CAIRO: With Commercial International Bank’s (CIB) due diligence period for its acquisition of National Bank for Development (NBD) under way, executives from both banks discussed success factors and pitfalls related to bank mergers and acquisitions.
CIB Chairman and Managing Director Hisham Ezz El Arab and NBD Chairman and Managing Director Aly Shaker shared their views this week at a conference organized by the American Chamber of Commerce in Egypt.
Although Ezz Al Arab and Shaker stressed that the acquisition is still under consideration, they confirmed that the due diligence, which began in August, is due to be completed soon.
CIB is Egypt’s fourth-largest bank and the largest one that isn’t state-owned.
It was established in 1975 as a joint-venture between the National Bank of Egypt (NBE) and Chase Manhattan Bank. NBE is working to divest its interest in CIB as part of the government’s policy of increasing private participation in the banking sector.
CIB has been seeking to acquire a smaller rival since the Unified Banking Law of 2003 increased the minimum capital requirement of banks, forcing smaller banks to either raise capital or become acquired.
To date, all but seven of the smaller banks have either been acquired or are pending acquisition. The topic of the conference is therefore timely.
Transparency during the due diligence and clear communication with stakeholders were highlighted as the key factors for a successful acquisition.
Ezz El Arab described the pressure on a due diligence team to portray the institution to be acquired in a positive light, for fear of causing the acquisition to fail. The integration team, which eventually carries out the actual merger, should offset unrealistic optimism by acting as the devil’s advocate.
While most failed mergers are the result of integration challenges being ignored and the benefits being overestimated, Ezz El Arab added that successes are typically due to a common approach and way of thinking amongst the acquirer and its target.
The process of acquisition naturally causes anxiety with the staff due to worries of redundancy, among other concerns. Shareholders are also keen to be updated on the status of the acquisition. For these reasons, Shaker said that he currently spends half his time communicating with his staff and other stakeholders about the acquisition.
Ezz El Arab highlighted the importance of identifying a walk-away price when considering an acquisition, and that the acquisition should be abandoned if this price is exceeded. The walk-away price is particularly important to counter the media pressure for the acquisition to succeed.
The private-sector banks historically focused on the metropolitan areas of Cairo and Alexandria,ignoring the governorates where state-owned banks dominated. The expansion of the private-sector banks into these areas were hindered by logistical complications and the need for government approvals.
This, Ezz Al Arab explained, motivates foreign banks to acquire Egyptian banks. While such consolidation was discouraged by the government a decade ago, consolidation of the banking sector is now the policy of the government.
The reforms in the banking sector were partly prompted by the weak financial position of many Egyptian banks. Drawing on experiences with Turkish banks, Shaker outlined three categories of managerial blunders that can cause such “problem banks and are particularly important during an acquisition.
The first blunder is technical mismanagement, in which the lack of internal control, poor planning and a strategy of “growth for the sake of growth by a new management eager to prove itself result in a deterioration of asset quality.
With the accumulation of losses, the second blunder of cosmetic mismanagement arises. Managers here use deceptive accounting methods, such as low provisioning or delayed recognition of expenses,to cover up financial difficulties while they search for a solution to their troubles.
Finally, a desperate management engages in risky practices such as speculative investments to boost profits or high interest rates on deposits to address liquidity issues.These practices only exacerbate an already weak financial situation.
“Such type of management will lead to the deterioration of the management culture, said Shaker, adding that “changing a deteriorated culture may take the new management as long as it took the culture to deteriorate unless several layers of management are changed.
