated a total of 42 branches nationally, a figure which has been reduced to 37 and is expected to fall even further to 24. The exact number of staff reductions is unavailable, but is thought to have been substantial, as one of the compelling reasons for the merger was the need to return the financial sector to a size the economy can sustain.

Following a “run” situation on three indigenous banks – National Commercial Bank of Trinidad and Tobago, Trinidad Cooperative Bank and Workers Bank – the Central Bank transferred control of all three to First Citizens Bank. After an initial decrease in the number of employees by 171 to 989, staff levels have started to rise again and are now at 1,009. In the acquisition of Republic Bank by Bank of Commerce (owned by CIBC of Canada), completed in October 1997, about 22 per cent of the total combined staff of the new entity (554 people) applied for the separation packages that had been offered. Both this acquisition and a number of those that have occurred in the insurance industry may be considered to have had positive outcomes, since redundancies were voluntary and separation packages were generous or, in the case of the insurance industry, the merger or acquisition actually resulted in the new company expanding operations and therefore increasing staff levels through new recruitment. An example of post-acquisition job growth is the 1991 Guardian Life of the Caribbean, which following the acquisition of Crown Life Caribbean, increased its sales force by 280 staff. Royal Bank of Trinidad and Tobago was the first commercial bank to acquire interests outside its domestic market, guided by such considerations as familiarity with laws and markets in economies where it can analyse risk and which are compatible with its existing technology. Most acquisitions by Royal Bank took place in the late 1990s.

North America

In the United States, the number of banks and banking organizations (stand-alone banks and top-tier bank holding companies (BHCs)) both fell by almost 30 per cent between 1988 and 1997.[45] Concentration, as measured by the share of total nationwide assets held by the eight largest banking organizations, rose from 22.3 to 35.5 per cent. Total bank offices rose by 16.8 per cent, although total bank plus thrift offices declined by 0.1 per cent partly because banks acquired branches formerly owned by failed thrifts.

American banking has experienced the most rapid and extensive restructuring – over 5,000 banks lost their independence after being purchased during the 1980s and 3,000 more disappeared between 1990 and 1997. Almost half the banks operating in 1980 had been bought by 2000. From 1997 to 1999, the number of banks declined by 30 per cent and the market share of the eight largest rose from 22 to 35 per cent. In 1997 mergers took place between Morgan Stanley and Dean Witter, and Travelers and Salomon Brothers. Travelers again merged in 1998 with Citicorp to form Citigroup, the world’s fifth largest bank and America’s first by revenue. The objective was to create a global “financial supermarket” and by 1999 it already had 100 million clients.

In 1999, BankAmerica, born of a merger between BankAmerica and NationsBank a year earlier (then fifth and third largest American banks, respectively), ranked closely behind Citigroup in terms of assets ($620 billion) and capitalization; another mega-merger united Bank of Boston and Fleet Financial. The only foreign bank to succeed in acquiring an American financial organization in a 20-year period was Deutsche Bank in 1998 (Bankers Trust). In July 2000, the Swiss financial group UBS – the first non-American financial services group to become listed on Wall Street – announced its takeover of PaineWebber, copying a model pioneered by Merrill Lynch that combines the process of creating securities for sale (investment banking) with the distribution of those products to investors through brokers. Citigroup and Morgan Stanley Dean Witter, the largest securities firm, are products of mergers of investment banks and brokerage firms.

Table 3.7.   Concentration in non-bank segments of financial services, United States
 


 

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997


Life insurance:

 

Number of firms
Asset share of 8
largest (%)

1 367

42

1 288

40

1 223

39

1 221

38

1 177

37

1 187

36

1 082

35

1 054

35

1 001

35

NA

NA

Property-liability
insurance:

 

Number of firms
Asset share of 8
largest (%)

940

33

1 193

32

1 272

32

1 267

32

1 232

32

1 197

32

1 187

31

1 179

34

1 138

36

NA

NA

Securities firms:

 

Number of firms
Capital share of
10 largest (%)

6 432

58

6 141

62

5 827

64

5 386

62

5 260

62

5 292

63

5 426

61

5 451

59

5 553

59

5 597

56

Savings
institutions:

 

Number of firms
Asset share of 8
largest (%)

3 175

14

3 100

15

2 725

18

2 386

20

2 086

19

726

18

1 532

19

1 420

22

1 322

21

1 201

31

Credit unions:

 

Number of firms
Asset share of 8
largest (%)

13 875

6

13 371

7

12 860

7

12 960

7

12 594

7

12 317

8

11 991

8

11 687

8

11 392

8

11 238

8


Source: Berger et al., op. cit.

Linear extrapolations indicate various outcomes over the next 10 to 15 years depending on dates and methodology. One 1992 study made a “best-guess” estimate of 5,500 independent banking organizations in 2010, the largest 50 accounting for 70 per cent of domestic assets and the top 100 sharing 87 per cent. A 1995 study, using failure and merger models, projected 7,787 organizations by 2000, a figure which has already been realized. Extrapolating this to 2010 yields an estimate of 4,771 banking organizations. Another study has projected an astonishing drop to 2,390 banking organizations by 2010. However, such extrapolations do not specify the processes generating change. Another method might suggest that the number of banks (in contrast to banking organizations) could decline to about 7,000, at least by 2002, and then begin to rise again. Factors likely to slow the decline and spur growth include a decrease in the number of potential multibank holding consolidations and mergers among independents, as the best “deals” are consummated and an increase in entry by the number of independent new banks filling niche markets abandoned by larger, consolidated banks.

Canada, despite a tradition of restricting many types of M&As, has experienced more than 350 in the sector since 1990, according to the Conference Board of Canada. Activity is expected to grow significantly following government legislative proposals for a comprehensive reform of the financial system, including new rules on M&As. This aims at striking a balance between the competitive needs of the sector in a globally competitive environment and better protection of consumers and workers. While the new rules would increase the proportion of shares of large banks an investor could own to 20 per cent of voting shares and 30 per cent of non-voting shares, the Bank Act would continue to prohibit control of large financial institutions by single shareholders or groups of shareholders. Rules for non-bank financial institutions provide for continued wide ownership of demutualized companies with over C$5 billion in equity, while demutualized insurers with equity of less than that amount will be eligible to be closely held after a transition period to end on 31 December 2001. The policy would prohibit acquisitions or mergers between large banks and large demutualized insurance companies or such linkages between their holding companies. The threshold above which trust companies, stock life insurance companies and property and casualty insurance companies must have a 35 per cent public float would go from C$750 million to C$1 billion.

Thematic overview

M&As, technological and work organization changes and enterprises’ pursuit of competitive advantages are having a profound impact on sectoral employment worldwide. There has been a decline in permanent employment, increased job instability and insecurity, and rapid growth of various non-standard forms of work, including part-time and temporary employment. The ILO report Social effects of structural change in banking extensively analysed M&A processes, noting that they invariably led to branch closures and staff retrenchment.[46] The cause-and-effect relationship remains constant in today’s M&As. Job cuts are not only expected in M&As but are built into managerial calculations of desirable outcomes. Financial markets and the financial press invariably expect cost savings from staff expenses as a clear signal that the merged entity intends to move aggressively to reduce operating costs and increase its income-cost ratios.

Employee turnover and mobility, important measures of the extent to which employment relationships have changed, are on the increase. Over the last ten years job tenure has been on the decline, especially for those who have not systematically upgraded their skills and general employability. The pressure to reduce costs, especially fixed costs and to adopt flexible staffing and work methods has had a pervasive effect on employment. Nevertheless, it is downsizing – permanent job reductions driven mostly by corporate restructuring – which has received most attention. The process differs significantly from lay-offs during earlier periods that were caused by recessions and were largely temporary. Job insecurity in the globalized economy affects people in the traditionally most stable jobs in sectors previously offering secure, high-paid jobs and career advancement opportunities.

Continuing efforts to reshape the boundaries of firms through mergers, acquisitions and outsourcing have further contributed to job insecurity. If jobs are outsourced, they might be as stable as those in the original companies, but in companies that are bought and sold, restructuring takes place over an extended period and the employees face considerable career disruption.[47]

Virtually all the worldwide M&A activity reviewed above has generated lay-offs or employment contraction in financial services. We will attempt to highlight the direct job losses that have resulted from those specific deals. It is important, however, to include a caveat: the data included here derives from companies’ own announcements or estimates from other sources, including affected trade unions. For many reasons these may not reflect actual job reductions and some of the reasons will help explain frequent discrepancies between the announced and actual job impact of individual M&As. Firstly, companies often recruit staff with the skills to suit jobs in new business lines or for new functions at the same time as eliminating existing positions so that it becomes difficult to ascertain the net job impact of the merger or acquisition. “Churning”, as economists term this practice, is especially widespread in the United States. Secondly, during the course of integration, companies may realize their projections were over-ambitious and that the implementation of the full retrenchment programme could seriously jeopardize the ability of the enterprise to respond to changes in the economic environment. Thirdly, regulatory constraints and industrial relations considerations may induce organizations to adjust their initial plans. This report does not seek to cover job losses in any comprehensive manner. It should, in fact, be noted that because many mergers, especially in the United States, involve small local financial institutions which rarely appear in the international press, the real job losses from M&As in the financial services sector worldwide must be much higher than the cases included here indicate. Nevertheless, the numbers are sufficiently indicative of what enterprises expect to derive from M&As in terms of reductions in staff numbers and associated payroll expenses.

For the above reasons, any examination of the employment impact of M&As in general, and in the financial services sector in particular, faces serious data obstacles. There has so far been little systematic tracking of job losses resulting from M&As. Existing literature on M&As also tends to focus almost exclusively on financial, competitive, consumer and shareholder considerations. National statistical data is likewise usually deficient as a tool to analyse employment repercussions, as few national statistical offices compile the type of M&A-related data that would facilitate both the quantitative and qualitative analysis of their impact on employment. Were such statistics available, it would still be extremely difficult to disentangle with any precision the effects of M&As from those of other factors, such as increased competition and the introduction of new technologies.

Unlike past M&As, which were primarily driven by growth and market-share goals, the vast majority of M&As today relate to the need to contain costs. There has been a definite shift in focus towards increasing margins and profits in a mature, deregulated and globalized industrial sphere where there is little room to increase margins any other way other than through cost reductions.

A merger provides the ideal occasion to review cost and revenue structures as a basis for planning and implementing new processing and staffing arrangements. The obvious need to harmonize the human resource practices of two organizations and to rationalize overlapping functions also provides persuasive arguments for job cuts to eliminate duplication. Competitive and investor pressures often ensure that even non-merging banks will seek to reduce their own cost-revenue ratios to avoid lagging behind the industry average. In this way a merger, even when restricted to only a few institutions, can set off an industry-wide employment-penalizing chain reaction.

Job losses in individual firms are usually exacerbated by increased use of information and communications technologies in the newly merged organization and the outsourcing of functions previously performed by employees. Financial institutions around the world are not only closing traditional outlets as a result of M&As but are also reducing staff at remaining offices by making use of new technology to overhaul back office and other support operations.

On the basis of current trends it is predicted that, given the size of the acquisitions possible under current policy standards, it is plausible that by 2010 there could be a small number, perhaps five to ten, of very large multinational organizations present in most urban areas, holding a dominant share of local banking business, along with a large number of relatively small, local community or regional institutions. If these large organizations were also to combine with large non-banking firms, along the lines of the 1998 Citicorp-Travelers merger, their product markets would increase substantially. Moreover, global combinations, such as Deutsche Bank and Bankers Trust, will also result in an increasing number of foreign market intersections, while lowering the number of large potential competitors in domestic and global markets. The number of organizations that remain on the fringe will depend on the size of the niche markets they occupy, the relative cost structures of small and large banking organizations and the strategic pricing arrangements that develop.

Indisputably, the efficiency measures advanced as the motive for most M&As inevitably affect the two areas where most financial sector staff have traditionally been employed: the branch and the back office. A decline in the number of banks, branches and personnel is already under way, although statistics from the United States Federal Deposit Insurance Corporation indicate an increase in the number of branches from 80,377 to 83,290 between 1984 and 1998. In the European Union there was strong growth in bank branches (189,100 in 1990, peaking at 207,260 in 1996) but the trend is beginning to reverse. The decline in the number of banks in the European Union was even more striking, falling from 14,640 in 1990 to 8,820 in 1997. After a period of employment growth (from 2,792,600 employees in 1992 to 2,963,800 in 1996), the number of bank personnel in the European Union had fallen to 2,940,000 by 1997. The declining trend in the number of banks, bank branches and staff has subsequently continued unabated, not least as a result of M&As boosting national financial market consolidation.

Growing public attention is beginning to be paid to corporate downsizing, mass lay-offs and other human dimensions of M&As. Indeed, few employment or managerial practices have provoked as much public furore, particularly when no economic rationale is readily apparent, perhaps because corporate downsizing represents an immediate and direct threat with which many working people can easily identify as possible in their own cases.

Critics also claim that the current spate of M&As are resulting not only in massive lay-offs but also in financial exclusion for an increasing number of communities whose branches are closed and reduced personal service without any corresponding reductions in service fees and other charges. In addition, mergers of large banks lead to a concentration of market power and less competition, and small businesses, which generate most employment around the world, have greater difficulty accessing business loans. Observers also note that, while merger-related lay-offs can generate cost savings, this may be at the risk of disrupting operations, leaving staff adrift and the company unable to respond to new threats or opportunities. Another development closely associated with lay-offs – outsourcing operations – may be cheaper, but can also result in a loss of quality control.

For many management observers, the way in which the public debate about mass retrenchments associated with corporate restructuring has been framed is instructive. Managerial autonomy is generally seen to be a necessary element of organizational decision-making; the argument that businesses are over-regulated is these days often effective, even in countries with traditions of emphasizing social responsibility among corporate objectives. However, a growing number of commentators have begun to question the concept of managerial decision-making autonomy when this results in externalities that must be coped with at public cost, through increased unemployment insurance expenditure. Moreover, a growing number of political figures, activists and reporters have begun to highlight an apparent link between the negative consequences for employees of mass lay-offs and the simultaneously positive repercussions for senior managers of increases in the value of executive stock options. The fact that financial markets have historically rewarded companies that engage in downsizing has only fuelled the perception that the misery of ordinary workers and the financial success of management and owners are inescapably connected.

Faced with so much criticism, many restructuring companies have begun to try to appear more concerned about workers who lose their jobs, and to move the focus of the debate about downsizing from increases in stock prices or executive compensation to the more legitimate ground of ensuring corporate competitiveness or organizational survival. Such defences of downsizing, however, tend to be coupled with statements defending managerial autonomy and rejecting the need for public scrutiny. M&A proponents do not dispute the immediate negative impact on jobs. They argue instead that the focus on short-term job losses in individual firms ignores restructuring’s contribution to economic health and long-term economy-wide employment growth. Job reductions in the short term are the necessary price of restructuring excess costs out of a blotted financial services sector, the result of which should be increased efficiency and eventual benefits in the form of economy-wide employment growth.

Historically, M&As have been considered synonymous with economic booms, part of a virtuous cycle in which rising stock prices preceded an acceleration of inter-firm consolidation. The reverse, such as the 1930s Depression, the 1973 Oil Shock and the Financial Crash of 1987 usually put an abrupt brake on such consolidation.

The banking and financial services sector is not likely to be generating additional employment in the coming years. This has already ceased to be the case in some countries and the current wave of M&As is increasing the rate of staff cuts. While the disappearance of banking institutions at the end of the 1980s mainly involved bankruptcies or the takeover of distressed firms, contemporary M&As mostly relate to healthy companies and have two primary motives:

–      the need to cut costs, requiring job reductions, especially through substantial pruning of branch networks; and

–      diversification strategies to ensure revenue growth. Such diversification can be geographic, by product or a mixture. Beyond the acquisition of a banking company, product diversification can also be achieved by acquiring only specific operations of another bank or the financial interests of a non-bank company. This relatively recent trend will certainly grow in coming years. It is in fact among the core subjects addressed by banks in their strategic debates. Would it be preferable to be involved in as many financial products as possible and pursue “global player” ambitions, or, on the contrary, should a niche strategy be adopted? Many major American banks, having massively withdrawn from outside their home market up until the 1990s, now seem to have adopted a strategy of acquisition to widen their product lines as a prelude to a new international foray. The adoption of a market economy by many previously socialist countries and their entry, as well as that of other emerging economies, into the international financial market system may explain this trend to some extent.

In Europe, the prospect of the euro has unified financial markets, accelerated the concentration of teams and reduced the weight and number of specialist economists. Previously it was indispensable for big international investment banks to have the opinions of country analysts for each country in the Euro-zone before formulating investment strategies. Today economic research in the majority of such banks is entrusted to a reduced number of analysts responsible for following developments across the zone as a whole. It is important to underline that, at the European Union level, the Acquired Rights Directive, revised in 1998, provides for the permanence of an employment contract even if one of the parties to the contract (the employer) may have changed, in the event that enterprise ownership is transferred in full or in part. The Directive aims at ensuring continuity in the employment relations of economic undertakings in the event of structural changes such as those ushered in by an acquisition. The new employer is obliged to continue to employ all the staff of the acquired undertaking “on the same conditions as those agreed between staff and the seller”. The European Court of Justice has interpreted these provisions in terms that are mostly favourable to employees.

The financial sector contributes significantly to job creation at two levels: direct employment and jobs created indirectly by the activities of the sector. To put this contribution into perspective, a Canadian study[48] estimates that banking in Canada supports some 380,000 jobs (about 3.4 per cent of private sector employment), while financial services as a whole support just over 1.2 million jobs (10.7 per cent of private sector employment). Banks and their subsidiaries directly employ over 221,000 Canadians, while financial services as a whole directly employ around 500,000 people, 4.3 per cent of business sector employment. The bank workforce alone constitutes 1.5 per cent of Canadian employment, spread across the country in rural and urban areas. Data analysis shows that employment within banking grew from 212,900 in 1994 to over 221,000 in 1997, but growth was not constant. Moreover, future job growth is uncertain and dependent, at least in part, on the policy and regulatory framework resulting from legislative reform currently under consideration. The regulatory framework sets the context within which banks compete and determines, in part, the industry’s ability to contribute to employment and economic prosperity.

