In a press ann-ouncement around the same time, the Boards of DFCC and NDB said that there was no definite decisions on any aspect of such consolidation and that final decisions would be dependent, amongst others, on arrangements being agreed keeping paramount the interests of customers, employees (which in the case of DFCC include those of DFCC Vardhana Bank) and other stakeholders of the banks. Moreover, consolidation of the two entities will be dependent on regulatory approvals.
The Boards of Directors of DFCC and NDB also assured its shareholders, employees, the regulatory authorities and the investing public that they would be kept informed of the progress in connection with the proposed transaction as and when necessary. Then a few days ago NDB and DFCC announced they have jointly hired Boston Consulting Group India to advise the banks on the amalgamation process.
In business, companies generally merge for the following reasons;
To get key talent, knowledge, and technology
For market dominance or economies of scale
Vertical mergers for efficient channel control
Hybrid mergers for spreading risk, cutting costs, creating synergies, or could also be a defence mechanism to survive against competition
Survival by developing critical mass
Acquire a bigger asset base to leverage borrowing
Top line growth objective
Adding a core competency to provide more combinations of products and services
The big picture
Therefore, what is the declared rationale for the merger? Essentially, to create a bigger asset, that makes sense, if it is to expand their base markets and to become large enough to make larger transactions and also to increase the capacity to carry more debt.
On paper, the three entities combined using the pooling of interest method will create an entity the size of Sampath Bank. Total assets will be in excess of 385 billion. PAT would easily go over six billion. In addition, the three entities combined have a market cap of 79 billion, around 3% of the total market. The DFCC combined market cap is clearly more than NDB. However, valuing firms are complex, because the valuation often involved issues like synergy and control, which go beyond the value of a firm.
Delivering a clear strategy
Then at a strategic level, given that DFCC is a pioneer in the development banking space and NDB is clearly in the commercial banking space, the way forward would be to manage these two entities as two separate divisions within a single structure to retain the specialised skills in long-term project lending and to cull out the best in both cultures and processes of each SBU to ensure the merger does not become messy and difficult to manage, the folding-in of the divisions can happen once the synergies can be seen and measured by results.
The services (HR, marketing, IT and data sharing) then could be delivered through a shared service centre at HQ level and the cross selling efforts can work through the shared service centre. The challenges faced in the process of integrating the workforce in both entities without a clear rationale for the merger at each company level to the parties affected are many and complex.
While one would expect that a merger would bring about the desired growth, a majority falls short of their goals and objectives. While some failures can be explained by financial and market factors, a substantial number can be traced to mismanaged human resource issues and processes.
“On paper, the three entities combined using the pooling of interest method will create an entity the size of Sampath Bank. Total assets will be in excess of 385 billion. PAT would easily go over six billion. In addition, the three entities combined have a market cap of 79 billion, around 3% of the total market.
The DFCC combined market cap is clearly more than NDB. However, valuing firms are complex, because the valuation often involved issues like synergy and control, which go beyond the value of a firm”
People are the key to making a merger work, and it is the HR-related problems like cultural ignorance, leadership/management disputes, loss of key talent and the inability to manage change which are the basic reasons why mergers fail to deliver the desired results.
Any merger has a profound effect on the people of both companies, and managing this impact is an important part of managing a successful transition to a unified leadership, business model, and finally to create the new organisation.
A lesson from the SmithKline and Glaxo Welcome merger in 2000, was that the new entity, right from the beginning, must set the tone for long-term and not short-term success for the new company. Therefore, for a successful merger, firstly in the pre-deal stage, it is the organisational design (realise the vision of the merger) that needs focus, particularly assessing and selecting the right leadership talent.
Remuneration also plays a key role and needs to be considered from a multiple perspective to identify the impact on employer, employee, and cost. Maintaining and building morale and loyalty and treating people fairly are the other areas in this stage that plays a significant role.
In the post-deal stage, it is the responsibility of the new board, the new CEO and HR to plan and manage the integration process to ensure a successful integration. To do that effectively, HR needs to manage employee communication, manage the change and the new culture, focus on talent retention and selection, integrate the HR functions, integrate pay and performance and also leadership development.
By managing this effectively, the new entity would be able to engage employees in productive work and keep their motivation/commitment levels at the highest possible levels to achieve the desired goals and also retain the key talent needed to manage the merged entity.
Combining an entity to create a bigger asset and for financial synergy may be good reasons for the merger, provided the people running the show appreciate the deal and know they are getting a decent deal.
Bank mergers generally create a lot of stress for employees, customers and shareholders. Stakeholders who are happy with the services that their bank provides are often less than enthusiastic about the changes that come from such mergers when they become messy and would look for other options outside the new entity and the new could lose market share instead of gaining it.
(The writer was a Bank Director from 2003 to 2014.)