Mergers not just about cost-cutting

Mergers not just about cost-cutting

This week marks the end of Westpac Banking Corp's exclusivity period for doing the numbers on St George Bank, and should bring forth some more nitty-gritty on synergies.

This week marks the end of Westpac Banking Corp's exclusivity period for doing the numbers on St George Bank, and should bring forth some more nitty-gritty on synergies. The presence of ex-Dragons Gail Kelly and Peter Clare means no one expects any shocks. The rough outline of the deal is likely to be no more than tweaked.

Yet the deal's exact nature and numbers will not be the measure of its success. Kelly, her chairman Ted Evans and even the target's chief executive, Paul Fegan, have emphasised that any long-term value in the scrip merger has to come from maintaining the customer base and brand value.

Commonwealth Bank of Australia used to proclaim the success of its State Bank of Victoria takeover because the integration came in on time and on budget, despite a customer hemorrhage that buoyed deposit growth at Bank of Melbourne for five years. And Westpac, in turn, kept only the Bank of Melbourne brand name - the bare minimum it committed to when taking the bank over. Just how many customers that one shed is difficult to pinpoint because the Australian Prudential Regulation Authority, in its wisdom, stopped releasing state market share numbers a few years ago.

Analysts will rightly focus on the numbers of this latest deal - earnings per share accretions, synergies, funding mechanics. The customer and brand focus is less tangible, but not soft.

Indeed, on Kelly and Fegan's own terms, and increasingly in the merger and acquisition literature, brand is crucial. Renzo Scacco, general manger of global brand analyst Interbrand, says even when the value of a brand is not explicit in a balance sheet, it is there as an intangible asset, as goodwill - a real number, capable of disappearing.

"You can be very accurate on the value of this asset, so when you are bringing two brands together you have a very real metric on the value you should be creating," he says.

If you have two brands worth $100 million each, your starting point is $200 million of brand equity that must be grown. A decision to subsume one brand into another automatically means a balance sheet loss - so any offsetting value, such as from cost savings, needs to be well understood and managed.

A brand is not just a masthead, Scacco says; it is - as Kelly, again, has emphasised - a measure of service and expectations. Thus it is recalibrated daily, and is crucial for the acquirer's return on investment.

Interbrand values St George's brand equity at $1 billion and Westpac's at $3.6 billion. The merged entity, then, will have nearly $5 billion of initial brand equity - and a particular challenge to preserve it.

Kelly clearly sees this merger in terms of growing that brand equity. She says the thinking on bank mergers has shifted from a cost focus to a revenue focus.

That's why there's some legitimacy in the seemingly illogical proposition of keeping all St George's branches, even if they are alongside a Westpac one. The savings come from head office, technology, funding - not from customer-serving staff and branches.

Kelly talks of particular customer segments, such as an older cohort at St George with valuable banking and wealth management needs: "St George has a very strong proposition there, and it's a segment with a lot of value. BankSA is very important too, it's different to St George and Westpac."

Monash University marketing professor Steve Worthington notes an emerging trend for multiple brand strategies at banks, both after cross-border mergers and when banks want to tap different segments in one market.

"This is something banks are only coming to realise," he says. "While their brands are valuable, they're not as valuable as they should be."

Research shows there are no right and wrong ways to manage brand portfolios, but plenty of ways to erode value.

Richard Ettenson, a visiting professor at Bond University from Thunderbird School of Global Management in the United States, says "the customer and employee impact of business combinations is often overlooked, and considered an afterthought in many merger deals".

Ettenson says a company has 10 distinct options for brand management after a merger; and having looked at all US mergers since 1995 with a transaction value exceeding $US250 million ($261 million), he found in 64 per cent of cases the target brand and identity either disappeared, or the two were kept separate but with no leveraging of value.

The research showed that in a typical merger, the focus was on potential deal breakers. But the right brand strategy not only offered the opportunity for revenue leverage but also sent strong signals to the customers and staff being acquired - the ultimate value.

Fairfax Business Media

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