Direct employment figures tell only part of the story. Financial services employment in Canada (as elsewhere) has an impact that goes far beyond a simple headcount, and bank employees are learning new ways of working, adapting their skills and abilities to meet new business needs, and mastering and using new technology. Financial institutions are high value added employers, given the evolution of products and services offered by the industry in response to changing customer preferences. The financial sector is producing higher value added products and services, such as money management and risk management services which are increasingly being delivered to customers using electronic delivery channels. Consequently, financial institutions must recruit employees with higher education and skill levels or upgrade the skills of existing employees. In banking, this shift towards higher value added production has a substantial effect on employment. The workforce structures of most banks in developed countries have changed dramatically in recent years, reflecting the market transformations currently under way driven by technology, globalization, increased competition and changing customer demand. Industry data show a flattening in organization structure and a significant shift to higher value added employment. From 1990 to 1996, employment among executives decreased by 13.6 per cent, middle management increased by 15.5 per cent, professionals increased by 17.4 per cent and clerical levels decreased by 15.9 per cent. The growth among middle management and professionals represents growth in knowledge-based, higher paid positions and demonstrates a shift from routine, transaction-based jobs to knowledge-intensive jobs. This is reflected in bank payrolls, which increased from C$9.4 billion in 1994 to C$12.16 billion in 1997. Significant growth at the middle-management level results, at least in part, from the retraining and redeployment of employees whose jobs have been eliminated.

Financial institutions also generate numerous jobs indirectly through their participation in the economy. A study by The Boston Consulting Group, examining the indirect employment impact across Canada, confirms the significant “ripple” employment effects generated by financial services, estimating that for every employee in financial services another job is created with a supplier, a customer or elsewhere within the same area. This national study estimated that the financial sector indirectly employed some 730,000 people in 1996, providing total direct and indirect employment for just over 1.2 million people. Much of its indirect impact on employment is as a major purchaser – in 1992, the banking industry spent over C$6.5 billion on goods and services. These indirect purchases generated approximately 46,000 jobs in supplier industries. The financial sector spent nearly C$30 billion on goods and services, generating approximately 247,000 jobs.

For some supplier industries, the indirect impact of financial sector purchases is particularly important. It has been estimated that financial sector purchases accounted for over 5 per cent of employment in 13 different supplier industries in 1992, including “other business service industries” which include computer services (12.3 per cent), postal services (11.5 per cent), real estate management (9.8 per cent), telecommunications (8.6 per cent) and printing and publishing (8.2 per cent ). Employees in the financial sector and its supplier industries spend wages and salaries that stimulate economic activity. Banks and other financial services providers reinvest some of their profits, inducing more economic activity. Dungan estimated that in 1996 “induced” activity of this kind resulted in the creation of 150,000 jobs by banks and banking suppliers, of a total of 500,000 jobs created by the entire financial sector and its suppliers. Employment is generated not only through purchasing activities but also through direct investment in the economy – for example, in the construction industry. Direct investment activity is estimated to have generated just under 50,000 jobs in 1992, in addition to those noted above.

Financial institutions also support job creation by providing credit and other financial services to businesses, by financing projects, through mortgage lending which facilitates housing construction and through other investments in job-creating activities. Bank lending to small and medium-sized enterprises alone supports companies that provide over 6 million Canadian jobs.

As with direct employment, many jobs being generated by supplier firms are higher value added jobs. As financial institutions have increasingly sought to improve their efficiency in the face of growing competition, some in-house activities have been outsourced to more efficient suppliers, creating jobs among suppliers of goods and services in such high-wage sectors as computer services, telecommunications, law and accounting.

M&As imply immediate and direct job losses ...

A study on the efficiency effects of bank mergers in the United States,[49] which summarizes nine case studies, reports that all nine mergers resulted in significant cost cutting in line with pre-merger projections, although only four of the mergers were clearly successful in improving cost efficiency. As for employment, the largest volume of cost reductions was generally associated with staff reductions and data processing systems and operations. Payroll reductions often accounted for over 50 per cent of the total cost reduction and in at least one case the reduction in staff costs accounted for nearly two-thirds of the total. In all cases, the savings achieved were of the order of 30 to 40 per cent of the non-interest expenses of the target. All of the merged firms indicated that the actual savings either met or exceeded expectations. Most of the firms projected that the cost savings would be fully achieved within three years after the merger, with the majority of the savings being achieved after two years.
 

Box 3.3. Union views on the effects of M&As

The European banking sector has witnessed job losses since the beginning of the 1990s. The impact of such job losses has been greater in northern than in southern Europe, although overall the decline in employment has been somewhat offset by growth in specialized financial service firms, such as those providing consumer credit. Although employment in the insurance sector has generally been stable due to growth related to technological-based productivity gains, a UNI-Europa study reports that almost 130,000 net jobs were eliminated as a result of M&As in the European financial services during the 1990s.

While it is often difficult to distinguish the repercussions of M&As from those of other initiatives aimed at responding to competitive pressures or from the impact of information and communication technologies, it is clear, nonetheless, that these factors are often not unconnected and that merger decisions set off a dynamic process of workforce restructuring.

The nature and quality of employment have also changed in the last few years. Employment reductions have particularly affected branch networks and administrative functions. Older workers and women workers with traditional banking skills, who are not easily transferable to new centralized functions such as those required in call centres, are the most affected by these changes. Product standardization has generated new functions requiring high volume sales to customers without the necessity of traditional banking qualifications. When new jobs are created, they often require management and IT skills or other specialized abilities that the above groups of workers do not possess.

Jobs have also been affected by another important trend: the growing outsourcing of certain functions, such as IT, cleaning and maintenance that used to be performed internally. M&As have been found to accelerate such corporate practices because enterprises tend to review their entire cost structure around M&As with a view to identifying the maximum savings possible. The working conditions of subcontracted workers performing such outsourced functions often differ to those of staff in direct employment.

Source: UNI-Europa study, analysis of responses, 2000.

Blaustein and Dressen[50] noted that mergers aim at scale economies, so are usually followed by the merging of services, the idea being to retain the best structure, shifting staff as needed and making others redundant. American bank mergers are commonplace and usually involve retrenchment. Integra Financial Corp., the consolidation of Union National Bank and Pennbancorp, led to 12 per cent staff cuts. Several factors favoured such concentration trends particularly overcapacity, cost-cutting and profit-seeking initiatives and banking sector decline while the implementation of the Interstate Banking Act lifted some restrictions. The number of commercial banks fell from 14,417 to 10,054 in the decade 1985-95, down 30 per cent. Banks also lost ground to non-banks like General Electric, General Motors and American Express which were strong competitors not carrying branch networks. Yet until the mid-1990s at least, the consolidation of American banking was accompanied by substantial growth in the number of branches and commercial offices (up 25 per cent between 1980 and 1994, and up 7.3 per cent between 1988-94, respectively), partly because of fewer restrictions on the expansion of banking activities (especially after the adoption of the Reagle-Neal Interstate Banking and Branching Efficiency Act of 1994). Nonetheless, employment levels declined approximately 5 per cent between 1984 and 1994, because of the development of technology-based distribution channels and greater automation. Thus, even before strong growth in telephone and Internet-based banking, employment in American banks was declining. The 1995 merger between Chemical Bank and Chase Manhattan led to the elimination of 12,000 jobs of a total of 75,000 in the combined bank. Similarly, the 1998 acquisition of the Bank of America by Nations Bank included plans for the lay-off of 18,000 workers by 2002.

In western Europe, the number of bank branches and personnel increased in tandem with the number of organizations up to 1996-97, when both started to fall slowly. The aggregate figures do not, of course, capture the wide variations between different EU countries. The employment situation in the financial services would be worse were it not for some growth in specialized services such as consumer credit. Employment in insurance has, on balance, remained largely stable, with growth in the sector compensating for technology-based productivity gains. There have, however, been substantial job losses in individual countries and specific companies. Moreover, overall figures seeming to indicate lower job losses in insurance as compared to banking cannot be taken at face value since in neither industry do national statistics differentiate between full-time, part-time and temporary jobs. While aggregate employment statistics seem relatively stable, counter-intuition indicates erosion in the quality of employment, with much of the growth being in atypical, temporary and part-time work that is increasingly replacing traditional full-time employment. In 1994, the share of credit institutions (commercial and savings banks, and mutual organizations) in overall employment in the then 12 Member States of the European Union was roughly comparable across the region – around 2 per cent, except for Luxembourg where the figure was closer to 9 per cent (mostly commercial banks). Sectoral specialists predict the disappearance of approximately 300,000 banking jobs between 1999 and 2002 as a result of continuing sectoral concentration due to M&As.

There are growing concerns at the massive job losses and increased potential for social instability brought about by such wholesale restructuring. The financial sector is at the centre of this process, as both an agent and a beneficiary of change. Conservative estimates indicate at least 130,000 finance jobs may have disappeared in western Europe as a result of M&As over the past ten years, and similar numbers are projected to vanish with increasing M&A-driven sectoral consolidation over the next few years as the current wave of M&As continues. Such downsizing reflects recent changes in the sector, including a continuing shift from branch-based business to Internet and phone accounts, that have changed the nature of bank work, altogether costing an estimated 200,000 additional jobs not directly related to those lost through M&As during the same period.

Table 3.8.   Total number of branches and bank personnel in 15 EU countries (1993-97)
 


 

 

1993

 

1995

 

1996

 

1997


Savings banks:
Branches
Personnel

 


57 885
639 000

 


56 020
682 400

 


54 670
748 500

 


54 650
740 000

Cooperative banks:
Branches
Personnel

 


49 060
392 000

 


52 300
398 400

 


56 020
501 500

 


56 000
500 000

Commercial banks:
Branches
Personnel

 


95 960
1 746 000

 


95 880
1 719 300

 


96 570
1 713 800

 


96 500
1 700 00

Total:
Branches
Personnel

 


202 905
2 777 700

 


204 200
2 800 100

 


207 260
2 963 800

 


207 150
2 940 000


Source: Heikki Koskenkylä: Threats and opportunities for today’s European banks (Bank of Finland, 2000), paper submitted to the Institute of Economic Affairs Conference on European Retail Banking, Geneva, 22-23 Feb. 2000.

Job losses have variously been estimated from 17.5 per cent for the Bayerische Hypo-und Vereinsbank (HVB) to 23 per cent for the Union de Banques Suisses/Société de Banque Suisse mergers. In reality, actual job losses in the new UBS have been much smaller than that.

Following a later acquisition of Bank Austria by HVB in July 2000, it is estimated that a minimum of 1,300 jobs, in addition to a significant number of branches, will be eliminated from Bank Austria’s domestic retail banking with the aim of realizing annual savings of 500 million euros. Additional cost savings were projected in Switzerland where both banks own subsidiaries and in Poland where the merger of their respective subsidiary banks would give birth to a Polish banking giant.

In addition to $875 million set aside as a retention pool for key PaineWebber professionals, UBS has budgeted $400 million for restructuring and integration costs. In 1999, PaineWebber increased its employees from 18,452 to 23,175, its brokers from 7,118 to 8,554, and its branches from 307 to 385. UBS is expected to attempt to extract synergies worth $425 million per year from operations: half from cost savings in overlapping operations in capital markets and other investment banking areas and the rest from projected revenue enhancement through the cross-selling of its traditional products to PaineWebber clients, tax breaks and lower financing costs. The purchase is apparently a first step towards further acquisitions to upgrade the bank’s existing American investment banking operations.

Given the announced annual cost savings of between $750 million and $1 billion, redundancies at DLJ, following its acquisition by Swiss banking giant Crédit Suisse, are expected to be much heavier than the 10 per cent officially announced, although deeper cuts are likely to be tempered by a labour shortage on Wall Street and little overlap in operations. The new acquisition is to be integrated with another subsidiary, Credit Suisse First Boston (CSFB), to strengthen the group’s investment banking business in the United States. However, as the two firms cater primarily to institutions and inevitably therefore compete for the same clients, the process of choosing which equity analyst stays or which sales team keeps which account is likely to be contentious in all but the few areas where one firm has a decided edge.[51] Retention incentives for key personnel include $1.2 billion to be paid out over three years. An additional $2 billion in stock options held by DLJ staff will only be exercised according to the existing schedule, not when the merger is completed which means staff leaving early will not be able to benefit.

Even failed M&As can provide only very short-lived respite for employees. After the breakdown of its merger plans with Deutsche Bank, Dresdner immediately announced plans to shed 5,000 jobs, or 10 per cent of its workforce. It might be meagre consolation for the employees concerned to reflect on the fact that had the merger been successful the combined company had planned on saving up to $2.8 billion a year by eliminating some 16,000 jobs worldwide from its combined workforce of 142,000, with close to 6,000 coming from their retail banking businesses alone. Central elements of the rationalization plan envisaged the combined bank spinning off its relatively unprofitable retail operations. Bank branches would be pruned from 2,500 to 1,700, and the rump would be spun off into a new company called Bank 24, which would become Germany’s largest retail bank. One-third of the new retail concern would then be sold to insurance giant Allianz, a major shareholder in both banks, which would thus obtain a ready-made distribution outlet for its insurance products, and control of mutual fund manager DWS, asset manager Finanza & Futuro and insurance company Deutscher Herold in the swap. This would allow Dresdner to concentrate on more lucrative wholesale banking activities such as M&As and bond issuance. Bank 24, meanwhile, would be floated on the Frankfurt Stock Market within three years. The sale would also mean Deutsche Bank giving up its booming Internet operations, which already have 700,000 customers.

A number of characteristics were especially striking in this instance. In addition to the determinant role of Allianz in the merger project, as the single largest shareholder in both Deutsche and Dresdner, Deutsche felt it needed to secure its position in its home market as a first step towards global expansion in competition with the big “bulge bracket” American investment banks that dominate the M&A advisory services, debt issuance and corporate financing worldwide. In this regard, Deutsche had paid $10 billion two years earlier to acquire Bankers Trust but the market judged the deal over-costly and difficult to integrate given the different corporate cultures.

The dilemma for Dresdner and similar banks is that the markets consider them too big to be “niche” players and too small to be effective in increasingly globalized markets. This market evaluation is reflected in the banks’ share pricing which they are under pressure to lift by merging with counterparts whose overlapping branch networks would make it possible to close offices without losing customers. Unilateral branch closures would certainly mean the loss of such customers to rivals with nearby branches. Dresdner had consequently re-entered difficult merger talks with Commerzbank, under similar pressure, to create Germany’s second largest bank. One aspect of the deal would have merged the two banks into a holding company, with five legally separate operating companies covering areas such as asset management, investment banking and retail banking. As with the proposed merger with Deutsche, Allianz would take a 40 per cent stake in the retail operation and a 60 per cent majority in the asset management business to move the Munich-based insurer from being the world’s sixth largest asset manager, with $647 billion of assets under management to having $1,025 billion, making it second only to UBS. The closure of overlapping branches and the integration of support functions would, as in the merger proposal with Deutsche, result in job losses. These new negotiations had also ended in failure by July 2000, mainly because of disagreements between the two largest shareholders in the banks, Allianz (21.7 per cent of Dresdner) and Cobra (17 per cent of Commerzbank), an investment group headed by a former Dresdner executive, on the valuation of each bank.

The product of merging the first- and third-ranked Spanish banks, BSCH plans on eliminating about 4,500 jobs between 1999 and 2002. The first stage of BSCH’s downsizing programme envisages 2,400 voluntary redundancies negotiated with trade unions before the merger in 1999 (1,300 in BSCH and 1,100 from the BS group). Between 1991 and 1997, the Spanish banking sector shed 23,000 posts, mainly through early retirement schemes. Spanish savings banks are involved in a similar consolidation process, and in 1999 three regional financial institutions in Galicia merged, although continuing to retain their own brands in their respective operating zones.

In Switzerland, UBS and SBS foresaw reductions of about 7,000 jobs (1,800 as possible redundancies), of a total of 13,000 in the group worldwide, according to a 1999 management announcement. However, information provided by UBS in September 2000 indicates only 1,285 employees in Switzerland actually lost their jobs between June 1998 and June 2000. Of these, 14 per cent (125) found new jobs inside or outside the bank, 70 per cent (656) agreed to early retirement and 15 per cent (145) were made redundant. A special advisory team established within the framework agreement[52] between the bank, ASEB (Association suisse des employés de banque) and the personnel commissions of the banks was dealing with the case of 346 employees with a view to finding mutually acceptable solutions.

Although the banking system in France is very diverse, increased concentration was discernible as from the early 1990s. As in many other OECD countries, there are multiple reasons for this. Consolidation and the formation of mega-corporations in other sectors tend to inspire similar processes in financial services, with service providers wishing to attain a comparable size and sufficient resources to meet clients’ increased resource needs. The expansion in distribution channels and growing internationalization also require investment capacities that only large institutions can meet. Increasing technical and procedural complexity necessitates the type of high general management expenditure that only sufficiently large business volumes can absorb. As a result of consolidation and greater use of technology, the number of employees in the French banking network (excluding those in the postal financial services) declined from 431,000 in 1986 to 409,791 by 1995.

French credit institutions currently employ approximately 2 per cent of the active labour force. The entire financial services sector (including savings banks, mutual institutions and consumer credit specialists) experienced a drop of 26,000 jobs from 1986 to 1997. Despite retirements, negotiated redundancies and a substantial shift from full-time to part-time work, industry analysts still consider the sector to be overstaffed.

In general, M&A-related job losses have primarily affected branch networks, followed by back office functions. Reductions in operational activities such as asset management are rarely significant, though there have been some exceptions. The failure to conclude lengthy and highly publicized merger negotiations has frequently resulted in the damaging loss of talented staff to competitors owing to uncertainty and job insecurity ushered in by such processes. Following the long and abortive 1999 attempt at a three-way merger in France of SocGen, BNP and Paribas, the president of the newly formed BNP-Paribas pledged to build up the financial market and investment banking arms of the new company which would be based in London. As a start, the programme envisaged a strengthening of Paribas’s equity department, which had suffered massive defections, particularly of young analysts, during the extended period of the merger.

