Hostile or friendly?

Bank of Cyprus and Marfin Popular Bank shifted their takeover war to academic circles this week as the battle to swing public opinion on whether the deal is hostile or friendly took a new turn after MPB officially tabled its proposal at the CSE and BOC described the bid as “irregular” and “not to be taken seriously.”

The second session of the Cyprus College “Monday University” round-table discussion saw a packed audience as hundreds gathered to hear Hellenic Bank CEO Makis Keravnos, Bank of Cyprus Deputy Group CEO and Cyprus CEO Charilaos Stavrakis, Marfin Popular Bank Cyprus CEO Christos Stylianides and Etyk bank employees’ union Chairman Loizos Hadjicostis discuss “Mergers and Acquisitions.”

Marios Mavrides of Cyprus College coordinated the discussions.

 

Most M&As fail

 

Makis Keravnos started the discussion by noting that 85% of all mergers usually fail because of issues such as client losses, culture clash, system and procedural differences, low staff morale as layoffs eventually follow and shrinking productivity.

“Unless the merger is carefully planned, and I mean very carefully planned, it is most likely to fail,” said Keravnos.

In the case of Cyprus, any merger or acquisition becomes even more difficult considering that the parties involved are chasing the same clients, offering identical products and laying off staff is next to impossible, unless achieved on a voluntary basis.

“Post merger integration is a very difficult task, while attention should be paid to the share structure of the merging organizations,” Keravnos said.

Chrisos Stylianides, however, countered that the statistics refer to all M&As, pointing that in the case of banks, during the 1995-2000 period there were more than 2000 bank mergers in the run-up to euro adoption while in Greece, during the period 1996-2003, there was a wave of mergers reducing the number of banks from 44 to 21, adding that not even one had failed.

 

Euro adoption

 

Stylianides insists that after EU membership and in the run-up to euro adoption in January 2008, Cypriot companies need to join, become bigger and more powerful in order to become competitive and strong enough to expand abroad and withstand the new challenges of globalization.

Referring to patriotic noises against the MPB bid for BOC, Stylianides says its best to have Cyprus companies and banks merge with Greek companies, whose management is in Cyprus, rather than risk being acquired by other foreign institutions.

 

Hostile or friendly?

 

Charilaos Stavrakis said there are two types of M&As. Hostile or friendly and locally or cross-border. He backed the case that 85% of hostile bids, such as the MPB bid for BOC usually fail, while an even higher number of cross-border deals are also likely to fail.

In defending the Bank of Cyprus decision to reject the Marfin bid, Stavrakis said this is because it is difficult to identify the cost savings and synergies that are likely to emerge from such a merger.

Stavrakis noted that since 60-65% of bank costs are staff costs and even if one believes the argument that there will be no staff layoffs, then the 20% benefit from the merger as promised by MPB strongman Andreas Vgenopoulos will have to come from other operational cost savings.

“I can assure you that this is very difficult,” Stavrakis told the audience, explaining that since BOC and MPB have totally different IT and operational procedures, a merger would lead to increased costs, rather than lead to cost savings.

“Its obvious that the cost synergies will come through staff layoffs and since Etyk will not allow such a case, then the merger benefit will be wiped out and lead to higher costs against shareholder interests of both banks, who risk seeing a decline in share prices,” he said.

Referring to the “economies of scale” arguments brought forward by the MPB camp, Stavrakis said academics will confirm that beyond a certain level, the economic of scale ceases to hold leading to higher costs.

“It’s no wonder that big banks globally carry a low or no premium at all, while small to medium sized banks trade at high premiums,” he said, adding that in the US, the bastion of capitalism, no bank is allowed to have more than 10% of share of deposits.

 

No layoffs

 

Loizos Hadjicostis said it would be best if Cyprus banks would remain in Cypriot hands, but being realists, the union knows that it needs to adopt to the new challenges.

“In terms of local bank M&A activity, the score is Cyprus 3-0 against foreigners considering the successful way with which the Cyprus operations of Grindlays, Chartered and Barclays were acquired by three local major banks,” said Hadjicostis.

He too agreed with Keravnos that unless the merger is carefully planned to the final detail, it is likely to fail.

Being a strong unionised economy, Hadjicostis said Etyk will insist on no layoffs and maintaining benefits at all levels. He did not however, mention if Etyk will ask for guarantees for such promises and how it would react if after a number of years, the employer side decides to change its policy on “no layoffs”.

Christos Stylianides reminded the audience an earlier statement made by Vgenopoulos that if the deal is not backed by Etyk, then it would not proceed.

“I can assure you that if no synergies are identified, then we (MPB) will also not proceed with the bid. But in our opinion there are many synergies, which will lead to a 20% benefit,” he said.

 

Hiring freeze

 

Stylianides said synergies are likely to emerge from a staff hiring freeze and voluntary retirement schemes in addition to merging IT, head offices, product merging, cross selling and in the expansion drive abroad.

“Marfin has plans to hire 100 people a year, and I’m sure BOC has similar plans. Add to this the 50 or so annual retirements per year and you can see how a hiring freeze combined with retirements and voluntary schemes will cut into costs,” said Stylianides.

Charilaos Stavrakis however, has a different opinion on a staff hiring freeze, claiming that “if no fresh blood comes in” then it is likely to lead to an ageing staff and higher personnel costs.

He also dismissed the argument brought about by Styliandes that there are 50 or more retirements in the pipeline. “At BOC, we will have 12.7 staff retirements every year in the next five years,” implying that MPB has not done its homework correctly with respect to staff retirement cost savings.

 

Efficiencies

 

A member of the audience probably put the best question as to whether a takeover or merger would be justified if it would lead to efficiencies. Both Keravnos and Stavrakis insisted that the efficiency of the Cyprus banks is “probably at its best and certainly the best during the last ten years.”

Stavrakis went a step forward and reminded the audience that the cost to income ratio, the best efficiency benchmark for any bank, is below 50% at Bank of Cyprus and compares very favourably with European and global banks.

“You have a trusted management and board who have doubled revenue while at the same time cutting costs leading to record profits (most from core activities) and in the process helping drive the value of the share price substantially higher in the best interests of shareholders, staff and clients. Why give up all this for a promise and for a bank that has not even completed its own 3-way merger involving much smaller banks,” concluded Stavrakis.