New York. -- A kindly preliminary round in the cruel business of merging banks was much in evidence during the past few weeks. First, two major New York institutions, Chemical and Manufacturers Hanover Trust, agreed to consolidate. Then two regional banks, C&S/Sovran and NCNB, followed.
The accolades and handshakes come first, next the inevitable cutting of costs. If the second phase goes as well as the first, the troubled U.S. banking system could be salvaged by the much-predicted consolidation of the nation's banks. That may be a dream.
Wall Street analysts predict merging overlapping bank operations can trim 20 percent to 40 percent of the expenses of the combined entities without simultaneously destroying the franchise. It sounds great. But.
Cost reductions can come from three areas: people, systems and real estate. History suggests only people can be quickly pared, but doing so often provokes low morale and chaos. Turf wars erupt. Employees begin printing resumes rather than business proposals. Credit officers familiar with accounts leave. Loyalty dies. Files get bungled. Irate customers are left waiting on hold, disconnected because of telecommunication problems stemming from office shifts and the firing of the familiar old operators.
And personnel problems can pale besides the other two. Banks build computer systems in a hodgepodge fashion over many years. Typically, merely keeping the myriad generations of machines in a single bank working together is a difficult task. Merging the systems with others that are almost inevitably incompatible can be a nightmare.
Moreover it is a nightmare that can become particularly acute because merged banks attempting to cut costs typically lean toward the area where customers, and bank executives, don't look, the back office. Unfortunately, the cuts are equally blind, eliminating technicians in precisely the area where technical assistance becomes paramount. Maddening errors result.
Lastly, a major area of savings for the consolidation of banks in one market is real estate. But few leases are short term. Even Chemical, whose long-term lease on its Park Avenue headquarters was concluding, still has a commitment until 1994. And headquarters is only the tip of a vast, sprawling network of offices and operations owned by the two banks in New York City. Chemical's lower Manhattan operations center occupies more than one million square feet; Manufacturers Hanover owns a huge data processing center nearby. Dumping leases or unnecessary space -- the equivalent of the entire inventory of smaller cities -- will be difficult in the current depressed real estate market, to say the least.
Successful bank mergers typically have a strong chief executive in charge who can make brutal decisions quickly. Customers stay put because the problems are brief, rather than because they are absent. Hugh L. McColl Jr., chief executive of the C&S/Sovran-NCNB conglomeration, to be known as NationsBank, has the reputation for being tough and decisive.
More gentle mergers have often gone awry, such as Sovran's merger with Citizens & Southern a year ago. Sovran's bad Washington-area loans may have been the killer, but an inability to trim expenses sufficiently or to refine bureaucracy set the stage. Importantly, it, like the Chemical-Manufacturers deal, was merger of equals, leaving two sets of top executives.
Underlying the tenuous prospects for bank combinations is the reality that banks are only service companies. Unlike, say, Oreos, which taste as good under the management of Nabisco Brands, Reynolds Tobacco, or Kohlberg Kravis & Roberts, who have all held the reins in recent years, banks do not have an enduring brand. They are as good as their current management, and the consequence is that many institutions that dominate in one era fall by the wayside in another. Indeed the major beneficiary of some bank mergers is the competition, which may find that sought clients become eager customers.
Motivating bank deals, on the other hand, is that in many ways these companies have become less like traditional banks, meaning lenders of money, and more like commodity manufacturers, depending for their survival on production efficiencies. Credit card and check processing, for instance, all are subject to economies of scale. Merged back office operations, if done well -- a big if -- can produce substantial savings. Already, that has taken a substantial toll on bank employment, which has been declining since 1985.
In this sense, banks are no different than the postal system or magazine subscription departments, constantly seeking to reduce the cost of processing paper. They have become factories.