The new BNP-Paribas employed 76,150 staff in 1999, 28,000 of whom were outside France. At the time of the merger it was announced that about 3,600 staff would be cut in France over three years. According to the bank’s chief executive, taking account of natural attrition involving about 2,000 departures per year, the operation may actually result in the net recruitment of 800 young employees each year, and not involve any involuntary terminations. Outside France, there will be 700 retrenchments annually for three years, 300 to 400 of which will be in London. Management does not envisage any difficulty in implementing the reductions most of which are also expected to be through natural attrition. One of the causes of the failure of the merger proposal to create SBP (the proposed bank under the three-way merger) related to its employment consequences. According to SocGen, BNP’s target in the proposed merger (with 33,800 and 38,500 employees in France in 1997, respectively) achieving the merger-related profitability forecasts projected by BNP by 2002 would have required, in addition to an expected attrition level of 1,000 jobs annually (500 each from BNP and SocGen), that SBP eliminate an additional 6,000 positions within three years.

Information systems constitute another area which is usually deeply affected by merger-related job losses, although at the beginning of the integration process IT specialists are frequently expected to work extra hard to harmonize systems. Once the system harmonization is complete, however, banks usually feel the need to reduce overstaffing in this area as computer-related costs usually represent between 10 and 15 per cent of their turnover.

The March 2000 announcement of a proposed merger (eventually aborted) between Germany’s Deutsche and Dresdner banks provoked strong criticism over expected job losses (800 branches were expected to be closed and 16,300 job losses of a worldwide total of 140,000 for the combined company, were forecast). The German Confederation of Trade Unions (DGB) trade union had proposed that profits generated by the merger should be partly used to guarantee against job losses but most analysts considered there was such an extensive overlap between the two banks’ operations that such guarantees would deprive the merger of its raison d’être. Following the merger failure, Dresdner Bank announced a vast restructuring programme, including the elimination of 5,000 jobs (approximately one in ten); 300 branches – a quarter of its network – are to be closed over two to three years. As a result of uncertainties and insecurity generated during the negotiations, a significant number of the 7,500 staff in the bank’s investment banking subsidiary, Dresdner Kleinwort Benson (and a major cause for the failure of the negotiations) quit to join competitors.

Deutsche Bank’s acquisition of Bankers Trust foresaw an eventual increase in staffing levels to 90,000, half of which would be outside Germany. Nevertheless 5,500 reductions were expected in June 1999, primarily affecting the merged bank’s operations in London and New York. The financial windfalls awarded to Bankers Trust’s senior managers in the merger package, estimated at $400 million, also generated much controversy in Germany.

In Japan (see above), a wave of mega-mergers is gathering strength. These manoeuvres will create the second largest Japanese and third largest global banking and financial services group, each with combined assets of over $1 trillion. The mergers are also expected to result in widespread redundancies, probably amounting to a reduction of 6,000 out of 37,000 jobs, and the closure of 150 of DKB/Fuji/IBJ’s combined 704 branches. However, the companies have pledged that cuts would be through attrition up until 2006, rather than lay-offs. In the context of the continuing erosion of Japan’s lifelong employment traditions, it is not impossible to envisage that this is just the first step in a restructuring process which will result in further and significant job losses. The situation raises increased concerns given the fact that in Japan employment security is based on social rather than legal foundations, and social safety nets are more corporate-based than national. The 1999 strategic alliance of Japanese commercial banks Sumitomo and Sakura, aiming at a complete merger by 2002, envisaged the elimination of 3,000 positions within two years of the merger and, in the meantime, a restructuring programme involving 6,300 job cuts and the closure of 183 branches, including 32 outside Japan.

The failed merger plans of Asahi and Tokai banks foresaw the establishment of a common holding company in 2000, and a four-year programme to cut 4,000 jobs, or 17 per cent of personnel, and to close 70 branches in Japan and ten abroad. In March 1999, Japan’s largest banks also pledged to cut 21,000 jobs in exchange for $60 billion of public funds to boost their capital base. The cuts, representing 15 per cent of the banks’ current staff, would be implemented over five years as part of broader restructuring intended to solve Japan’s long running banking problems.

In Indonesia, financial sector consolidation, also as a result of the Asian financial crisis, is continuing under the supervision of the Indonesian Bank Restructuring Agency (IBRA) and the financial support and watchful eye of the IMF. Banks merged so far under the bank takeover project include Bank Danamom Indonesia, Bank PDFCI, Bank Duta, Bank Nusa Nasional, Bank Pos Nusantara, Bank Rama, Bank Tamara, Bank Tiara Asia and Jayabank International. Given the “shotgun marriage” nature of this multiple bank merger, it is possible that the employment effects will be severe.

According to two Latin American trade unions, Association of Bank Employees (AB) Argentina and Single Central Organization of Workers (CUT) of Brazil, consolidation and its employment repercussions in these two countries are roughly comparable to those being experienced in Europe. M&As have contributed to cutting the number of banks in Brazil – by far Latin America’s biggest banking market with an estimated 25 million account holders out of a population of 165 million – from 263 in 1994 to 214 by June 2000. Concurrent with this process, approximately 79,000 financial sector jobs have disappeared. It must be said that pre-merger employment at many of the banks involved was already declining, but there is evidence to support the argument that M&As have accelerated the trend. For example, in 1994, the combined staff of Banco Itaú, BFB, Banerj and Bemge totalled 63,895; by 1999, after Banco Itaú had acquired the other three, their combined workforce was down to 44,699, or a reduction of 30 per cent. Similarly, the total number of employees of Unibanco and Banco Nacional in 1994 was 31,743. Following the takeover of the latter by the former in November 1995, staff levels had fallen to 19,000 by 1999. A comparable trend is discernible with the acquisition of BCN, Baneb and Credireal by Bradesco or of BGC, Banco Noroeste, Bozano, Simonsen and Banco Meridional by Banco Santander Brasil. However, the acquisitions by ABN-AMRO Bank of Banco Real and Bandepe in 1998 increased employment in the combined group slightly from 20,992 in 1994 to 21,579 in 1999. In the meantime, nine banks – four Brazilian and five foreign – are vying to buy Banespa, one of the biggest publicly owned banks, from the Government, with the sale expected to trigger further takeovers as unsuccessful bidders attempt to expand or protect their own market positions.

Bank of America’s acquisition of Security Pacific was expected to result in 11 to 13 per cent of the positions of the combined operations being eliminated. However, other evidence suggests a higher average of 17.5 per cent may be more likely, especially as in July 2000 the bank announced it would eliminate an additional 10,000 jobs (7 per cent of the current workforce) to boost profits. The lay-offs would principally focus on middle and senior management. Concurrent with the restructuring, a major overhaul aims at increasing sales of stocks, bonds and other financial services to the 30 million existing banking customers through the bank’s 4,500 branches. Only about 1 million of its customers buy bonds, stocks and mutual funds from the bank at the moment. Among the changes envisaged are the transformation of 500 branches into financial centres featuring television sets tuned to financial news networks, computers to allow Internet access to accounts and layout and other changes to make them more welcoming. The branches will provide customers with investment advice, access to the company’s retail brokerage unit and research and other services. The company hopes to gain new customers to boost revenue growth by 7 to 9 per cent annually from the current level of 5 to 6 per cent. Bank of America’s plans are in line with those of many other banks that are expanding fee-based operations like investment services, which are more profitable than traditional banking business such as the provision of loans.

Paradoxically the United States, which recorded the most M&A activity in the financial sector, also seems to have added the most new jobs: approximately 461,000 between 1990 and 1999. During the same period, however, depository institutions, commercial banks and savings banks, which account for the greatest share of employment and merger activity in the sector, shed a total of approximately 447,000 jobs. These job losses were amply compensated by those created in non-depository financial institutions, such as mortgage banks and brokerages, security and commodity brokerages, holding companies and other investment offices. However, available statistics do not permit an assessment of the replacement jobs’ comparative quality. A growing concern everywhere, not just in the United States, is that high-paid jobs are being replaced by low-skilled, low-paid assembly line types of jobs representing the area of highest employment growth in financial services. Job creation in the sector should also be considered in the light of one of the longest peacetime economic growth periods the United States has ever recorded.

A 1999 study by the Office of Advocacy of the United States Small Business Administration, provides an excellent analysis of the employment impact of M&As in the United States. While the focus of the SBA report, covering the 1990-94 period, is on business acquisition activity by firm size and industry, many of its findings are pertinent in the context of this report. The main conclusions are that merger and acquisition activity differed by industry.

Acquisition rates for the major industries ranged from 1.6 per cent of all establishments in services to 6.4 per cent in finance, insurance and real estate. The finance sector also had the highest percentage of employment associated with acquisitions: 12.1 per cent of the sector’s workers in 1990 were in establishments that had been acquired by 1994. The all-industry average was about half that, at 6.9 per cent. More than 4,000 establishments were acquired in national and state commercial banks. Between 1990 and 1994, employment changed more in surviving acquired establishments than in surviving non-acquired establishments, and the overall result was greater job loss in acquired establishments. The employment creation, destruction and net change rates are calculated on the basis of the appropriate aggregate change in employment divided by the aggregate employment of those establishments in 1990.

According to the same study, some of the acquired establishments gained jobs, and their total gains were 21.3 per cent of the 1990 base year employment of acquired establishments. Others lost jobs, and their total losses were 24.6 per cent of the 1990 employment of acquired establishments. Thus the net change in acquired establishments was a loss of 3.3 per cent over the period. The surviving non-acquired establishments, on the other hand, had a small net job increase of 0.7 per cent during the same period. Acquired establishments had job destruction rates 6 percentage points higher, on average, than their non-acquired counterparts. The average job creation rate was only 3 percentage points higher. A possible explanation for the higher job loss was the fact that many establishments were acquired primarily for their physical assets or for some of their skilled labour or management, which were subsequently transferred to other locations of the acquiring firm.

In absolute terms, finance and services were the second largest – after retail trade – in the number of acquisitions (about 22,000 or 23 per cent each). The finance, insurance and real estate industries had the highest net job loss rate for acquired establishments, primarily because of a high rate of job destruction. The acquired retail trade establishments also had a high net job loss rate, but this was primarily due to a low rate of job creation. Establishments in small firms involved in acquisition activity generated much more employment than those in large firms. In fact, the acquired establishments that belonged to large firms before their acquisition experienced such significant losses in employment that the group of acquired establishments as a whole recorded a net loss of jobs despite the fact that over this same period the entire population of surviving establishments produced a small net increase in jobs.

In Canada, a study commissioned by the government of British Columbia has analysed what the employment impact would have been had proposed mergers involving four of Canada’s largest chartered banks – CIBC, Toronto Dominion Bank, Bank of Montreal and Royal Bank – been approved by the federal Government (they were eventually not approved). Together with the Bank of Nova Scotia, the four banks comprise Canada’s five largest national banks.

The CIBC and Toronto Dominion Bank had argued in their application that more jobs would be generated within a few years due to expanded services. The Royal Bank and Bank of Montreal acknowledged possible initial job losses of 10 per cent which could be implemented via attrition. The Bank of Montreal argued that the new bank would eventually have a positive employment impact of between 5 and 10 per cent after a transitional period. There were projections of an expansion in the number of branches of the combined operation from 2,532 to about 3,000 – branches that would employ staff, though not necessarily perform traditional branch functions. Other commentators predicted the closure of a third of the branches of the combined Royal Bank and the Bank of Montreal with major job losses affecting many highly paid middle managers.

An important attribute of this study is that, given British Columbia’s economic structure and level of development, its conclusions can be roughly extrapolated to similar mergers in countries with comparable economic conditions.

Table 3.9 below provides chartered bank employment patterns over a decade in Canada and British Columbia. The data, published by the Canadian Bankers Association, refers to permanent full-time and part-time employees but excludes temporary or casual workers; it describes the workforce of the six largest chartered banks (in British Columbia’s case this essentially refers to the “big five” since the National Bank has little presence in the province). The employment impact of banking is understated by excluding certain categories of employees (temporary, casual) and institutions (chartered banks other than the big six and subsidiary companies). The table indicates rising numbers of bank employees through to the early 1990s followed by a decline thereafter, trends comparable to those seen in many other industrialized countries.

Table 3.9.   Chartered bank employment in Canada and British Columbia
                   (permanent, full-time and part-time)

 


Year

Bank employees
in Canada

% of labour force
in Canada

Bank employees in
British Columbia

% of labour force in
British Columbia


1985

162 163  

1.24  

19 685  

1.30  

1986

162 667  

1.22  

19 987  

1.29  

1987

162 850  

1.19  

18 104  

1.15  

1988

164 417  

1.18  

17 306  

1.07  

1989

169 246  

1.2  

17 599  

1.05  

1990

172 484  

1.2  

18 121  

1.06  

1991

173 090  

1.2  

18 435  

1.05  

1992

172 776  

1.19  

18 654  

1.03  

1993

170 808  

1.16  

18 780  

1.02  

1994

N/A  

N/A  

N/A  

N/A  

1995

161 346  

1.08  

17 760  

0.92  

1996

160 104  

1.04  

17 592  

0.89  



Years

 

Canada

 

British Columbia


1985-90

 

6.4

 

-2.8

1991-96

 

-7.5

 

-4.6

1985-96

 

-1.1

 

-10.6


Source: Canadian Bankers Association: Canadian Bank Facts (various years). The 1996 data are from Annual Employer Reports under the Federal Employment Equity Act.

Just as in other developed countries (see tables 3.10 and 3.11), it is apparent that permanent bank employment as a percentage of the labour force has been in gradual decline since the mid-1980s. This is consistent with other studies which have concluded that part-time, temporary and other atypical employment contracts are an integral part of M&A-related employment strategies.

The sharp decline in Canadian bank employment in the mid-1990s followed mergers with and the takeover of trust companies, such as that involving the Royal Bank and Royal Trust. Consistent with the pattern in other countries highlighted in table 3.10, employment growth peaked in the 1990s and then started to decline. During the 1980s, a period of financial deregulation and rapid introduction of new technologies, employee numbers expanded as new services and products were added. After 1990 the employment-saving potential of the new technologies appeared to have exceeded their market-expanding capacity and employment began to fall in a context of rationalization and cost reduction. Table 3.12 provides a more detailed snapshot of various types of bank employment in 1995. The extent to which the six largest banks rely on temporary and permanent part-time workers (31 per cent of employees in Canada; an estimated 35 per cent in British Columbia) is noteworthy.

Table 3.10.  Bank employment patterns in European Union countries
 


Country

1980 (thousands)

1990 (thousands)

1994 (thousands)

% change 1980-90

% change 1990-94


Belgium

68

79

76

16.2

-3.8

Finland

42

50

36

19.0

-28.0

France

399

399

382

0

-4.3

Germany

533

62

658

16.5

6.0

Italy

277

324

332

17

2.5

Netherlands

113

118

112

4.4

-5.1

Norway

24

31

23

29.2

-25.8

Spain

252

252

245

0

-2.8

Sweden

39

45

42

15.4

-6.7

United Kingdom

324

425

368

31.2

-13.4

Total

2 011

2 344

2 274

16.6

-3.0


Source: A. Tickell: “European financial integration and uneven development”, forthcoming in R. Hudson and A. Williams (eds.), in Uneven development in Europe (London, Sage).

Table 3.11.  Financial sector employment in Australia
 


1986 (thousands)

1991 (thousands)

1996 (thousands)

% change 1986-91

% change 1991-96


208.6

224.4

190.7

7.6

-15


Source: Finance Sector Union of Australia submission to Inquiry into the Australian Financial System, table 1.

Table 3.12.  Bank employment in Canada and British Colombia, 1995
 


Employers

Employees

Canada

British Columbia


Six largest banks

Full-time
Part-time
Temporary

122 550
38 770
16 600

17 760

1 8201

Subsidiaries of six largest banks2

Full-time
Part-time
Temporary

17 800

 

1 9601

 

All other banks

Full-time
Part-time
Temporary

11 050

1 2151

Estimated totals

 

206 800

22 755


1.  The British Colombian breakdown is not provided in the Canadian Bankers Association figures. It has been assumed that the regional breakdown for other forms of employment listed here parallels that of full-time and part-time employment by the six largest banks.
2.  Includes employees of securities, mortgages, trust and insurance subsidiaries.
Source: Canadian Bankers Association,
Bank Facts, 1996-97.

With 18,975 permanent full-time and part-time employees, 1,820 temporary employees, and another 1,960 jobs in subsidiary companies, the chartered banks employed some 22,755 British Columbians, exceeding the workforce in most of the province’s other major industries. The direct employment impact of the banks was therefore significant. Beyond its direct impact, however, the banking sector also stimulated significant employment in other industries through its purchase of suppliers and services, and through the wages spent by its own employees and the employees of its suppliers whose employment could be attributed to the economic demand of the banks.

One detailed study concluded that spending by banks in other industries created 46,050 jobs in Canada.[53] With 190,400 people directly employed in the banking sector, the two groups of employees induced a further 149,450 jobs across the economy for a total of 385,900 Canadian jobs attributable, directly or indirectly, to the banking industry. The ratio of total employment to direct employment in the banking industry was thus 2.03:1. British Columbia had a sufficiently diverse economy to permit extrapolation from the Canadian figures to the provincial level, and so applying the multiplier of 2.03 resulted in a total of 46,193 jobs that could be attributed to the banking sector.

To obtain a clearer picture of the broader employment impact in British Columbia of the proposed bank mergers, a series of three estimates was prepared using different economic models. The estimates showed losses ranging from a low of 2,350 to a high of 3,400 direct jobs. Counting indirect job losses, it was concluded that from 4,770 to 6,800 positions could disappear. It is worth noting that the British Columbia study only discusses job losses for existing positions. Although natural attrition and normal turnover would reduce involuntary redundancies, and thus the impact on incumbents, from the point of view of the economy as a whole and the aspirations of jobseekers, employment would still have declined.

... but generate other jobs

As might be expected, job growth in investment banks and firms specializing in M&As has been inversely proportional to losses elsewhere in the financial services sector, although the increase can in no way compensate for overall reductions. Another sector which has seen employment growth is services to finance and insurance, including stockbroking, share registry, mortgage broking, credit card administration and insurance broking and dealing. In Australia, for instance, growth in this subsector of financial services grew by about 36 per cent between 1991 and 1996, and a further 14 per cent between 1996 and 1997. Even in restructuring financial service organizations, jobs in IT and marketing functions as well as in call centres have increased as a result of the shift in strategies.

As might be expected, jobs in the growth areas – with the exception of those in call centres – tend to have a better-paid, better-educated workforce with greater proportions in associate professional, professional and managerial occupations. There is an inverse relationship in growth between full-time and part-time employment, with full-time jobs on the decline.

