The merger process is usually delayed and often break ups happen on account of trivial issues or the egos of the people involved.
In Nepal, merger and acquisitions (M&As) is practiced mainly in the banking sector. Following the directives issued by the Nepal Rastra Bank (NRB) in the Monetary Policy for FY2015/16 which required banks and financial institutions (BFIs) to enhance their paid-up capital by four-fold (from Rs 2 billion to Rs 8 billion in case of commercial banks), M&As turned into a binding reality.
The intent behind the M&A drive of NRB, as it is understood, has been to limit the number of BFIs, especially commercial banks, and the policy requiring a four-fold capital rise in two years prima facie appeared as a herculean task to achieve, without mergers. NRB succeeded in its objective to a large extent as there has been a considerable reduction in the number of BFIs in the last five years, particularly in categories ‘B’ (development banks) and ‘C’ (finance companies).
However, the number of class ‘A’ institutions (commercial banks) has gone down by just one to 27 after the merger between Global IME Bank and Janata Bank in 2019; commercial banks have resorted to acquisition of ‘B’ and ‘C’ category BFIs or have gone for right share issuances or a combination of both to meet the minimum paid-up capital requirement set by the central bank.
It appears that the promoters of commercial banks were resistant to lose their identity. The only merger that took place, subsequently, between between Global IME Bank and Janata Bank was more a voluntary initiative.
Behavioural Aspects on M&As
The directors and key promoters of BFIs do not usually wish to dilute the status or authority they enjoy in being associated with the bank, which diminishes, once the merger takes place. Many directors and senior staff fear losing their roles post merger. Therefore, the merger process is usually delayed and often break ups happen on account of trivial issues or the egos of the people involved, even after signing the Memorandum of Understanding (MoU).
In Nepal, more than the actual execution of M&A, rumours spread widely before it happens and many of them may not have any truth in it. Sometimes, when two friends, who are promoters of two BFIs, are seen in a public place together, speculation occurs that a ‘merger is happening’ between the two entities they belong to. The share market reacts quickly to it and sometimes the regulators have to intervene, in order to unveil the truth and protect the interests of the general public. Some promoters or the board of directors take pride in having concluded the merger deal without the knowledge of their management. So, there exists a gap in communication at all levels.
When the key promoters/board of directors intend to go for a merger with a bigger entity all key decisions at their organisation gets deferred including the regular growth of employees, expansion activity, upgradation of the Core Banking System (CBS) software, even face lifting of branches and capital expenditure, etc, in order to augment the swap ratio. The employees who have contributed to the growth of the organisation are generally ignored. All they care about is the value (swap ratio) from the merger deal and their role in the merged entity. Also, mergers could be a good pretext for the extensive involvement of the board of directors or promoters at the organisation, beyond the role envisaged by the regulators.
Rationale for M&As
Despite the presence of the psychological and behavioural aspects discussed above, mergers have become a dire necessity for many reasons. Apart from growing to be a stronger entity, able to withstand unanticipated events, there might be other aspects, some of which could be to stop organic growth becoming stagnant, to dilute the high inferior quality of assets by merging with relatively better BFIs, to leverage the branch network of merging partners (branch expansion being a cumbersome process), to enhance the lending capacity on account of Single Obligor Limit, to lessen the unhealthy competition, to bring the economy of scale in operation. NRB also encourages mergers between BFIs having a common shareholding of family or business groups.
Transparency in M&As
There are many facets to M&As. Today, we are focusing on a few aspects including the communication process during the activity, particularly among employees involved in the merger process, as a part of displaying professionalism, transparency and keeping their morale high.
As banking is a service industry and its success lies in the human resources a bank possesses, its leadership and the strategy it adopts, as well as good corporate governance at different levels including the board of directors, it is imperative that the interest of employees is not undermined in the merger process.
Particularly in the case of commercial banks acquiring ‘B’ or ‘C’ category BFIs, which has been a common occurrence in Nepal, the mapping of staff, generally involves downgrading by 1 to 3 corporate levels at the acquiring institutions (although there is no consistency). Even in the same category institutions (for instance, both commercial banks and development banks) there is usually one entity which is more decisive in the integration of human resources at the merged entity and the chances of staff from one entity being unfairly treated remain high. So, in both situations employees join the merged entity with low morale and productivity levels.
