Anyone who lived a corporate existence during the merger mania of the Eighties will be familiar with the common perception of two major service industries coming together – it was invariably said that two crap businesses were merging to make one big crap business.
Excuse the vernacular, but it doesn’t work with any other word. And no offence by juxtaposition is intended now as I move on to examine the rationale behind last week’s proposal of merger between Lloyds Bank and TSB.
Part of the trouble with merger mania is that it gathers its own momentum. Mergers in a sector become accepted and subsequently perceived as inevitable simply because they are happening. It happened in almost every industry during those boom years of the Eighties. It is happening now in the utilities industries.
There is, very often, an overwhelming rationale to such mergers. But they should be examined for their individual merits, rather than simply be assumed to make business sense because everybody is at it.
All the more important, therefore, to have a look at the rationale behind the Lloyds/TSB exercise. Especially since it is widely predicted that the merger will trigger a fresh bout of merger mania. We should, at least, establish whether these corporate beasts are mating as part of a process of natural selection, or whether they are the first lemmings to reach the edge of Lovers’ Leap.
Corporately, Lloyds is something of a darling of its sector. Its shares have outperformed those of Barclays and NatWest over most of the past decade. It acquired Cheltenham & Gloucester in a deal that pleased the City by putting it squarely in the low-cost mortgage market.
But it has all too often looked as though acquisition and size were all that mattered. There was the ill-fated tilt at Midland back in 1992 – a manoeuvre that so shocked the target bank that it could hardly wait to jump into bed with HSBC. That the prospect of a Lloyds merger made Midland shudder must raise questions about the management at Lloyds.
And that TSB appears, by contrast, so keen to form a union with Lloyds must raise questions about the management at TSB. As a matter of fact, TSB’s management has changed beyond recognition since 1986, when it was led to flotation by Sir John Reed and his team.
There was the arrival as chairman of Sir Nicholas Goodison from the chair of the Stock Exchange in 1989, followed by a period of attempted rationalisation under ex-American Express chief executive Don McCrickard. They had much to sort out. The previous regime had seen fit to splash out much of its 1.27bn cash pile on the 777m purchase of merchant bank Hill Samuel during the last period of merger mania in the sector.
This was just after the Big Bang of City deregulation and just before the global meltdown of equities in 1987 that halved merchant bank capitalisations. Undeterred, the deal was pushed through at the agreed price and Hill Samuel subsequently went on a lending spree that cost TSB more than 430m.
Sir Nicholas Goodison and, more particularly, new chief executive Peter Ellwood, have done much to put TSB right and, with TSB’s shares rising by nearly 1 last week to 370p, its shareholders might feel that they have little to grumble about. But it is, nevertheless, worth drawing attention to the TSB legacy and, indeed, to the sector precedent of the Hill Samuel merger.
The story goes that Britain is horribly overbanked. Look at any high street and you can see the point. Apparently, the Cooperative Bank services some 2 million customers with 1,700 staff – a ratio that implies that the entire retail banking market could be operated with fewer staff than the sum of those at TSB and Lloyds.
Technology makes this possible – and it is the economies of scale provided by IT that is, we are told, one of the central motives for the Lloyds/TSB deal. But, as we know, the retail banks have proved pitifully slow in implementing technology to competitive effect.
Furthermore, consolidation among retail financial services providers is likely to reduce competition. Managements have shown a languid disregard for the potential of networked branches in, say, sharedealing and portfolio management services.
The question now is whether the Lloyds/TSB deal will trigger a rush to rationalise. Actually, much of the necessary rationalisation has been done already – apart, that is, from the mortgage sector – which makes Lloyds/TSB look rather more as though it is coming towards the end of a process, not starting it.
The deal may yet prove as exciting as its principals would have us believe. But, with the historical precedents, the paucity of technological imagination and the competitive restrictions of consolidation in the industry, it is difficult to see what we are getting from the merger of Lloyds and TSB.
It will certainly be big – which brings me back to my original observation.