In investment banks, especially in the United Kingdom, the employment situation was hardly bright in 1998 due to the Asian and Russian financial crises, which occasioned massive lay-offs. Starting in 1999, however, the City of London merchant banks have beefed up their staff by more than 20 per cent. The ferocious acceleration of M&As has encouraged greater recruitment. SocGen, which employed 1,400 people in the City at the end of 1998, had 1,800 by December 1999. The increase is explained by a reinforcement of teams in the areas of corporate finance, research and trading. This drive shows no signs of running out of steam any time soon. Salomon Smith Barney, for instance, has announced plans to increase its strength from about 250 to approximately 450 bankers in 2000.

In addition to M&A deals in the financial sector, banks are called upon to provide advisory services on M&A operations in other industries. Given the accelerating propensity for consolidation, which makes it a growth area, several financial services institutions are interested in acquiring M&A specialist banks. Chase Manhattan – the third largest American bank, which is itself a product of a 1995 merger between Chemical Banking and Chase Manhattan, thus announced the acquisition of the corporate and investment bank, Hambrecht and Quist. In the same vein, BankAmerica had previously taken over Robertson Stephens and Montgomery Securities.

Japanese employment also stands to gain in some measure from the new Japanese inclination for M&As. The value of all M&A deals jumped from $17.5 billion in 1998 to $150 billion in 1999.[54] From 417 M&As in the first quarter of 1999, the number of deals jumped to 439 in the corresponding period of 2000. This development is driving an expansion in investment banking services and employment, making investment banking and online banking services almost the only growth area in recession-hit Japanese financial services. Since 1997, for instance, Merrill Lynch has increased its staff in Japan from 670 to 3,650, while Goldman Sachs has doubled the number of employees to 1,200 during the same period, and expects that figure to double again in the next two to three years.

From the point of view of employment, M&As clearly benefit the professionals involved, investment banks which provide specialized advisory services, public relations agencies and legal and accounting firms. In addition, the growth of Internet financial services and the multiplication of new small and medium-sized market entrants (start-ups and subsidiaries of established financial institutions) does tend to reduce, but not totally compensate for, sectoral job losses. Insufficient time has passed, however, to be able to interpret these two trends to ascertain the degree to which they reduce job losses.

Lay-offs as an anti-takeover tool

The 1999 contest for Britain’s third largest high-street bank, NatWest, revolved around claims among protagonists as to which could secure the largest job reductions. Since the Bank of Scotland and the Royal Bank of Scotland based their rival hostile takeover bids on claims they would be able to increase the target’s profitability through cost savings, the target immediately promised a programme of measures it would itself implement to reduce costs, including the elimination of about 15,000 jobs between 1999 and 2002. NatWest was unsuccessful in its efforts, however, as investors were unconvinced that the measures it proposed – cutting 3,400, or 6 per cent, of its workforce – would provide superior or equal savings to those projected for its besiegers’ own plans.

Dresdner’s plans to cut 5,000 jobs following its aborted mergers with both Deutsch eBank and Commerzbank have similarly been viewed by industry observers as intended to increase its defences against takeovers. The rationale behind such retrenchments is usually that the financial markets appreciate them as concrete signals of organizational focus on reducing costs and increasing shareholder value. Such pre-emptive action against potential raids is based on the argument that management has previously not paid sufficient attention to raising shareholder value by failing to increase operational efficiencies and returns on resources it has been entrusted with. The point to note however is that in the process employees are reduced to a simple “cost adjustment variable”; the deeper the jobs are cut the better the financial markets judge the action, even though the result might be to reduce the organization’s operational capability to generate the required returns.

Gender-specific effects

The European finance sector provides a good example of women’s access to professional jobs. During the 1970s and early 1980s, the growing and diversifying finance sector was an important source of women’s employment. Even without the M&A-related job reductions, however, the 1990s have been a period of stagnating employment resulting from growing competition, the increased introduction of labour-saving information technologies, and the shift from traditional finance jobs to sales and customer service. These developments have considerably affected women’s jobs, particularly those in areas of finance such as administration and branch operations with a high proportion of female employees. For these vulnerable women workers, there is the possibility of reskilling through continuing training as part of affirmative action initiatives; this should increase their chances of successfully competing for emerging finance jobs.[55]

In theory mergers should provide employers with ideal opportunities to demonstrate their commitment to best practice in the area of non-discrimination and equality of opportunity. In practice, at the management level, where women are sparsely represented, mergers have sometimes been equated with the perceived more masculine traits of a military operation, with the acquirer assuming the characteristic of victor or conqueror.

In most countries, the financial sector is characterized by a predominately female workforce at the lower hierarchical levels and in a number of specific occupational categories. The distinction between men’s and women’s jobs has, as a general rule, traditionally manifested itself by men holding the managerial decision-making positions and women occupying the majority of front and back office clerical jobs. It has also been intimated that women who move into decision-making positions in finance tend to gravitate towards peripheral managerial jobs, perceived to have lower status. There are suggestions that women usually move into areas where they may be able to exercise high levels of skill and expertise but have little effective organizational discretion. These jobs easily turn “dead-end” in terms of traditional, upwardly mobile career advancement, and gender segregation is thus reproduced in new forms. Clearly, given these gender characteristics, the integration of merged organizations must have different outcomes for men and women workers, as cost cutting tends to fall disproportionately on the functions in which women are disproportionately represented.

Before the current wave of M&As in finance, a feminization trend had been developing in the sector in many countries since the 1980s, focusing on branch management and administrative functions. In Finland, for example, the proportion of female branch managers in some banks was approximately 7 per cent in 1983, but by 1992 had risen to over 37 per cent. The initial large-scale influx of women into branch management took place during a period of growth and expansion into new business. This influx coincided with internal banking reforms which transferred corporate banking knowledge and expertise from most branches and concentrated them in specific corporate branches, leaving local branches to focus almost entirely on retail and SME customers whereas previously all branches had offered a range of services to all client groups.

The social partners and public authorities are increasingly conscious of the need for improvements in the working conditions and career prospects of women at all levels, whether in low-skilled functions or in professional, supervisory and management positions. Despite substantial progress in the employment framework – legislative measures, policies on equality of opportunity at the workplace, improvements in women’s professional qualifications and their increased participation in economic life – the situation and characteristics of men and women in banking and other financial institutions continue to be distinguished by vast inequality. Women remain handicapped relative to men regarding professional status, pay and possibilities for career progression. In the context of M&As, changes in work organization and job specification are more likely to be detrimental to women given the fact that they are disproportionately represented in part-time work and are therefore less visible to showcase their skills and exercise their rights.

Some academics suggest that rank-and-file workers are most likely to lose their jobs in “white knight” takeovers, while the reverse is true in hostile takeovers, when management jobs are at greater risk. In all cases, however, women’s experience of mergers is likely to differ to that of men. If women have different contracts to men or have different expectations of the same contracts, then M&As may be gender-insensitive. As a result of choice rather than discrimination, many women prioritize the home rather than the workplace and choose work patterns and contracts that reflect this priority. However, this also means that women are more liable to be on contracts and in positions which are ripe for rationalization. They are more likely to be flexible or peripheral workers, and if they are core workers they are more likely to be in lower to middle than senior management. Moreover, if women place greater weight on the interpersonal relationships that work allows them, it is more probable that they will experience stress as a reaction to the possible loss of colleagues because of M&As.[56]

Using data from Project Servemploi, an eight-country study of women’s work within retail and financial services, Collins and Wickham report encountering women who have been demoted in post-merger restructuring, whose job titles and responsibilities have altered as they have been compelled to take on tasks associated with both the old and the new companies, and whose line management has been reorganized so that they are no longer sure what it corresponds to and whether it is likely to remain stable. Whilst these changes had not necessarily all been negative, they did call for considerable adaptability and flexibility by employees for which they were either not necessarily prepared nor credited. In addition, mergers often involve office closures and the relocation of jobs, and some of the women in the study had been relocated. In a case involving a recently acquired insurance company, call centres had been closed and the customer advisors had been offered the opportunity to move to a call centre in another town. Some had done so, but were finding that having to work at a distance from their homes undermined the very reasons they had chosen call centre employment in the first place: to be able to manage work and childcare. Evening work in nearby call centres allowed many women with small children to coordinate childcare with their husbands’ or partners’ availability. Commuting further to work made this much more difficult, and those who had experienced one merger were more likely to leave the organization when the company was taken over again.[57]

There has been significant progress in women’s employment in the financial services sector in recent years as a result of positive action plans and equal opportunity programmes to improve women’s access to jobs in fields in which they have been under-represented in the past. According to a research project by the Equal Opportunities Unit (DGV) of the European Commission and the European Network, entitled “Women in Decision-Making”, more than 40 per cent or up to half of all employees in the banking and finance sector of most EU Member States are female.[58] The project report discloses a slight increase of women in executive positions in recent years. Among the banks sample between 1990 and 1995, the proportion of women in lower management rose from 25 to 27 per cent, in middle management from 13 to 17 per cent and in higher management from 6 to 8 per cent. There was nevertheless still a considerable gap between the proportion of women employees and women managers. Whereas in 1995 women accounted for half of the employees in the banks sampled, they only represented 16 per cent of their managerial workforce. The proportion of women managers decreases as they move up the management scale.

Table 3.13.  Proportion of female employees and managers in European banks, 1995 (%)
 


Country groups

Female
employees

Female
managers

Lower
management

Middle
management

Higher
management

Number
of banks


Scandinavian1

61.5

22.2

38.1

23.8

14.3

7

Anglo-Saxon

65.2

24.4

42.8

16.2

6.8

13

West European

45.6

14.0

22.2

11.1

5.0

22

South European

28.9

7.9

17.5

11.3

5.9

15

Subsidiaries of foreign banks2

45.4

20.6

14.7

33.7

11.0

6

Total

46.6

16.1

26.8

16.5

8.4

63


1. Country groups are defined as follows: Finland, Sweden and Denmark; Great Britain and Ireland; France, Germany, Austria and Benelux; Spain, Portugal, Italy and Greece.
2. Subsidiaries of French, German, Dutch and Belgian banks located in Luxembourg, Belgium, Portugal and Greece.
Source: Quack and Hancké, op. cit., p. 48.

The same obstacles discussed by various authors as hindering the access of women to management positions can also work to their detriment in downsizing situations. At the individual level, women might lack the appropriate education, training or experience to be retained during merger-related retrenchment. This is particularly likely to occur when managers from the amalgamating organization are competing for fewer positions in the combined company and such criteria as seniority in post and other LIFO-based (“last in, first out”) considerations are taken into account. Structural and cultural factors can also be an obstacle. Women managers might not have the same professional networks and personal contacts at their disposal to enable them to compete for the remaining positions in the merged company. The male values which dominate financial service organizations and the gender stereotypes and prejudices of personnel managers in many countries can keep women out of management positions, and slate them first for termination during restructuring. At the social level, the unequal distribution of family obligations between men and women still makes it more difficult for women to combine a management career and having children. Various combinations of these factors may work to ensure preference for men’s retention, especially when the idea that women are homemakers and men are the breadwinners is still strongly anchored in local culture.

The 1993 ILO report, Social effects of structural change in banking, highlighted the fact that employment gains and losses in the financial sector do not affect men and women equally. Most research shows that women, including women managers, are disproportionately affected by merger-induced job losses in the financial services sector, involving a reversal of the modest inroads they were beginning to make into upper management levels. Ample evidence points to the fact that the bulk of job losses through restructuring affects middle-management positions, and the teller and clerical functions in which women workers are most represented.

A career in finance, and banking in particular, was traditionally considered a male preserve. Women were first employed in the sector as clerks, rarely rising beyond the rank of teller. In many parts of the world, banking remains male-dominated, with reports of gender ratios among bank employees of 75:25. In some countries, however, the proportion of women workers in the financial sector has recently risen in response to officially sponsored employment equity initiatives. Despite the general increase in the number and proportion of women employed, work in banks still tends to be highly gender-segregated, with women concentrated in the lowest tier of the employment hierarchy, where as a rule they have tended to be clustered in clerical positions, data processing or at the lower management level. In recent years, women worldwide have also begun to make some inroads at both the middle and, to a lesser extent, the upper management levels. ILO data show that in the United States women increased their share as financial managers from 19 per cent in 1970 to 45 per cent in 1991, a score similar to that of managers in general. National statistics in the United States show that by 1995 women accounted for just over 50 per cent of all financial managers.[59] The ILO report, Breaking through the glass ceiling: Women in management discloses that the proportion of middle-level women managers in the financial services of large companies in France grew from 15 per cent in 1982 to 26 per cent in 1990 – a greater increase than that achieved by women in management overall. In the United Kingdom the share of women among financial managers rose from 11 to 17 per cent in the 1980s while, in Hungary, the proportion of women among chief accountants and economic managers was already as high as 64 per cent in 1980, and increased further to 75 per cent by 1990. In Canada, the proportion of women in senior management positions rose from 2.6 per cent in 1987 to 20.3 per cent in 1998, bringing industry representation into line with the Government’s benchmark. They also represented 49.2 per cent of all middle managers, and 51 per cent of all professionals in 1998. Many national studies elsewhere reflect similar trends.

Table 3.14.  Occupational groups by gender in British Columbia in four banks proposing to merge, 1996
 


Occupation

 

Employees

 

Men (%)

 

Women (%)


Upper level managers

 

48

 

87.5

 

12.5

Middle and other managers

 

3 076

 

43.3

 

56.7

Professionals

 

625

 

28.0

 

72.0

Supervisors

 

451

 

9.1

 

90.9

Clerical workers

 

4 146

 

11.8

 

88.2


Source: Government of Canada: The employment impact of proposed bank mergers, at http://www.bankmergersbc.gov.bc.ca/emplimpact.html.

Table 3.14 presents the full-time gender employment structure in the British Columbia operations of four large Canadian banks (the Royal Bank and Bank of Montreal on the one hand and the Canadian Imperial Bank of Commerce (CIBC) and the Toronto Dominion Bank on the other) which had applied for supervisory approval to merge into two. Opponents of the proposed mergers argued (successfully as it turned out) that, as is the usual pattern everywhere, the mergers would have negative consequences for employment because they would result in the rationalization of branches and the retrenchment of branch employees. The most likely occupations to be affected would almost certainly be middle and other managers, supervisors and clerical workers, the majority of whom were women in all cases.

A trend can be seen in the services industry, including finance, similar to that which swept manufacturing previously, involving a flattening of  management structures. One of the results of bank mergers is usually the closure of branches and the removal of whole layers of middle management, where most women are now concentrated. M&As and the rationalization that follows clearly affect women workers to a higher degree than their male counterparts. It is the lower tier occupations and middle-management positions that mostly disappear in the restructuring and rationalization that follow most M&As. In addition, M&A-related cost-cutting measures combine with the trend towards flatter management structures to reverse women’s inroads into middle-management positions. Even if some of the job losses are absorbed through attrition, the number of attractive management positions available to female candidates shrinks, promotion becomes more difficult and morale declines. It is obvious therefore that, unless affirmative gender policies are adopted to supplement merger-induced retrenchments, the progress so far recorded vis-à-vis women’s employment and advancement in finance will erode.

Tienari[60] analyses top and middle management within a domestic Finnish merger between two large, established banks (Kansallis Banking Group and the Union Bank of Finland) to conclude that the process is detrimental to women’s employment in banks. The author argues that, in merger implementation, three central problems of integration have been identified: coordination, control and conflict resolution. Early on, the need for standardized management information systems such as reporting and budgeting arises. It may also become necessary to initially tighten controls on decision-making at lower managerial levels, in order to establish a stable operational platform for integrating two sets of organizational practices. This may again take place in conjunction with increasing degrees of formal regulations and procedures aimed at making the new organization more predictable and to moderate the effects of uncertainty in terms of individual stress and post-merger drift.

A horizontal merger is an event of organized change which provides a stage for competition between individuals, both for core positions and for more peripheral jobs. One outcome may be the exit of key individuals. This is also a likely occurrence beneath the level of two top management teams, often the sole focus of empirical research on power struggles and internal competition within mergers. On the other hand, mergers in contemporary competitive business environments are typically justified by value-maximizing motives. Ever more often, mergers incorporate downsizing objectives as two overlapping organizations are compressed into one to reap synergy benefits. Duplicated operations are trimmed, and this typically entails dismissals at all hierarchical levels of the organization. Due to the elimination of overlaps, merger procedures unfold as personal and collective survival games for the individuals involved, albeit often parallel to an erosion of perceived self-efficacy.[61]

Consequently, the “re-staffing” of an organization following a merger comes to resemble a large-scale recruitment process. The past performance of candidates for each organizational position is evaluated and decisions made. This process provides an opportunity to homogenize both traits and practices within the various units and functions of the firm. Putting it provocatively, merging may present a unique chance to get rid of individuals with suspected, unwanted “counter-cultural” beliefs at all managerial levels. The “re-staffing” procedure may also take place in parallel to a redefinition of jobs and positions – as well as to changes in the hierarchical ranking of these positions. Women are uniquely disadvantaged in this process because of stereotypical perceptions of gender characteristics. The “transformational leadership” popularly considered to be a requirement in successfully fusing two different organizations is seldom gender-neutral, as images of the ideal organizational member, the top manager, and the organizational hero tend to be those of forceful masculinity.

Training and reskilling associated with M&A-related change

Professional competence and interpersonal skills are a decisive competitive factor in any service industry, and nowhere more so than in the financial services. In addition, the situation of a service company markedly differs from that of a manufacturer in that the front-line staff of a service organization constitute the tangible view of the product. While a manufacturer’s customers cannot observe the incompetence and lack of skills of production plant workers, any defaults or lack of knowledge of in-service company staff, such as those employed in banks and other financial services organizations, are painfully obvious.