As mentioned earlier, employees are among the key stakeholders in any BFIs and when the rumour spreads, it ruins the work environment. Many staff won’t have access to information, thus gossip starts at the organisation. This will be more devastating in the weaker entity, if it is being acquired by a perceived stronger one. The morale of staff in the acquired entity generally goes down. It produces anxiety among the staff, about their future or the inferior role post merger or even the possible loss of jobs.
Even if a merger between BFIs is to happen, it usually takes a long time for the implementation and integration process to end. The work environment is seriously diluted in the organisations getting merged except for a small section of people who are engaged in the merger process. What is important here is the need for an appropriate communication channel from the board or the leadership level of the concerned banks, officially down to the grass roots level of the concerned entities. The role of the CEO will be crucial in making frequent communications to staff, keeping them updated, inviting their cooperation and giving them assurances that their interests are being taken care of.
Every effort should be made to make everyone feel comfortable in the new environment and that they belong to the same entity (rather than identifying them by their previous entity) in order to maintain the harmony and morale which is generally lacking, as seen in the many instances of mergers in the past.
Good Practice of Communication
An example of good industry practice that has happened elsewhere pertains to the acquisition of businesses in the Middle East & South Asia (MESA) region of ANZ Grindlays Plc Ltd by Standard Chartered Plc in 2000.
The following is the communiqué (staff information pack), disseminated to the entire staff of the merging entities, soon after the acquisition agreement was signed, and regulators and stock exchange were informed:
What is happening – Background information: Details of countries and regions being covered for acquisition and the intention of both the entities, etc, were outlined.
Why it is happening – Context for change: ANZ wished to focus in Australia, New Zealand and Asia-Pacific and the sales deal freed up resources for its core business and new growth opportunity. Standard Chartered intended to grow in the emerging market, which was the reason for acquisitions taking place.
When is it happening
– high level timeline/milestones of the events.
What it will mean for me
– Overview of HR process, option, etc. The communication said that the majority of staff will move to Standard Chartered. The selection process will cover both the organisations. It will be transparent – the best person will get the role/job. A professional consultant (name also disclosed) was hired in the integration planning.
A brief introduction of the acquiring entity was highlighted viz. its geographical footprints, main markets, number of employees, culture and values, etc.
Key integration process: This involved the formation of a task force, which included mainly human resources and communication, information technology and finance, infrastructure and finance (similar to branch integration and relocation here), retail customers (including deposit clients), commercial customers (corporate borrowers), etc.
Frequently Asked Questions (FAQs) about the M&A were also stated here. A standard line of communication to customers was devised, stating that the merger is happening and this change will mean greater access and network for the client, etc.
How to find out more – Key contact details were mentioned in this section.
The above communication was sent to each staff in the applicable regions of the group, immediately after the official merger announcement. Subsequently, integration of HR went through smoothly in the market where both banks operated, in a transparent manner. Likewise, the key policies and practices of Standard Chartered were introduced and gradually inculcated.
The Way Forward
Currently, an atmosphere has been built up again for ‘Big Mergers’ to take place, possibly stronger banks bidding to acquire the relatively smaller sized ones might become a more common phenomenon (the market is already abuzz with rumours and speculations). Therefore, it might be timely for the stakeholders to give a thought on this front as well. The structured process, as discussed above, can only help in maintaining the working environment and avoiding conflict. While banks are growing bigger and stronger it is also important that they embrace good practices as a part of sustainable business.
Although NRB has, in the past, intervened when the issues have become grave, there is also a need to ensure transparency in the process of integration, particularly in human resources and promote the environment of equal opportunity. It can be done by monitoring the process more closely, as well as formulating appropriate policies, which necessitates hiring of independent consultants with a meaningful role, having no conflict of interest in the concerned entities, at least, to form the transparent policy or basis, in order to address the human resource issue, which is, ultimately, a sensitive one!
(Giri is a banker with more than three decades of experience. He had been with Standard Chartered Bank for nearly 25 years, as Head of Corporates at the time of exit. He also worked with Kumari Bank for six years as Deputy CEO. He can be reached at [email protected].)