Wednesday, September 17, 2008

Banks Merging: a Competition Law issue?

Not counting the Federal Reserve's takeover of Freddy, Fanny and AIG (into what is truly a non-profit gigantic enterprise), or the break-up of ABN AMRO, or Barclays' scavenging of Lehman, there are three major bank mergers JPM of BS, BoA of ML, and LTSB of HBOS. But only the latter two may be referred to judicial review under competition law. Should they be?
The major bank mergers we are seeing are defensive in hostile markets. This means that they will inevitably shrink to less than the sum of their current parts, including, I would argue, less too in market share terms! Furthermore, the market shares of the recent past will be a poor guide to the market shares of the near future and, in any case, we have officially no way of knowing banks' respective market shares in most of investment banking e.g. in fixed income, FX or in any OTC trading! The banks themselves don't know the answers with any certainty, and have no idea about market shares right now or in the near future!
Lloyds TSB may believe it is a dream come true to be able to buy HBoS. Some commentators fear the new group's possible 28% of the UK domestic market in mortgages and similar % of retail deposits, but the combined size is likely to be much less than the current sizes of the two banks added together.
Nor is this likely either in the case of the BoA/ML merger, which impressively sums to:
– 20,000 WM financial advisers handling $2.5 trillion of HNW client assets.
– BoA has $589bn AuM
- Merrill has 49% (45% vote) of BlackRock ($1.4tn of AuM)
– BoA + ML combined
= No. 1 underwriter of global high-yield debt,
= No. 3 underwriter of global equity,
= No. 9 adviser on global M&A (based on 2008 first-half data).
– Combined retail & and SME banking = 48% of revenue
- Combined corporate and investment banking = 32% of revenue
- Combined WM = 20% of revenue (based on 2008 first-half data).
The new group looks well balanced. But, I recall when Credit Suisse was the first bank to analyze mergers in terms of capacity loss in the markets (at the time of SBC's purchases of Brinson and Dillon Read). The BoA/ML merger will (by similar reasoning) amount to less than the sum of the two parts i.e. capacity will be lost from the combined group of probably about 20% (my guess). This is a function of the hostile trading and business environment and the usual merging of two cultures issues, plus the inevitable poaching by other banks.
A corrollery is the RBS-led takeover of ABN AMRO and the current Lloyds TSB/HBoS merger where the combined value will also most probably turn out less than the sum of the parts. The value of the combined group starts out less than either of the 2 banks on their own a year ago.
BoA and ML are complementary to each other. Capacity will be lost in wholesale trading markets (ML in London was already clearing out its offices floor by floor days before the BoA merger) and the new group will not pose a competition policy issue.
Similarly, or even more so, LLoyds TSB and HBoS are complementary geographically in retail networks and in wholesale trading. But, even if they were not, capacity is likely to be lost anyway, given the current business environment, and this means the deal need not be anxiously scrutinised under UK and EU Competition Law.

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