Twenty years ago, commercial and savings banks were highly bureaucratic organizations whose prevalent business activities were to take deposits, give credits, and organize the payment system within highly protected and compartmentalized national markets.[62] Today banks, and other financial organizations in general, are becoming more flexible organizations that offer a wide range of products, including deposits, credits, payment systems, insurance, credit cards, cash management, and pension and mutual funds. In addition, they are increasingly exposed to greater levels of competition within deregulated international and national markets. As a result of these developments, banks have shifted from a transaction-based organizational model toward a sales and service orientation, implying the corresponding changes in work organization and skills requirements. Changes in enterprise structures in which front and back office work is separated as a result of greater product standardization involves greater specialization and a degree of deskilling. In some cases, the demise of the traditional branch employee with a full range of banking skills means that jobs are narrower and more routine and require less skill. In others, however, branch staff are expected to be able to perform any front office task apart from the provision of substantial loans and more complex financial products.[63] Employees must be familiar with a far wider range of products than in the past, in addition to possessing the traditional banking skills involved in performing quick and accurate transactions. Furthermore, although the sales culture may involve set scripts and computerized customer profiles, it undoubtedly requires new skills. These developments point towards a change in staff profiles from traditional skills in favour of marketing, IT and more sophisticated value added services. As more functions are shifted to technology-based platforms, the outsourcing of IT-related activities is likely to increase.

Training has always been an important focus of human resource practices in financial institutions; the changing nature of training practices is linked to changes in strategy generally and the decline of a generalist career path. The emphasis on both cost reduction and a sales and service orientation has led to a greater targeting of training toward specific jobs rather than the development of employees who have expertise across the full range of skills. The fragmentation of internal labour markets has amplified this trend, with different groups of employees perceived as requiring a different quality and degree of training and education.[64]

The radical transformation of the competitive environment in the financial services requires an ever more highly skilled and effective workforce, and there has therefore been a logical shift from purely administrative functions towards those with greater commercial content in which the emphasis is on providing advice and the know-how that the bank can place at its customers’ service.[65] To meet all these needs, staff are expected to be more flexible, adaptable and versatile in their skills. With the increased use of IT, the demand for computer skills is growing. As might be expected of a sector undergoing extensive change and which, in addition, is a major user of technology, the financial services sector in many countries has invested heavily in employee training. The Canadian Bankers Association reports increased investment by its members in human capital. Training by Canada’s six largest banks rose by 12 per cent between 1995 and 1997 to a total of Canadian dollars 301 million or an average of C$1,500 per employee (about 2.8 per cent of total payroll). CBA reported that training opportunities were offered to employees whose functions might become eliminated so that they could move into different or new business areas. Other support to educational and training programmes by the industry included activities aimed at promoting youth employment, such as sponsoring educational, internship, entrepreneurial and stay-in-school programmes, as well as offers of scholarships and the hosting of conferences on youth unemployment/underemployment. Given the competitive importance of having highly skilled staff, banks increasingly view themselves as learning organizations where continuous learning should be encouraged. In addition, training facilitates the redeployment of staff whose functions may be eliminated, either into different or new business areas and increases the possibility of re-employment of retrenched staff. Total investment in training, percentage of payroll average expenditure per employee and the number of participants in training programmes all show substantial increases. Banks compare favourably to other employers when it comes to staff training. Comparable though varying levels of investment in skills are reported in different countries and regions.

According to the Belgian Bankers Association, their sector is investing considerably in training. While Belgian enterprises in general only devote the equivalent of about 1.2 per cent of payroll to training and are, as a result, behind the European average of 1.9 per cent, the comparable figure for the Belgian banking sector is 4 per cent.

Generally speaking, the acceleration in the introduction of IT and the effects of M&As are convincing many financial service providers to significantly modify training programmes. In addition, European banks – unlike their American counterparts which increasingly encourage their clients to carry out as many of their operations by Internet as possible – are seeking a balance between “remote banking” and traditional staff-supported service. This choice in mode of service mix again has considerable implications for staff training requirements, including a sufficiently high grasp of customers’ expectations and the specific products matching their needs.

From an employee perspective, there is some evidence that occupational attachment is increasing even as tenure with a given employer may be declining, and this raises the importance of the issue of investment in continuous training. Yet while employees may have greater interest in developing their occupational skills because they will be using them longer, employers may be less inclined to provide those skills or to finance their acquisition because the increased worker mobility in the new working environment implies that they are less likely to gain a full return on their investment. Trade unions similarly feel that training policies need to underpin technological and other changes, and point to grading problems raised by the multiskilled nature of the jobs of some front office customer service workers. Many feel that it is the task of employers to anticipate new jobs more precisely and design human resource plans and development programmes accordingly. In this connection, M&As should not be haphazard operations but be strategically planned. If that were the case, both recruitment and personnel development policies, including appropriate training to match anticipated post-merger skills, would be integrated into organizational strategies to avoid lay-offs and favour redeployment instead.

People’s sense of insecurity has much to do with how they assess the worth of their skills and competencies in relation to rapidly changing labour market needs, their access to training opportunities and their ability to upgrade them and have them recognized. Knowing that one possesses skills that are in high demand reduces the sense of insecurity.

Given the demise of the implied promise of lifetime or at least long-term employment inherent in past employment relationships, workers are increasingly demanding that a substitute, at least emphasizing a promise of employability, be developed to compensate for their increased job insecurity. In an industry where massive restructuring and job losses have become commonplace as a result of technological innovation, mergers and other competitive factors, the importance of a new approach cannot be overstressed. Employees view inadequate training and development in the absence of employers’ commitment to long-term job security, as an added assault on the psychological contract. It is unsurprising therefore that a recent survey of staff in a major bank by the Finance Sector Union of Australia (FSU) found 90 per cent of respondents rating improved access to training as important or very important. In another survey, 82 per cent of respondents believed that they would benefit from having skills which were recognized by other employers, while over 50 per cent of them also believed the company would rather employ new people with the desired skills than train existing staff.

It is a paradox of today’s highly competitive market environment that many enterprises are less willing to train and manage their human resources as they have short-term planning horizons and often little knowledge about their long-term skills requirements. In addition, they seldom provide skills training for fear of poaching by competitors, unless there are adequate cost-sharing arrangements. And firms are generally providing no training at all to the growing numbers of casual and temporary employees. Yet research, especially in the United States, demonstrates that training and development can be key retention tools,[66] and that the most common reason for employees to leave their job in the United States was a better opportunity elsewhere, followed by a lack of opportunity for advancement and enrichment. Trade unions argue that with a changed employment relationship, skills development and training opportunities rather than just pay must become integral to reward systems. Sufficiency of training is beginning to rate as high, if not very high on trade union agendas.

In many financial organizations, however, there is growing recognition that staff skills, abilities and knowledge are a crucial competitive asset in the increasingly commodity-oriented markets for financial products. Employers are consequently seeking to hire highly trained workers and are providing supplementary training in both basic skills and new techniques to their staff. Criticism has nevertheless been voiced regarding disparities between management rhetoric about work needing to be customer-service driven, and practical application – especially in both bank and insurance call centres – when people hired for their customer-service skills quickly learn that what is rewarded is the volume not the quality of service provided.

An ILO report[67] submitted to the 88th Session of the International Labour Conference in 2000, stresses the growing demand for continuing education and training (CET) for employability. One of several contributing factors is enterprises seeking to enhance their competitiveness. In addition, many displaced and vulnerable workers need CET because their skills are specific to one employer or sector, putting them at higher risk of unemployment if they lose their jobs. The long-term unemployed whose skills have deteriorated and whose confidence has ebbed need CET to boost their chances of getting a job. “Second-chance” workers who dropped out of general education and/or training at an early stage need CET to make up for lost opportunities, and many people simply wish to continue learning as technology and the world of work continue to change.

The report notes that workplace training and learning programmes often depend on the size and type of the enterprise and the type of work organization and management culture. Multinational and large enterprises tend to approach CET in a systematic manner and to make in-service training investment an integral part of their human resource and total quality management policies and practices. A few have even started to integrate human resource investment into their accounting systems, just as they would any other investment in physical capital. In the context of the financial sector, organizations increasingly expect their human resource management practices and new forms of work organization to provide close support for their competition strategies.

Despite the increased enterprise demand for CET, overall firm investment in training has been insufficient, except in countries with a tradition of on-the-job training (e.g. Denmark, Germany, Japan and Switzerland). If employee turnover is high, firms may be reluctant to train workers. Firms that risk having their staff “poached” tend to limit investment to non-portable firm-specific training; and smaller firms generally provide limited training as they often face higher training costs per employee. A recent study reports one-in-five Dutch, one-in-four American, almost 30 per cent of Swiss and a third of Canadian workers all felt they were not receiving the training they needed. Many studies show that women workers are less likely to receive employer-sponsored training.[68]

The widespread use of IT, financial product innovation, changing customer attitudes and expectations (expanded choice, transparency, increased cultural and competence levels) are modifying the nature and structure of finance employment. There is a marked decline in administrative functions and their replacement by employment in management services. Other changes, such as reductions in headquarters staff (a trend accelerated by M&As), or an increase in subcontracting – representing a form of reversion to core competencies – are under way. All these trends have implications for the type of initial training, but especially for the “lifelong learning” requirements of finance workers.

In Europe, the first major international call centres were Dutch, British and Irish because of relatively flexible labour practices and the multilingual capacities of local workers. The upgrading of teleworkers’ skills is driven by the fact that they have to operate in a multimedia environment, interacting with clients over the telephone and directing them towards the financial products best suited to their needs, etc. The skills’ enhancement of staff may well become another consequence of this sector’s concentration. There are particular concerns regarding those on temporary contracts, interspersed with unemployment, who are likely to see their skills and competencies deteriorate faster than those of permanent employees, as they often have less access to in-service and continuous training. This especially affects women, who are liable to become less employable over time and risk social exclusion. Maintaining and renewing these workers’ skills is an important issue. Some countries, particularly in the European Union, have integrated basic social rights, including the right to training, into labour codes that extend to workers on temporary contracts. 

4.   Managing downsizing related
      to M&A restructuring

While M&As are driven largely by financial considerations, their success vitally depends on the motivation of retained workers to contribute to the achievement of merger objectives. The high proportion of failed M&As may not be unrelated to the manner in which staff are often relegated to cost variables rather than being made active partners in the change process. Social plans, guarantees against forced departures and the involvement of staff in M&A-related decision-making are critical motivating factors. The study referred to in Chapter 1[69] concluded that the failure of the overwhelming majority of M&As resulted from concentration on “hard” legal and finance issues to the detriment of the “soft people issues” in merger planning and implementation. Poor communications with employees appeared to pose a greater risk than that with shareholders, suppliers or customers. The study found that success was linked to a holistic approach when the “soft” people and cultural issues were an integral part of the focus on financial performance. Of the companies involved in the survey, just nine (less than 10 per cent of respondents) addressed all the “soft keys,” and each was successful. The study stresses the fact that once value was lost, it was seldom recovered. Even though possibly the most difficult to implement effectively, headcount reduction was the area in which most companies reported achieving their targets. Loss of staff – an inevitable result of M&As – often included the very individuals the acquirer needed and intended to keep to succeed. M&A value extraction was impossible without the enthusiastic cooperation of employees.

Apart from organizational impacts such as reduced commitment, motivation and productivity, constant restructuring sometimes produces other perverse effects for the employer. The Finance Sector Union of Australia (FSU) reports that redundancy has become so common and job insecurity and work intensification so prevalent in downsized organizations, that retrenchment is sought after for the “pot of gold” it can provide. Companies spend time and money convincing workers to accept redeployment rather than retrenchment. Indeed, workers often prefer retrenchment, arguing that their position is not comparable to the previous cue, is not within reasonable commuting distance and alters their contract; some prefer to stick around in case the next restructure delivers the “pot of gold”.

In the current M&A-induced restructuring and industrial relations climate in the financial services sector, all stakeholders have a vested interest in determining practices best able to mitigate the impact of downsizing on workers and the future profitability of their enterprises. No universal solutions exist to successfully merge and downsize – each organization must develop programmes that address the concerns of all its stakeholders, remembering that constant communication with employees is critical. A paper prepared as a background report for the ILO High-level Tripartite Meeting on Social Responses to the Financial Crisis in East and South-East Asian Countries, held in Bangkok in April 1998, reviews some international experience in trying to prevent and limit worker displacement caused by adverse economic conditions. These and other examples culled from various sources are relevant to M&A-related restructuring.

Policies and practices on worker displacement

The way in which the post-merger employment situation develops is largely contingent upon employers’ obligations towards their workers in terms of consultation, information, notification, compensation and redeployment under the laws, culture and practices of the country concerned.

European Union

Adjustment processes in continental western Europe are based on cooperation among the social partners, with strong industrial relations frameworks encouraging “co-determination” in decisions with important human resource implications. European Union regulations provide procedures for informing and consulting employees and the Collective Redundancies Directive (75/129/EEC and 92/56/EEC) requires an employer contemplating collective redundancies to start consultations with workers’ representatives before hard decisions are taken. Trade unions, notably in the United Kingdom, have accused some employers of ignoring these regulations, of rarely providing prior information or of consulting their workers before M&As and accompanying retrenchments are announced – on grounds of secrecy to prevent insider dealing. Takeover codes typically require companies to minimize the risk of information being leaked. Regulations also stipulate that, apart from senior management and their advisers in the companies concerned, inside information should be confined to a very restricted number of persons; however, they allow the companies to decide whom to inform under obligations of absolute secrecy. The takeover panel in the United Kingdom has determined there is no reason why worker representatives could not be included among the “insiders” to comply with employers’ obligations on prior information and consultation.

Japan

Life-time employment has long been considered the standard employment arrangement. Large corporations typically hire workers directly from schools, provide extensive on-the-job training throughout their careers and employ them until they retire. Lay-offs are “acceptable” only if taken as a last resort, when alternative measures such as reduction of overtime, retraining, transfer within the enterprise and among its subsidiaries and networks of companies cannot absorb all the surplus workers. Such requirements are not written in statutes but are established exclusively through court precedents. Courts have held that long-term contracts be assumed by new companies in case of mergers or takeovers and voided dismissals where no consent or consultation with unions had taken place.[70] Current Japanese practice reflects strong social expectations of acceptable corporate behaviour, rather than labour legislation, requiring employers to consult with unions or employee representatives when formulating restructuring plans that might have lay-off consequences. There are growing indications, however, that these traditions are eroding.

United States

The situation in the United States is very different from that in Japan and managers have extensive prerogative to discharge workers under the “employment-at-will” doctrine. Few restrictions exist on how employers may change the level of employment within their firms, creating a constant upheaval in both employment and enterprise markets and greater reliance on the external labour market to absorb redundant workers. Employment security is consequently a major issue in collective bargaining. Although the Worker Adjustment and Retraining Notification Act of 1988 (WARN) tempers the United States tradition of “fire-at-pleasure” by requiring firms with more than 50 employees to give 60 days’ notice of impending lay-offs to workers and the community, there is no stipulation for advance consultations with unions or workers, much less negotiating alternatives or social plans with them.

Canada

The Conference Board of Canada (CBC) has developed guidelines proposing “best practices” in restructuring, highlighting voluntary and involuntary strategies and stressing that planning for the exercise should be aligned with a clear vision of the organization’s future; respect and fairness in dealings with employees; and great concern with communications. The right “mix” of programmes includes: reduction of inward flow of employees; increased flexibility for internal staff redeployment; increased outflow of employees; or a reduction in the cost of incumbent employees. Each of these approaches is dependent upon the particular organization’s culture and desired restructuring outcomes. Practices to avoid involuntary lay-offs include: reducing the inward flow of employees through attrition and hiring freezes; increasing the flexibility of internal transfers, accompanied by training where necessary; providing incentives to increase the outward flow of employees through early retirements, buyouts or lump-sum payments; and business start-up assistance. The CBC suggests additional incentives for departing staff in terms of continued health and life insurance benefits for a period of time and tuition fees up to a defined maximum. Programmes to reduce the cost of maintaining existing workforce levels range from temporary or permanent work-week modifications and leave of absence. Where there is insufficient uptake of voluntary incentives, companies may have to initiate involuntary terminations to meet restructuring objectives within established timeframes. The CBC stresses the need for this downsizing exercise which should revolve around severance packages, outplacement, training and relocation, thereby contributing to an easing of the transition process for both departing and remaining staff. It refers to those organizations complying with “best practices” as those which often exceed the statutory severance requirements in order to reduce the economic and psychological impact on the outgoing employee; provide outplacement counselling to decrease the impact of the job loss by facilitating the grieving process; and assist the exiting employee find meaningful employment or skills training as quickly as possible.

Australia

Proposed mergers of financial institutions in Australia must be authorized by the Australian Competition and Consumer Commission (ACCC) and the Australian Treasury. No explicit provisions exist recognizing the right of workers and their representatives to be involved, except in so far as they are part of an interested public. Section 6.8 of the ACCC’s merger guidelines provides that any interested party may make a submission open for inspection on a public register and there may be provision for a conference of interested parties.

International labour standards relevant
to worker displacement

The ILO Termination of Employment Convention, 1982 (No. 158), and its accompanying Recommendation (No. 166), set out, as a basic principle, that the employment of a worker shall not be terminated unless for a valid reason connected with the capacity or conduct of the worker or the operational requirements of the undertaking. Part III of the Convention relates to consultation of workers’ representatives and to notification to the competent public authority. Paragraphs 21 and 22 of Recommendation No. 166 reflect the principle that when employers are obliged to introduce changes, they should first consider all other possible measures that would allow them to avoid terminations. Measures put forward by the Recommendation aim at reducing the number of workers by voluntary means (early retirement with appropriate income protection, natural reduction of the workforce, internal transfers, restrictions on hiring) and work-sharing (restriction of overtime work and reduction of normal hours of work).

The legislation and collective agreements of many countries provide for the supply of information to workers’ representatives and consultations. These regulations aim at easing tensions created by redundancies and giving the workers’ representatives an opportunity to present their point of view, to make alternative proposals or negotiate on the planned reductions.

Convention No. 158 stipulates that when the employer contemplates terminations for reasons of an economic, technological, structural or similar nature,[71] the employer shall:

Although legislation in the field of collective dismissals varies considerably between countries, much legislation insists on prior consultations with workers’ representatives and the timely communication of information on dismissal to the labour administrative authorities. In many countries, legislation establishes the basic points of this procedure, while inter-occupational collective agreements and framework agreements play a key role and are often supplemented by industrial or sectoral agreements.

