Banking and finance - Don't bank on a bank's acquisition.

(From Financial Director)

Byline: Jules Stewart.

What are the ingredients of a successful bank merger? It is almost easier to answer the question by looking at what doesn't make for a successful bank merger. For one thing, a 'merger of equals' is almost always a recipe for failure. Consider the Spanish case of Banco Santander's merger with Banco Central Hispano (BCH). Touted as a merger of equals, it took a little more than two years for the curtain to come down on that operation, with a weak BCH management unceremoniously turfed out of the team and Santander squarely in the driver's seat. Closer to home, look at Lloyds TSB. Lloyds was once the shining star of the banking industry; the developed world's most profitable bank. But try to put together the commercial and savings bank cultures of two organisation of roughly the same size, and what do you get? Conflicting strategies, management and IT systems. The result is a lot of unhappy shareholders of a bank that has lost its direction.

Hong Kong and Shanghai Banking Corp's takeover of Midland Bank was a different story. The Hong Kong bank saw the writing on the wall; it wanted to be regulated by the Bank of England and get a foothold in the lucrative UK market. So it looked around for a failed bank and found Midland, a pygmy by comparison, so there was no talk here of any merger of equals.

Nothing changed at Midland (except the name, which the Hong Kong people said they had no intention of changing) and HSBC, as it later became, used Midland as a local business. It's quite a different affair from two banks with about 2,000 branches each trying to cut out the overlap.

Nearly 60% of all underperforming British corporates cited a failed merger or acquisition as the leading cause of their problems, according to a Deloitte & Touche survey. Most often, the problems arose from a failure to integrate the acquired business in time, or at all. In other instances, the acquisition rationale was ill-conceived, and this often led to overpayment and a poor strategic fit.

Royal Bank of Scotland was obviously aware of these pitfalls when in 1999 it launched its audacious bid for NatWest, an institution twice the size of the Scottish bank and one that was perceived as teetering on the brink. A sad irony of the NatWest saga was management's attempt to expand through ...