Limited cost synergies for cross-border M&A
The key argument for transformational crossborder M&A in Europe – put forward not only by eager market participants but also by ECB regulators – is that it would create more efficient and profitable groups. The backdrop presented is one of stubbornly weak bank profitability, especially when compared to large US counterparts. More crossborder integration, goes the argument, would lead to larger, more globally competitive, and financially stronger players. But the end-result of merging cross-border two modestly performing banks is another modestly performing bank, just bigger and plausibly more complex. Unlike in-market mergers such as CaixaBank with Bankia or Intesa with UBI Banca, effective cost synergies are more difficult to achieve cross-border.
There are social, political, cultural, and regulatory hurdles which would make the case for vigorous excess capacity reductions in branches and back offices – notably staff – almost impossible to achieve under normal conditions. A 20% staff reduction resulting from an in-market merger, as difficult as it is to implement in parts of Europe (like France or Germany), is nevertheless more palatable than the same reduction being the consequence of a cross-border merger. Besides, a large-scale transaction like a crossborder M&A sucks up enormous management time, effort, and resources in pursuing a move which could also be unwelcome to equity investors. It is no surprise that there are no takers for the siren song of cross-border M&A so far.
The appeal of mega-transactions will likely not strengthen in the future. Because the real competitive frontier in European banking, as The Wide Angle has highlighted several times in the past, is in the increasingly open digital ecosystem. The digital advance has been driving – and is in turn being driven by – changes in customer behaviour. Short of a colossal earthquake in the digital space, it is highly unlikely that in the post-pandemic age bank customers will migrate back to branch banking on a big scale.
The financial landscape in which banks compete is increasingly defined by open payment platforms and channels, financial information and transaction APIs, open banking and finance, and cloud-based data storage and back offices. Which means that rather than contemplating buying or merging with the distribution and backoffice infrastructure of another large legacy bank in a different country, banks should be focusing on their own digital transformation – which invariably comes at a steep price. Not only systems and infrastructures, but also the intellectual capital to steer and improve them. It is here that senior management time, effort, and resources should be primarily concentrating. The complexity of a large cross-border transaction would be an inexcusable distraction at the wrong time.