5.   Impact of M&As on working
      and employment conditions

A merger or takeover in many ways invalidates the employment contract: the worker is now working for someone else, but without having taken any steps to change employers.[72] It brings home in the most emphatic manner the one-sidedness of the employment relationship and the fact that workers have no control over the decisions of their employer. M&As have sometimes been described as a legitimate means for breaking implicit contracts in order to restructure. The firm is a nexus of implicit and explicit contracts which only work on the basis of trust between managers and workers, itself underpinned by beliefs and assumptions regarding mutual responsibility between employer and employee (the “psychological contract”). Job security derives more from assumptions which M&As have the effect of disrupting. A change of management allows alterations in implicit contracts, facilitated by the fact that change is indeed expected. Rightly or wrongly, M&As can thus appear a deliberate strategy to violate internal norms and as a brute exercise of power. Most importantly, integrating differing company systems and procedures requires harmonization of various aspects of terms and conditions of employment: pay scales, job titles, entitlements and other benefits, job descriptions, reporting and supervisory lines are all subject to revision to ensure common practice in the newly combined organization.

Another important consequence of restructuring is the growth of non-standard forms of employment, variously defined as part-time, temporary or contingent work. An ILO report[73] identifies two basic pressures on enterprises to expand non-standard employment. The first is the pressure to shift labour from a fixed to a variable cost, particularly in countries where collective agreements increase the fixed costs of employment and labour legislation does not cover non-standard forms of work. The second is to shift work away from high-cost internal labour markets to more competitive, lower-cost external labour markets. A third possible pressure favouring the adoption of non-standard work is the introduction of a system of high-performance work organization, with its emphasis on flexibility, responsiveness and just-in-time production. A mid-1990s study in the United States confirmed that companies relied on temporary or contingent workers for the flexibility to respond quickly and effectively to changing market conditions.

Non-standard work is growing in many developed countries. In the United States it now accounts for roughly 30 per cent of employment, with the number of temporary workers having almost tripled since the early 1980s. In Europe part-time work has grown rapidly, especially in countries where it is one of the few ways for employers to avoid the high fixed costs of regular employment. In 1999, almost one in three workers in Switzerland, or 1,139,000 out of 3.9 million, were on part-time. As might be expected, part-time work is largely feminine, with more than one in two women compared to one man in ten. Significantly, 82 per cent of posts with reduced hours are occupied by women. Relative percentages for the Australian finance sector are 29 and six for women and men respectively, while part-time work as a whole in the Netherlands accounts for 39.4 per cent of total employment. In Japan, several factors, including an increased focus on short-term returns rather than the traditional attachment to long-term employment relations, have increased the share of part-time work to 25 per cent of all jobs.[74]

M&As, remuneration and other
compensation issues

Two conflicting aims appear to characterize current practices in financial sector remuneration: the need to reduce labour costs within a context of increasing competition and decreasing profitability and the necessity to compensate and adequately reward employee performance and commitment within an environment of continuous and challenging change.[75] Recent trends in compensation policies are moving towards more contingent, individualized and explicitly performance-based systems, while seeking to retain workers’ loyalty and commitment to organizational goals. This might explain why changes in compensation have tended to be less dramatic than expected compared with both current rhetoric and experience in other industries. The main exception to the industry trend is the United States, where in the absence of a collective wage agreement or any kind of coordination between banks in wage setting, wide differences in compensation levels both between and within financial institutions have always been the rule. Sales-based bonuses, either individual-based (as for lenders in wholesale operations) or distributed – via managers – to branch offices, are the most widespread example of incentives, while commissions have become common for crucial jobs, such as investment advisors.[76]

The gradual sector-wide shift from pay and reward systems based primarily on age and length of service, to one based on job evaluation, has gone some way in recognizing changing employment relationships and providing a common base for establishing pay procedures even after M&As. Trade unions argue, however, that changes to the psychological contract including erosion in job security have been so great as to require a rethink of reward systems. Workers’ most common concerns are linked to what they consider a lack of transparency about the process; a perception that performance assessments are too subjective; and belief that line managers are insufficiently trained to assess performance. The trade unions point to an inherent contradiction between objectives requiring team-based work and performance assessments focusing on individual contribution and call for better balanced individual and team-based rewards. A similar disconnection is identified between performance management schemes and desired productivity outcomes as well as the lack of mechanisms for recognizing consistently good performance, suggesting that pay should be determined by analysing outcomes and employee contributions to their achievement. Many workers believe they are not properly rewarded for embracing changed employment conditions and for their contribution to company performance. A recent survey of over 3,000 employees in a major Australian bank reflects the perception that companies’ reward systems are failing to gain their worker commitment and identification with corporate goals. Nearly 70 per cent felt performance bonuses were unfairly distributed, 67 per cent did not believe there should be salary reductions even if performance declined while 40 per cent did not consider performance appraisals were fairly conducted. Only 27 per cent were even confident they understood the new performance management system. A similar survey of 2,700 employees in another bank revealed that only 18 per cent of respondents believed their employer’s bonus and incentive scheme was well designed and fairly paid.

The introduction of a new performance-related pay system at a bank in the United Kingdom, which led to a strike, underlines the possible consequences of getting the system and process of introduction wrong. Avoiding such problems may require including the principles or processes of performance-based reward systems in enterprise agreements after appropriate consultations with workers’ representatives. Indeed, a recent collective agreement in a major insurance company sets out agreed principles for the creation of a “competitive, equitable and transparent process” and establishes a joint partnership arrangement between the company and the union for the introduction of a new system of job classification and evaluation.

Another area of interest relates to flexible pay and decentralization of the bargaining structure. According to the European Industrial Relations Observatory (EIRO), in the 2000 bargaining round, large employers in the Netherlands have sought more flexible pay systems, while trade unions have opposed virtually all such arrangements. In Sweden, the Finansförbundet (Finance Union – FSU), reports greater orientation towards individualized pay. Banks have instituted bonus and stock-option schemes. MeritaNordbanken, the biggest bank, provides special three-year bonuses for staff it considers indispensable.

Decentralization, which the unions accept to a certain degree subject to continued regulation of pay and working hours at the central level, is also gaining ground both at sectoral level and among larger groups of companies. Employers’ associations consider the simplification of current collective agreements – allowing different issues to be regulated at different levels – necessary to reduce detail and bulkiness. Trade unions are not opposed to the idea in principle, but propose a three-tier structure of economy-wide framework agreements mainly for: occupational social security; sectoral agreements on pay, working hours, job evaluation and other remuneration-related elements; and enterprise-specific issues regulated in consultation with works councils.

Many companies, including financial institutions, believe that converting their workers into shareholders can be an effective tool for employee reward and anti-takeover defence, as worker-shareholders would almost certainly oppose any hostile bids for their enterprise. Banking has a greater tendency than many other sectors to award employees share options through employee share ownership programmes (ESOPs) as supplements to basic pay. ESOPs were very popular in the United States during the 1920s when share prices were rising and Americans widely owned stock.[77] The 1929 market crash and the subsequent depression made shares less popular as compensation. The growth in ESOPs in the 1980s is linked to their significant role in M&As and leveraged buyouts (LBOs). ESOPs have been used in these operations in two main ways: as a financing vehicle for the acquisition of companies, including through LBOs and as an anti-takeover defence. An ESOP-based bid has important tax benefits, helping lower the buyout cost and their voting power can bolster anti-takeover defences. In France, BNP staff hold 3.2 per cent of capital and 4.3 per cent of the company’s voting rights, while those of SocGen own 8.6 per cent and control 12 per cent of voting rights. Employees in the two companies supported the positions of their own respective managements in the 1999 merger battle. Even failed mergers can have immediate effects on pay and other conditions as evidenced by exceptional awards to SocGen’s staff after the company’s successful resistance to BNP’s bid.

Globalization is tending to encourage a convergence in financial services salaries, at least in investment banking. End-of-year bonuses, often paid in a combination of cash, stock-options or stocks, have become generalized. The level of executive compensation, particularly fees and commissions related to M&A services, is itself usually a function of the number and value of deals.

M&As and working time

The link between financial sector concentration and patterns in regular working time is difficult to identify because working-time agreements depend upon the national context and are not limited to the sector under consideration.

Banks’ adoption of the retailing model is encouraging them to adjust their hours to customer requirements, extending opening hours on at least one day a week and even opening some branches on traditionally closed days such as Saturdays – a trend which has aroused strong trade union reactions in a number of countries. It goes without saying that M&As can provide an opportunity for management to opt for more customer-friendly working hours. However, the rapid development of Internet-based direct banking and ATMs – often accelerating and accelerated by M&As – has the opposite effect of reducing the need for longer opening hours.

In Germany, working time was at the centre of an industrial dispute in the banking sector in 1999, when bank employees protested against plans to make Saturday a normal working day. Employers agreed to grant compensatory free time for work on Saturday for incumbents but not for future hires. A number of independent studies conclude that the German banking sector could lose at least 100,000 jobs in the next five years if the current race for critical mass in the sector continues. To balance this trend, HBV (the sectoral trade union) has been pushing for a 35-hour working week in all banking establishments. In France, negotiations on a new collective agreement broke down notably on the issue of working time. Agreements have been negotiated within each financial group, but employers are determined to have the option to increase the use of part-time workers. Between 1947 and 2000, weekly working hours in French banks consistently declined from 45 to 35 hours and in Belgium the trade union umbrella organization, ACV-CSC and the trade union federation, Landelijke Bedienden Centrale-Nationaal Verbond voor Kaderpersoneel (LBC-NVK), report that bank workers have been able to obtain a 35-hour week.

In Australia, the FSU reports that two years after a restructuring and downsizing-related continuous improvement programme in the Commonwealth Bank, 84.8 per cent of surveyed managers reported an increase in their overall workload, while 77 per cent reported an increase in the number of hours they worked. According to the same trade union, unpublished ABS figures also show more than a third of finance workers usually work overtime, without financial compensation for more than a third of them. Close to a million hours of overtime are worked in the sector each week (equal to 25,707 full-time jobs at 38 hours/week or 24,421 at 40 hours/week), reflecting the fact that almost 40 per cent of full-time workers put in more than 45 hours per week (or seven hours more than the normal weekly working time); 69 per cent of these workers receive no pay for the overtime. The union draws attention to the coincidence of such unprecedented levels of overtime and the high number of mergers, restructuring and downsizing that have resulted in the loss of up to 36,000 full-time jobs – close to a 30 per cent drop in employment in consolidating organizations over a period of record profitability. It highlights the incredible pressure on workers to complete tasks, achieve targets and sell products to justify their continued employment.

Across the European Union, average collectively agreed weekly working time stood at 38.6 hours in 1999 – figures that had changed little from the previous year. However, usual weekly hours are on average two hours longer than the collectively agreed norm. Collective bargaining plays a key – though widely varying – role in determining the duration of working time in all Member States; bargaining levels and bargaining coverage vary considerably. Significant differences exist among sectors and between groups of workers. In banking, the longest agreed weekly hours (40) were in Luxembourg and the lowest in Portugal and the United Kingdom (35). Working hours in Belgian, Dutch, Finnish, Greek, Portuguese, Spanish, Swedish and United Kingdom banking were notably lower than the national average, while those in Germany were higher. Overall, the average agreed working week in banking, at 37.6 hours, was lower than the whole-economy average of 38.6 – perhaps reflecting the predominance of white-collar workers who have traditionally had shorter hours than blue-collar workers in many countries. EUROSTAT figures on actual hours worked per week by full-time employees, based on the 1998 Labour Force Survey, are, not surprisingly, generally higher than agreed normal weekly hours across the EU. The excess over normal agreed working time principally reflects overtime. In one group of countries – including most of those with high collectively agreed normal hours – the usual working week is quite close to the agreed normal week: the two figures are within an hour of each other in Belgium, Finland, France, Greece, Italy, Luxembourg and Sweden. In Belgium and Luxembourg, usual hours are actually below agreed normal hours. At the other extreme are countries where usual hours exceed normal agreed hours by two hours or more – Germany, the Netherlands, Spain and the United Kingdom though the gap would be narrower in Germany if the figure included East Germany. The United Kingdom has the largest gap of 5.6 hours between collectively agreed and actual hours – perhaps reflecting that country’s long hours and overtime culture and the low coverage of collective bargaining. The range between the highest and lowest actual weekly hours – 44 in the United Kingdom and 38.5 in Italy – is, at 5.5 hours, considerably wider than for regular agreed hours (three).

M&As as factors of stress and demotivation

A number of studies highlight the close association between restructuring and mass lay-offs and a “survivors’ syndrome”, resulting from the destruction of psychological contracts. Lay-offs and other restructuring processes introduce an element of unpredictability in deep-seated employee assumptions, creating feelings of loss of control, betrayal and unfairness. As staff suppress their anger and mistrust, their negative feelings trigger reactions ranging from generalized stress to demoralization, depression and burnout; these, in turn, lead to decreased productivity and stunt creativity. Managers suffering from their own strain of “survivors’ syndrome” often compound the problem by failing to recognize and respond to it in productive ways. Survivors are not only expected to be grateful for being retained, but to put feelings aside and work harder. Not surprisingly, poor morale due to lay-offs of friends and colleagues and increased job insecurity of retained staff is by far the worst human resource problem in today’s business climate.

Given that successful management of the restructuring process is vital for achieving organizational objectives, managers need to be aware that downsizing is more than a reduction in head count and work reorganization. Terminations destroy the firm’s social fabric as structures are altered, relationships disrupted and work patterns and communication flows modified, making it more difficult for retained staff to do their work. These structural problems may inhibit performance so that staff need help to cultivate new ties, although insufficient attention is usually given to the intricate relationship between the organization’s formal and informal structures. In addition, survivors who are already subject to “survivors’ syndrome” find they have to work harder to cover staffing shortfalls, with the consequence that increased workloads feed the stress related to job insecurity, undermining the very efficiency goals that motivated the merger or acquisition. Job insecurity may make employees feel pressured into agreeing to put extra effort into their jobs to demonstrate organizational loyalty; but such working conditions are neither sustainable nor conducive to the achievement of corporate objectives.

It has been estimated that stress-related problems costs the United States economy approximately $200 billion a year, or the equivalent of the revenues of the 500 most profitable firms. Similar estimates for the United Kingdom show stress-related illnesses absorbing almost 10 per cent of GDP.

Financial sector restructuring around the world has led to a high rate of call centre growth. Research by Deloitte & Touche has found, for instance, that Australia has 1,400 call centres and help-desks employing 50,000 people and annual sales of $2 billion. Staff turnover averages 18 per cent a year mainly due to stress, as confirmed by the fact that 80 per cent of workers are requesting stress management training assistance. The annual cost to the industry from the high turnover has been estimated at around $100 million.

M&As generate high levels of staff anxiety and stress as their working world is turned upside down, their jobs come under threat and their career prospects and professional competence are called into question. Collective defensive mechanisms, especially in hostile takeovers involving previously keen competitors, may lead to a “victor-vanquished” syndrome inducing behaviour inimical to the smooth implementation of changes for successful integration. Employees from each company are aware that there are many duplicated positions to be eliminated and the struggle to survive will be fierce. Trade unions may themselves be at loggerheads as the merger may involve companies recognizing different negotiating partners. Not surprisingly, it is much easier for managers to convince shareholders about the merits of proposed mergers than it is to persuade their own staff.

M&As and job security

A bank or insurance company used to be a place where a worker had a job for life. Not any more. As a 1995 survey on changes at work in Australia found, this is no longer the case: establishments using redundancy as a means of reducing their workforce increased from 49 per cent in 1990 to 74 per cent in 1995. Companies relied less on natural wastage and attrition to achieve desirable workforce levels.

Employment statistics around the world show a declining trend in financial services. This began in the early 1990s in some countries and extended to almost all countries by the end of the decade. Constant restructuring and redundancies have led to a culture of insecurity, which research shows is a key factor in negative worker reactions. According to Tienari,[78] “due to elimination of overlaps, merger procedures unfold as personal and collective survival games for the individuals involved. Merging may present a unique chance to get rid of individuals […] at all managerial levels”. The “re-manning” of what is, in effect, a new organization, may also take place concurrently with a redefinition of jobs and positions as well as changes in the hierarchical ranking of these positions. Not surprisingly, empirical evidence shows that workers everywhere are feeling increasing insecurity in their employment. Companies are restructuring and downsizing more often, increasingly replacing full-time jobs with part time, casual or temporary jobs and outsourcing. Call centres are proliferating, replacing traditional finance jobs.

The same Australian survey refers to the following staff attitudes in downsized firms: 72 per cent reported diminished job security; 53 per cent decreased organizational commitment; 50 per cent a drop in motivation; and 65 per cent reduced staff morale.

Australia’s Bureau of Statistics figures for 1999 show that 685,400 people aged 18 to 64 years had been retrenched on one or more occasions during the three years leading up to 30 June 1997, with only 55 per cent employed again as at 30 July 1997. Many of those not able to find new full-time employment had had to change to part-time work or changed their status from permanent to casual worker. In the United States, Challenger, Gray & Christmas, a Chicago-based personnel-consulting firm that monitors announced lay-off plans, reports that United States companies declared 675,000 lay-offs in 1999 and 678,000 the year before, up from 111,285 in 1989. Not surprisingly, 1998 represents a high point in corporate mergers and integration-related restructuring. Meanwhile, the Bureau of Labour Statistics, whose figures include lay-offs that are not publicly announced, reported a preliminary 1.57 million lay-offs in 1999, though it expected to revise this figure downwards. Even these statistics understate the real dimensions as they include only lay-offs of 50 or more employees at a time.

Employment statistics elsewhere reflect a consistent downward trend in finance sector employment. United Kingdom financial services employment, for instance, continued to rise up to 1990 when it peaked at 1,055,000, slumping to 994,000 by 1997. In the United Kingdom, Manufacturing Science Finance (MSF) estimates M&A-related job losses at 15,000 between 1996 and 1999. During this period, insurance job losses tended to be in back office routine processing functions and home service, involving agents’ door-to-door collection of insurance premiums. Slight offsetting increases were recorded in financial advisory services and customer service fields, as well as call centres. None of these figures provide insight into trends in employment quality, so that the aggregate nature of employment statistics might veil increased replacement of full-time jobs with atypical work. Call centre jobs growth, coinciding with losses elsewhere, tends to support this intuitive conclusion. Given that levels of job reductions are related to merger-induced downsizing, job security has become a key issue in many countries where M&As are common.

6.   Social dialogue in the
      context of M&As

Change is always a source of great uncertainty, tension and potential conflict; and the changes being brought about by today’s widespread economic liberalization and globalization are far-reaching, In principle, social dialogue is increasingly accepted as the machinery best suited to manage the effects of this change and to promote balanced social and economic development by seeking a greater understanding of the conflicting interests of the parties. As stated in the Director-General’s Report,[79] Decent work: “Social dialogue is a powerful tool that has helped solve difficult problems and foster social cohesion ... Developing a reflex for consultation and negotiation takes time and commitment. It also needs social partners that have the capacity and will to engage in the process responsibly and the strength and flexibility to adjust to contemporary circumstances and exploit new opportunities.” In addition to the capacity of social partners, disparities between perception and facts, law and practice and ideologies and realities all determine the effectiveness of social dialogue. Problems may also arise when social dialogue is irregular or brought into play only after decisions have been taken.

In view of their increasing frequency and the extent of the upheaval they cause, M&As are one of the most important issues of today’s labour markets. There is therefore a growing recognition for negotiated framework agreements to provide workers and their representatives with the opportunity to influence in a meaningful manner the strategic decision-making processes relating to M&As.

Prerequisites for effective social dialogue

The viability and effectiveness of social dialogue is contingent upon a social, economic and political climate conducive to this process and upon at least three independent and strong parties willing to cooperate. As the law-maker and watchdog, the State is expected to take an active role, along with employers and workers, in resolving problems of a social and economic nature and in encouraging the creation of an environment and culture of dialogue for the prevention and peaceful settlement of disputes. The role of the State in promoting dialogue is provided in the ILO Consultation (Industrial and National Levels), Recommendation, 1960 (No. 113) and the observations regarding consultation and cooperation between public authorities and employers’ and workers’ organizations at the industrial and national levels, also adopted by the 44th Session of the International Labour Conference in the same year. These instruments stipulate that social dialogue should take place in a spirit of good faith, confidence and mutual respect.

Institutional arrangements for social dialogue

Social dialogue mostly consists of a series of activities ranging from a mere exchange of information and preliminary consultations to negotiations and shared decisions which may result in binding collective agreements, pacts, codes of conduct or charters. It may take place within formal machineries or through spontaneously formed informal bodies representing the different parties. In some cases it may take place in the form of workers’ participation in the decision-making process within an undertaking to deal with areas not normally covered under collective bargaining. Social dialogue operates through works councils and workers’ representatives in management at the plant or enterprise level and through various national level tripartite consultation bodies.

Levels and scope of social dialogue

The issues covered under social dialogue vary according to the level at which they are discussed. Matters related to international law, basic human rights and trade may be examined at the international level; while others such as economic growth and productivity, competitiveness, employment, structural adjustment, labour market flexibility, social policy, training, social security and welfare, wages and remuneration, basic rights at work, gender and working conditions are generally discussed at the national level. Enterprise- or industry-level subjects usually include basic questions of wages and working conditions and other issues specific to the particular industry or enterprise normally covered under collective bargaining. Recent industry- and enterprise- level consultations have focused on competitiveness, productivity and employment protection. A whole host of other matters specific to a region or occupation may be dealt with at any level.

Regional integration, seen as conducive to economies of scale, has been an issue in the formulation of social and economic development policies since the 1960s. In recent years the debate has expanded to globalization and its consequences and driving factors – including economic liberalization and deregulation. Supporters of global integration maintain that it offers the advantages of even greater economies of scale and the possibilities of high levels of specialization, while critics fear it erodes States’ policy-making prerogatives. Globalization is already affecting the social and economic policies of nations, increasing the need for dialogue at all levels.

Institutional machinery for social dialogue, functioning with varying degrees of success, have been established in most regions. The 15-member European Economic Community, the oldest and perhaps the most advanced instance of regional integration, has established an elaborate framework for social dialogue. A Social and Economic Committee on Social Dialogue was set up in 1986 to enable the social partners within the European Union to lay the groundwork for future social policy through council directives. In 1994, a directive was adopted to introduce European works councils in enterprises with at least 1,000 employees in Europe or 300 employees in any two Member States.[80] It emphasizes workers’ rights to information and consultation, as well as the need for an exchange of views and dialogue between the social partners. The recent revision of Community law also creates the possibility of collective agreements at Community level in several areas such as paternity leave and part-time work. The North American Free Trade Agreement (NAFTA) has a complementary agreement on labour cooperation committing the signatories to high labour standards, while the Common Market of the Southern Latin American countries (MERCOSUR) has a tripartite Social and Labour Commission to pursue the implementation of social and labour rights in the Common Market. Similarly, the 15-member Caribbean Community and Common Market (CARICOM) has adopted a Declaration of Labour and Industrial Relations Principles taking into account international labour standards. This provides for cooperation between social partners and arrangements for consultation, cooperation and negotiations between public authorities and the most representative employers’ and workers’ organizations at the local, national or regional levels, as appropriate. Comparable social dialogue mechanisms have been established in Africa at both regional and subregional levels.

Tripartite consultations and agreements on the broad lines of government policies, as well as on socio-economic and labour issues, are widespread at the national level. Many countries have started tripartite institutions aimed at revising labour laws, establishing procedures for settlement of labour disputes and enhancing national social and economic development. The ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up has revitalized social dialogue by committing member States to apply the principles contained in core international labour standards, which are essential prerequisites for effective social dialogue. Social dialogue modalities are usually negotiated and agreed upon in advance. A number of countries, especially in Scandinavia, have concluded “basic agreements” setting out rules and procedures for labour relations. In addition, the agreements establish a structure for labour relations including workers’ representation through shop stewards or councils. In some other countries national tripartite consultations take place within bodies specifically established for that purpose either through legislation (e.g. the economic and social councils in France and the Netherlands) or by agreement (Sweden) within the framework of ad hoc arrangements. In other regions, some countries have adopted tripartism as a means of securing social partners’ focus on institutional cooperation and long-term strategy related to employment, productivity, wages and vocational training. Generally, the State takes the lead in initiating dialogue and encouraging accommodation of interests between social partners in the conception, formulation and execution of national social and economic policies.

Social dialogue at the sectoral and enterprise levels is largely conducted through collective bargaining, usually understood as being a bipartite voluntarist process by means of which the employers and the trade unions negotiate employment conditions and define their relations within a general framework established by the State playing an invisible but crucial role. There is no ideal bargaining level as each has its strengths and weaknesses; the enterprise level is, for instance, the most flexible but it frequently leads to substantial disparities in wages and working conditions among enterprises, while sectoral or branch-level bargaining may create uniformity in wages and conditions that do not easily lend themselves to specific conditions in different enterprises. In general, enterprise-level bargaining has been the rule in North America and Japan, while industrial- or branch-level bargaining has traditionally been dominant in western Europe although it has been losing ground to enterprise-level bargaining over the last ten years. One of the reasons for this is that enterprise-level bargaining tends to be considered better at enhancing flexibility to address problems resulting from today’s fierce competition.

A study on dual commitment in an Australian bank[81] concludes that where management accepts the role of the union and is willing to promote the development of trustful and cooperative industrial relations, it is rewarded with improved organizational performance in terms of higher productivity and lower absenteeism. The explanation for this appears to lie in the “collective voice” provided by unions. It is widely understood that effective dialogue can help reshape management practices and organizational rules thereby enhancing productive performance. This makes the processes of conflict resolution fairer and more transparent since employee concerns and preferences are conveyed to management in a more orderly and effective fashion. Specific areas of discontent and concern can be raised and more effectively resolved, improving the match between employee interests and employer policies.

Overcoming M&A challenges through
social dialogue

A 1999 study by Andersen Consulting concluded that although the speed and degree of integration are the two questions which contribute most to the success or failure of a merger, it is difficult to achieve in practice. Top executives, not to mention ordinary workers, of the target firm are usually destabilized by being acquired and need to feel secure quickly if integration is to succeed. The blending of management teams depends on inter-firm mobility, training and homogeneity in management practices which facilitate or impede the forging of a new, shared corporate culture. The study found that in reality teams take much longer to integrate, with the rapidity dependent on social aspects, particularly if the merger involves closures and redundancies. A similar study[82] by KPMG identifies the first 100 post-transaction days as the period most critical to value creation. It is also the time of most anxiety and uncertainty for both acquirer and target because everyone expects change but is unsure about the form it will take.

Merger implementation involves tricky management and personnel issues: sales forces must be integrated, management responsibilities redefined, facilities combined and employees fired or relocated. Some managers believe there are good reasons why these issues cannot be completely aired beforehand, including the fact that individuals with the information might try to sabotage deals for fear of their jobs. Others have argued that prior disclosure might increase the probability of insider trading and lay the company open to expensive time-consuming investigation from securities authorities. Unions counter that neither of these arguments stand; the right to consultations and information enshrined in legal provisions does not nullify management’s decision-making prerogatives; neither has there been any evidence of union representatives breaching confidentiality. Countries such as the Netherlands, where a code exists between the social partners and the Dutch Stock Exchange, are given as an example where confidentiality rules and information and consultation rights can be balanced without problem.

Although the Nordic region has witnessed the most intensive M&A-driven consolidation in Europe, the Confederation of the Nordic Bank, Finance and Insurance Unions (NFU) reports satisfaction with the way the mainly cross-border process has developed, even though there may have been some underestimation of its negative consequences. NFU believes the alternative – in-market mergers entailing widespread rationalization and massive lay-offs – would have been a much worse prospect. Workers and their representatives elsewhere, even in some countries where the legal obligation for information and consultation exists, complain that they are generally not informed or informed only after M&As involving their employers have actually occurred. And yet the Nordic consolidation illustrates that worker involvement can contribute decisively to the successful integration and achievement of merger objectives. Post-merger social dialogue, bringing together management and all the unions in the merging companies, is effective in helping to dispel the uncertainty and reduce the risks of eroding the industrial relations environment. The opportunity for both sides to get to know each other better and to collaborate on harmonization plans for the integrated organization signals staff that their interests will get adequate consideration in the new regime.

Under the principle of “co-determination” in many Nordic countries, staff have a right to influence corporate strategies, based on their right of representation on the corporate board, shop stewards’ right to express the employees’ interests and state their points of view to management and the right of employees to be informed of and to influence management decisions. Employees in all the countries, except Iceland, have a statutory right to a seat on the boards of companies with more than a certain number of employees. In Denmark and Sweden, this right embraces employees in parent-subsidiary corporate structures. Financial sector basic agreements in all the countries specify procedures for company-level co-determination. Such agreements, widespread at corporate levels in Norway, Sweden and Finland, but less common in Denmark, specify the type of questions to be discussed between the local union and management and the structures and procedures for doing this. In Norway, Denmark and Finland, discussions normally take place in specially elected bodies. In Sweden co-determination operates directly between local union representatives and management.

Co-determination does not require managers and employees to agree on specific issues and thus avoids giving employees a veto over management decisions. The system’s fundamental logic nevertheless provides for the right to be informed of management plans and to state opinions before they are implemented. Furthermore, it allows significant freedom to develop bipartite solutions adapted to corporate strategies and market positions.

MeritaNordbanken and other Nordic financial firms provide an excellent illustration of how the system works. In addition to an employee representative from both Sweden and Finland on the company board, a Nordic works council provides a forum for three union representatives from each country to meet top management approximately once a month. Given the high degree of transnational integration of activities and the fact that the two component banks are on an equal basis, employees’ representatives are substantially involved in decision-making processes at different levels. There is also a Swedish-Finnish union agenda for joint action. In some cases, however, cross-border mergers can sometimes have substantial unequal effects on employees’ chances to participate in decision-making processes. In Skandia, a Nordic works council existed in the early 1990s but was subsequently disbanded and was replaced by a European works council 1999 that includes employee representatives from outside the Nordic countries – although only Swedish employees are represented on the board. Co-determination structures in Skandia have been heavily affected by the founding of a new Nordic insurance corporation, If, which has merged the company’s non-life insurance activities with those of Norway’s Storebrand and Finland’s Pohjola. If employees from Sweden, Finland and Norway are represented on the central executive committee. Skandia has tried to develop a high degree of Nordic integration and employee involvement, but the unequal size and position of the parent company and the subsidiaries have resulted in cleavages between the corporate unions in the three countries and between the employees in Norway and Denmark and top management in Sweden.

In Denmark’s Den Danske Bank, the purchase of banks in Norway and Sweden has resulted in a feeling of loss of influence for employees in those countries who no longer have top-level representation in the parent company. There are efforts by company unions in the three countries to establish a European works council although top management prefers to deal with employee issues at the national level and does not see much relevance in a transnational co-determination body. Only Danish employee representatives are included on the board which probably explains the fact that the bank’s regional integration is considered poor. NFU has set itself the immediate task of systematically developing connections between unions in different national companies as a platform for building transnational co-determination structures and, in the long-term, equal representation for employees in all national companies in all transnational decision-making processes.

Elsewhere in Europe, the merger in France among AGF, Athena and Allianz France in 1998 saw management of the newly integrated company encouraging collaboration among unions of the constituent organizations with which it then negotiated a common agreement establishing a single works council to harmonize working conditions and facilitate mobility within the merged structure. Failure to consult unions may have negative consequences for merger proposals. Some observers have concluded that trade union opposition may have played a significant role in blocking the proposed three-way merger among SocGen, BNP and Paribas. The major trade unions (CFDT, FO, SNB-CGC and CGT) agreed a common stance accepting that the banking sector could not remain static in today’s competitive situation but calling for the change process to be based on social partnership and cooperation rather than through aggressive market-based takeover manoeuvres. Current draft legislation will require bidders to explain their strategic orientation, including social aspects, to the target company’s works council or be deprived of their shares’ voting rights in the target company.

The Netherlands illustrates the increasing weight of M&As in collective bargaining. The trade union, De Unie, Vakbond voor industrie en dienstverlening, reports that since the mergers between ABN and AMRO and NMB with Postbank to form ING Group, the differences among the three major banks (ABN/AMRO, ING and Rabo) have deepened. It has become increasingly difficult to agree upon a common collective agreement each year. ING, a financial conglomerate, poses particular problems because the group is subject to the collective agreement for the banking sector (with an average 36 working hours/week) and the collective agreement for the insurance industry (38.4 working hours/week). As a consequence, integrating the two sides of the group has been difficult. Employers have been examining the possibility of company-level agreements rather than sectoral collective agreements to overcome such problems and in January 2000, ABN/AMRO, Fortis, ING, Rabo and SNS/Real announced a decision to have individual company agreements which will cover 90 per cent of banking staff. The remaining banks – employing only a total of 10,000 staff – will continue to be subject to a sectoral collective agreement.

Trade union action

Finance sector trade unions generally accept the inevitability of M&As and sectoral consolidation, arguing that a cooperative rather than an adversarial industrial relations climate is necessary. Effective unions reshape and enhance management practices that lead to improved organization performance and help create conflict resolution processes that are fair and transparent. Social dialogue should provide employees with the means to air grievances on the changes in the sector and give them the opportunity to be heard. Trade unions, rather than individual workers, have an industry-wide perspective enabling them to develop essential links with other stakeholders and to temper management excesses. A major goal of trade unions is to convince employers and markets of the need for financial institutions to look further than cost-income ratios as the basis for ascertaining success. They argue that, for the financial sector to prosper, institutions must not only invest in their human capital but also work within their communities to be good corporate citizens.

Trade union strategies are evolving in tandem with developments in the general world of work and those specific to the sector. Global alliances and mergers among trade unions have increased with the acceleration in M&As around the world, a good example of which is the creation of a new international trade union confederation, Union Network International (UNI), comprising workers’ organizations in financial services, posts and telecommunications and media and publishing. The new organization covers a total of more than 900 trade unions representing 15 million members in 140 countries. The new organization has adapted information technologies as a major tool. When a strike broke out in the HSBC in Malaysia, for example, UNI members worldwide were kept informed of developments by Internet so that they could add their pressure on management through local action. Negotiations between the company’s global management and local and international union representatives for a final settlement of the dispute were carried out via teleconferencing. UNI played an equally important role in negotiating a consultation and information agreement between Barclays Africa and trade unions in the region, on the model of the European works councils.

Trade union mergers and other cooperative combinations are also developing at the national level to strengthen workers’ influence. The United Kingdom’s UNIFI, with approximately 190,000 members, is a result of a merger among BIFU (Banking, Insurance and Finance Union), NatWest and Barclays’ unions. In Germany, HBV (commerce, banking and insurance) and its 470,000 members has joined forces with DAG’s banking sector employees (480,000) and a part of those of ÖTV (transport and services, 1,580,000 members). These trade union amalgamations are a response to consolidation among enterprises in the sector. In addition, the three unions plan to merge with IG Medien (media and culture – 185,000 members) and the DPG postal trade union – 475,000 members in 2001 to form a single service sector union. Although most German unions remain attached to the principle of industrial-branch organization, convergence among different sectors is influencing trade union organization. In Italy, similar consolidation is considered unnecessary since unions usually act in unison when required.

In addition to the above intra-union developments and political action aimed at ensuring social considerations in M&As and restructuring processes, alliances have been developed with community and civil society organizations and other pressure groups at local, national and international levels, to highlight possible negative consequences of corporate combinations and financial sector consolidation.

The role of the ILO

The ILO tripartite meeting on the social effects of structural change in banking of 1993 called on the ILO to promote the application of all relevant international labour standards, particularly the Freedom of Association and Protection of the Right to Organise Convention, 1948 (No. 87) and the Right to Organise and Collective Bargaining Convention, 1949 (No. 98), in the financial services sector. Dialogue and cooperation between the social partners on human resource developments and other matters emanating from the rapidly changing and increasingly global environment that impact employment and labour relations were to be encouraged and information on topics of interest to the sector (e.g. the extent of overtime and its relationship to employment; working patterns and the terms of employment and conditions of work of banking and finance sector workers) were to be collected and disseminated.

As discussed in the report, M&As in the financial services industry may have a substantial negative impact on jobs beyond the net effect on financial sector employment, particularly if access to credit is substantially reduced for small- and medium-sized enterprises. A growing number of countries now consider that supporting and fostering SMEs is essential for promoting employment. Although the Employment Policy Convention, 1964 (No. 122), was adopted long before the current merger wave struck the financial markets, it has many important potential contributions to make to minimize the negative impact of M&As on employment. The most important features of the Convention are the stress it places on an integrated approach to developing employment policies. Responsibility for employment extends to all government departments, including ministries of finance, who are obliged to work together and to ensure that the impact of their respective policies promotes rather than diminishes employment. The Convention also advocates consultation with workers’ and employers’ organizations, stressing that any policies formulated should be appropriate for all parties concerned.

The ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, adopted by the Governing Body in 1977 and the associated ILO programme of promotional activities, technical assistance and advisory services, is similarly relevant to M&As in banking and financial services. As this report suggests, although the overwhelming majority of M&As are presently in market, it is expected that, as domestic market consolidation is completed, cross-border combinations and thus the role of multinational enterprises (MNEs) in the process will increase in relative importance. The Declaration urges governments, the MNEs and the workers, as equal partners in this triangular relationship, to assume commensurate responsibilities in order to ensure a peaceful industrial relations climate as a foundation for labour and social peace. It further calls upon MNEs, when they are considering changes in operations (including those resulting from mergers and takeovers) which would have major employment effects, to provide reasonable notice of such changes to the appropriate government authorities and workers’ representatives so that the implications might be jointly examined to mitigate adverse effects to the greatest extent possible. This is particularly important in the case of the closure of any entity involving collective lay-offs or dismissals.

7.   Summary and suggested
      points for discussion

Mergers and acquisitions (M&As) are driving most profit-making sectors towards consolidation and concentration and nowhere is this more true than in the financial services sector. The report examines the key facts and characteristics of this trend: developments in various regions; different aspects of the employment dimension; practices to manage human resources in the context of M&As integration and restructuring; implications for sectoral remuneration and other compensation issues; working time; and consequences for employee training, motivation, work-related stress and job security. The scope, institutional framework and potential for social dialogue in preserving harmonious industrial relations in the context of M&A-related employment losses are highlighted, as is the role of the ILO and international labour standards.

General trends, characteristics and
driving factors in M&As

Financial services support employment directly by providing high-quality jobs and indirectly through their pivotal role in maintaining credit to other sectors. A well-functioning sector is crucial to a national economy’s well-being and to international economic growth. The volume and monetary value of M&As reached exceptional levels in the 1990s, contributing to the growing trend towards sectoral concentration; this resulted in a steep decline in the number of financial service establishments, distribution outlets and staff levels. While the process is truly global, developed countries are the most affected by these developments. Although M&As remain overwhelmingly national in scope, increased cross-border operations are expected as internal market consolidation is completed. Diverse factors have been cited as the drivers of the consolidation process in the financial services sector, including: shareholder-value maximization, as well as efficiency and synergy goals; deregulation, liberalization, privatization and integration of markets; need for size and adequate resource bases; new technologies; and, most importantly, increased competition.

And yet, most research confirms that two-thirds of M&As fail to achieve their objectives for various reasons. The benefit of size and economies of scale are usually nullified by increased complexity and losses related to top-heavy organizations, while the difficulties of adequately blending cultural and other human factors in the integration of the combined enterprise are often underestimated. Internet banking is also challenging physical size approaches. Those in support of M&As emphasize that they contribute to greater enterprise efficiency, profitability and – by extension – increased economy-wide employment, arguing that the examination of their overall impact should not be limited to the level of the individual firm. Critics dispute both efficiency and employment benefits, however, pointing to the immediate job reductions that go hand-in-hand with M&A announcements. They also stress the inevitable decline in sectoral competition and service from greater concentration, leading to reduced credit support to small and medium-sized enterprises’ employment generation.

Employment effects

Employment in the financial services is in general decline, although the trend cannot be solely attributed to the effects of M&As. Other factors, such as greater competition, increased use of information and communication technologies (ICT), financial distress and rationalization unrelated to M&As, but sometimes facilitated by it, are all contributory factors. Nonetheless, the fact that M&As are invariably accompanied by announcements of job reductions, sometimes on a massive scale, establishes an unambiguous link between M&As and the decline in employment in popular perceptions and in the view of some analysts. For instance, conservative estimates indicate that at least 130,000 finance jobs have disappeared in western Europe as a result of M&As during the 1990s. Ascertaining the precise effects is complicated by the fact that official statistics on banking and financial services employment include an ever-increasing number of workers in atypical employment. Because rationalization mostly affects such operation areas as bank branch networks and the lower hierarchical levels which are highly feminine, there are grounds to believe that M&A-related effects of enterprise restructuring are gender-differentiated and may be arresting or even reversing progress in affirmative programmes.

Although employment gains in these areas do not in any way compensate for the greater losses generated by M&As in financial service employment, M&As do generate jobs in specific financial specialities: investment bands and other enterprises involved in M&A advisory services and financing. Employment in call centres has also increased as jobs have been shifted from more costly branch networks and other traditional financial services distribution outlets, although the quality and remuneration of these new jobs may not be comparable with those they replace. A number of studies also show an inverse relationship between the size of a financial institution and its loan portfolio to small and medium-sized enterprises, considered the highest generators of employment worldwide. However, it is difficult to determine with any precision the effect of this overall employment. Nor is it possible to assess from currently available data the exact contribution of the sector to inducing employment in other sectors through its purchasing power as well as that of its employees.

Working and employment conditions

A merger or takeover upsets the links between implicit and explicit contracts in a company based on trust between managers and workers, themselves founded on beliefs and assumptions regarding mutual responsibility between employer and employees. Integration also requires harmonization of various aspects of terms and conditions of employment to ensure common practice in the combined organization that may change existing human resource management practices of either or both organizations.

Two conflicting aims appear to characterize current practices in financial sector remuneration: the need to reduce labour costs within a context of increasing competition and decreasing profitability; and the necessity to compensate and adequately reward employee performance and commitment within an environment of continuous and challenging change. Contingent, individualized and explicitly performance-based reward systems are on the increase, but changes in compensation have tended to be less dramatic than expected compared with both current rhetoric and experience in other industries – perhaps because of the need to retain workers’ loyalty and commitment to organizational goals in a highly competitive business environment. Sales-based bonuses and commissions are the most widespread types of incentives and banking has a greater tendency than most sectors to award employees share options as supplements to basic pay. Nevertheless, workers express concern at what they consider is a lack of transparency in reward systems and an apparent contradiction between objectives requiring team-based work and performance assessments focusing on individual contribution. The workers are calling for better balanced individual and team-based rewards. Similarly, trade unions argue that changes to the psychological contract, including erosion in job security, are not adequately reflected in enterprise reward systems.

Reduced job security, increased workloads, anxiety and stress are other important consequences of heightened M&A activity. Given the demise of the lifetime employment tradition in the financial services, it is argued that the responsibility of employers has shifted to providing their workers with portable skills, not just to facilitate greater employability in order to assuage job insecurity but also because their enhanced skills are an essential competitive tool for the enterprise. As financial service operators reduce their headcount and expand their operations, workloads, overtime and work-related stress have increased. The effects on survivors of M&A-related downsizing have sometimes been lowered morale and a deterioration in organizational performance – so essential to today’s highly competitive markets.

Social dialogue

Social dialogue is increasingly accepted as the best means to manage the effects of fundamental changes in the contemporary world of work by seeking to balance conflicting interests. It is contingent upon a social, economic and political climate conducive to this process and upon independent and strong parties willing to cooperate. Social dialogue at different levels can be an effective tool in meeting the challenges associated with M&As and financial sector restructuring. Merger implementation involves sensitive management and personnel issues with far-reaching impacts on workers’ rights. Financial sector workers generally accept the inevitability of M&As, but argue that a cooperative approach – including fulfilment of management obligations to inform and consult their staff or their representatives before M&A decisions are taken – would preserve harmonious industrial relations that are so vital to enterprise productivity. M&As’ experience in jurisdictions with cooperative labour-management traditions, including through co-determination arrangements, seems to confirm the case for active social dialogue on enterprise changes and restructuring. Employee perceptions on the fairness of restructuring-related lay-offs seems to have significant implications for post-merger organizational commitment and performance. No universal solutions exist to guarantee successful mergers and each organization must develop programmes that address the concerns of all its stakeholders. However, constant communications with employees and the involvement of worker representatives in the entire M&A process, thereby reassuring staff that their interests will be taken adequately into account, are critical success factors.

Suggested points for discussion

Taking the foregoing report into account, the following list of points is offered as a basis for discussion to enable the Meeting to develop and adopt appropriate conclusions on the matters it considers of primary importance. The  Meeting is, of course, free to modify this list as it sees fit.

1.    General aspects of M&As

2.    Employment

3.    Working and employment conditions

4.    Training

5.    Social dialogue

6.    ILO action


[1] The changing landscape for Canadian financial services, research paper prepared for the Task Force on the Future of the Canadian Financial Services Sector (Ottawa, McKinsey and Company, Sep. 1998).

[2] UNCTAD: Impact of cross-border mergers and acquisitions on development and policy issues for consideration, note by UNCTAD secretariat (TD/B/COM.2/EM.7/2, 8 June 2000).

[3] ILO: Decent work, Report of the Director-General, International Labour Conference, 87th Session, Geneva, 1999, p. 1.

[4] Australian Bureau of Statistics: Finance (Canberra), ref. 5611.0, 1999.

[5] KPMG: Unlocking shareholder value: The keys to success (London, 1999).

[6] A.N. Berger et al.: Journal of Banking & Finance, Vol. 23 (Elsevier, Netherlands, 1999), pp. 135-194.

[7] S. Sinclair: Bank mergers and consumer protection in British Columbia, prepared for the British Columbia Task Force on Bank Mergers (1998).

[8] A. Berger et al., op. cit.

[9] S.A. Rhoades: “The efficiency effects of bank mergers; an overview of case studies of nine mergers”, in Journal of Banking and Finance (Elsevier, Netherlands, 1998), Vol. 22, pp. 273-291.

[10] BBC News Online: Banking on size to compete (http://news.bbc.co.uk, 7 Feb. 2000).

[11] A. Berger et al., op. cit.

[12] The impact of bank mergers and acquisitions on small business lending, a conference report prepared by the Office of Economic Research of the United States Small Business Administration’s Office of Advocacy (Washington, DC), Oct. 1997.

[13] Finance Sector Union (FSU): submission to the ACCC regarding the proposed merger between Commonwealth Bank and Colonial Bank (Melbourne, FSU, 2000), p. 6.

[14] ibid.

[15] R. Watts: “The web of deceit? How safe is internet banking? Could a hacker clear your account?”, Telegraph (London), website: www.telegraph.co.uk, 19 July 2000.

[16] ibid.

[17] G. Trefgarne: “Internet bank fails as Russian founders vanish with funds”, Telegraph (London), website: www.telegraph.co.uk, 9 Aug. 1997.

[18] M. Peterson: “Europe’s New Fusion: As cost-cutting fades abroad, FIG bankers focus on Internet growth strategies to drive bank mergers”, in The Investment Dealers’ Digest (New York), 27 Mar. 2000.

[19] M. Goorey: “Merger disruption”, in Global Finance (New York), Sep. 1999.

[20] L. Booth: What drives shareholder value, presented at the Federated Press “Creating Shareholder Value” Conference, University of Toronto, 28 Oct. 1998.

[21] Financial Times (London), 10 Aug. 1998.

[22] K. Smith: “The revenue chase”, in Banking Strategies (Chicago, 1999).

[23] A. Bolger: “Strange alliances spawn huge deals”, in Financial Times (London), 26 May 2000.

[24] ILO: Social effects of structural change in banking, Tripartite Meeting on the Social Effects of Structural Change in Banking, Geneva, 1993.

[25] G.A. Hanweck and B. Shull: “The bank merger movement: Efficiency, stability and competitive policy concerns”, in Antitrust Bulletin (New York, 1999).

[26] European Commission: Financial services: Implementing the framework for financial markets, action plan, Communication of the Commission (COM(1999)232).

[27] Section 6 of Act No. 287 of 10 October 1990: Norme per la tutela della concorrenza e del mercato (standards to protect the market and competition).

[28] WTO: “Trade and competition policy” in Annual Report 1997, Chap. 4, Vol. 1 (Geneva 1997).

[29] “New media, new rules”, in Financial Times (London), 4 July 2000.

[30] M. Peterson: “Europe’s New Fusion” in Investment Dealers’ Digest (New York, 27 Mar. 2000).

[31] ibid.

[32] F. Rwambali: “NBC to declare redundancies”, in The EastAfrican (Kenya, The Nation Group), 22 May 2000.

[33] Jeune Afrique – L’intelligent (Paris), May 2000, No. 2054, p. 65 and p. 92.

[34] ILO: Social effects of structural change in banking (Geneva, doc. TMB/1993), p. 22.

[35] OECD: “Highlights of recent trends in financial markets”, in Financial Market Trends (Paris), No. 76, July 2000.

[36] ILO: Progress report on the country studies on the social impact of globalization (Geneva, doc. GB.274/WP/SDL/2, 1999), p. 16.

[37] G. Graham: “An uncertain footing”, in Financial Times (London), 10 Jan. 2000.

[38] European Industrial Relations Review (London), No. 293, p. 8 and No. 316, p. 7.

[39] The Economist (London), 2 Sep. 2000.

[40] Article L.122-12 of the French Labour Code as amended on 28 Jan. 1981.

[41] A. Leyshon: Financial services mergers and acquisitions: Consumer impacts, report submitted to UNI-Europa 2000.

[42] The McKinsey Quarterly (New York), 1999, No. 3, pp. 26-35.

[43] S. English: “Job losses take toll on UK sales at Prudential”, in Electronic Telegraph, 28 July 2000.

[44] K. Janacek and V. Tomsik: Development of the banking and financial institutions in the Czech Republic, study for the ILO, 2000.

[45] A. Berger, R. Demsetz and P. Strahan: “The consolidation of the financial services industry”, in Journal of Banking & Finance (Amsterdam, Elsevier), No. 23, 1999, pp. 138 and 141.

[46] ILO: Social effects of structural change in banking (Geneva, doc.TMB/1993), p. 22.

[47] ILO: Training for employment: Social inclusion, productivity and youth employment, Report V, International Labour Conference, 88th Session, Geneva, 2000.

[48] Study prepared by P. Dungan of the University of Toronto’s Institute for Policy Analysis, for the Canadian Bankers’ Association, 1997.

[49] S.A. Rhoades: “The efficiency effects of bank mergers: An overview of case studies of nine mergers”, in Journal of Banking and Finance, No. 22 (1998), pp. 273-291 (Amsterdam, Elsevier).

[50] E. Blaustein and M. Dressen: Recherche de la productivité et rentabilité dans le secteur bancaire: Théories, pratiques et conséquences sur la gestion des resources humaines (France et Etats-Unis), Sectoral Activities Programme, SAP 4.38/WP.96 (Geneva, ILO, 1995), p. 31.

[51] The Economist (London), 26 Aug. 2000.

[52] Agreement on the job reduction process in connection with the merger of SBS and UBS signed in Basel and Zurich on 30 Jan. 1998.

[53] Study prepared by P. Dungan of the University of Toronto’s Institute for Policy Analysis for the Canadian Bankers Association, 1997.

[54] Financial Times (London), 8 May 2000.

[55] J. Laufer: Egalité des chances entre les homes et les femmes des categories cadres et professionnelles (Etude comparative concernant quatre pays européens: Belgique, Danemark, France et Pays-Bas), Sectoral Activities Programme, SAP 4.39/WP.102 (Geneva, ILO, 1997), p. 16.

[56] G. Collins and J. Wickham: Experiencing mergers: A woman’s eye view, paper presented at the 18th Annual Labour Process, 25-27 April 2000, University of Strathclyde.

[57] ibid.

[58] S. Quack and B. Hancké: Women in Decision-Making in finance, paper prepared in cooperation withthe European Network “Women in decision-making”,  for use by the European Commission, 1997.

[59] United States Department of Labor, Bureau of Labor Statistics: Employment and earnings (January 1996), in ILO: Breaking through the glass ceiling: Women in management, Sectoral Activities Programme, TMWM/1997 (Geneva 1997), p. 21.

[60] J. Tienari: Through the ranks slowly, studies on organizational reforms and gender in banking  (Helsinki School of Economics and Business Administration, 1999).

[61] ibid.

[62] M. Regina, J. Kitay and M. Baethge (eds.): From tellers to sellers: Changing employment relations in banks (Cambridge, Massachusetts, the MIT Press, 1999), p. 3.

[63] ibid.

[64] ibid.

[65] CEDEFOP: The impact of new technologies in occupational profiles in the banking sector, case studies in Luxembourg, the Netherlands, the United Kingdom and France (European Centre for the Development of Vocational Training, Thessaloniki, 1998), p. 10.

[66] T. Beck (Joint National Secretary, Finance Sector Union of Australia): Identifying and evaluating potential and rewarding performance: A union perspective.

[67] ILO: Training for employment: Social inclusion, productivity and youth employment, Report V, International Labour Conference, 88th Session, Geneva, 2000.

[68] ibid.

[69] KPMG: Unlocking shareholder value: The keys to success, op. cit.

[70] C. Evans-Klock et al.: Worker displacement: Public policy and labour management initiatives in selected OECD countries, Employment and Training Papers, 24 (Geneva, ILO, 1998).

[71] The definition of “economic, technological and similar reasons” varies depending on the country concerned and commonly takes into account situations such as plant closures, suspensions, production difficulties or cut-backs, phasing-out of industrial processes, changes in procedures or jobs, readjustments and restructuring, which are all reasons unrelated to the employees themselves.

[72] G. Collins and J. Wickham, op. cit.

[73] ILO: Training for employment: Social inclusion, productivity and youth employment, Report V, International Labour Conference, 88th Session, Geneva, 2000, p. 9.

[74] S. Inove: Japanese trade unions and their future: Opportunities and challenges in an era of globalization (Geneva, ILO, International Institute for Labour Studies, 1999).

[75] M. Regina, J. Kitay and M. Baethge: From tellers to sellers, op. cit., p. 19.

[76] ibid.

[77] P.A. Gaughan: Mergers, Acquisitions and Corporate Restructuring, second edition (New York, John Wiley and Sons, 1999).

[78] J. Tienari, op. cit.

[79] ILO: Decent work, op. cit., p. 39.

[80] Directive 94/45/EC, Sep. 1994.

[81] S. Deery and R. Iverson: Intercedents and consequences of dual and unilateral commitment: A longitudinal study (University of Melbourne, 1997).

[82] KPMG: Merger and acquisition integration: A business guide (London, 2000).


Updated by AV. Approved by JS/CDH. Last update: 24 February 2003.