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Pack fever grips financial services as the fittest become the biggestSVEN LUNSCHE looks at the wave of mergers in the SA industryTHE new slogan in the SA financial services industry is "survival of the biggest". A merger frenzy has rocked the life insurance industry over the past three weeks with all but Liberty Life announcing they are in merger talks with companies previously ranked as fierce competitors. The tone was set by the proposed demutualisation and subsequent JSE listing of Old Mutual and Sanlam, announced over the past few months, which has precipitated the current spate of mergers. Every major SA bank is reviewing its links with the life insurance industry and consolidating its merchant and investment banking arms.
"Basically what you're looking at in the future SA landscape are four or five giants who'll have a life and short-term insurance arm, a retail and merchant banking division and perhaps some add-ons such as stockbrokers and medical aid companies," says one analyst. "We're witnessing the first step as insurers try to build up their size through mergers and acquisitions." Over the past two weeks the following large deals have hit the market: As for the Momentum and African Life deals, cynics argue this is no more than a Gauteng breeze blowing the cobwebs of their Cape rivals.
The parties are thus re-examining their relationships with their respective partner-banks, Nedcor and Absa. Analysts say Sanlam wants to raise its stake in Absa to over 50% from 25% and Old Mutual wants to cement its ties with Nedcor. Furthermore, Liberty Life's equity relationship with Standard Bank has always lent itself to closer ties, even a merger. New Liberty Life chief executive Roy Andersen has hinted that the Standard Bank link is on his "to do" list - which leaves FNB and its cumbersome place in the Anglo financial services stable, alongside Southern Life. FNB managing director Viv Bartlett has said that last month's cautionary "goes beyond banking and insurance". This, and the inclusion of both Anglo and RMB Holdings in the cautionary, suggest that something bigger is going on - the likely creation of a joint Anglo-RMB-controlled holding company with three distinct arms; insurance (Momentum/Southern), retail banking (FNB) and merchant/investment/private banking (RMB). To date, shareholders, and not customers, have been the main beneficiary of the consolidation in the industry as merger speculation last year drove up average banking share prices by 40% and the insurance sector by over 30% (see graph). But in the long run the policyholders and bank customers should see some real benefits emerging, which brings one to the reasons behind the merger frenzy. The increased muscle that a bigger size brings with it is of course a strong rationale, but it is certainly not the motivating one in recent mergers. The key is the superior distribution networks that banks offer to products traditionally sold by insurers. Customers can expect a "one-stop" financial services shop which offers everything from normal banking activities to buying unit trusts and updating household insurance policies. Technology has also made the cost of providing a whole gamut of financial services through one operation very profitable. A previous obstacle to banking consolidation was that retail banking showed itself to be stubbornly resistant to economies of scale. In specific activities, such as credit card processing or securities custody, unit costs fall rapidly with size, and some focused categories of banking show evidence of economies of scale. In more general banking, however, complexity has in the past tended to offset any benefits accruing from size. All this is changing with the increasing intensity of the use of informaton technology in banking. The cost of software development is proving to be one of biggest factors in sorting the sheep from the goats, with 14 banks globally estimated to be spending more than $1--billion on information technology last year. Technology has also opened up electronic commerce to the financial services industry, enabling it to reach a wide range of clients via the Internet and so-called virtual private networks (VPNs). Last year's agreement between Old Mutual, Nedcor, Dimension Data and Woolworths extends the reach beyond the banking realm to retail as well. Mooted legislation in SA is also playing its part in speeding up the merger between banks and insurers. Bartlett has warned that overseas regulations regarding cross-shareholding between banks and insurers are likely to find their way onto the SA statute book. It would mean FNB could not count its R1-billion investment in Southern Life as part of its second-tier capital and thus put pressure on its capital adequacy ratios. SA is merely following in the wake of an international frenzy of merger and acquisition activity in the financial services industry as a whole. "The bigger the better" is the motto, and bankers are finding that the bar has risen several notches higher after a wave of mergers and acquisitions over the past year completely reshaped the face of the global financial industry. Last year alone, a survey by New York-based consultancy Securities Data international banking mergers showed $83-billion accruing from 400 deals; mergers in insurance totalled $73-billion from 325 deals. The leading international deals announced include Union Bank of Switzerland's proposed $23-billion offer for Swiss Bank; Zurich Insurance's $18.4-billion deal for BAT Industries' insurance business; First Union of the US's proposed $17.1-billion acquisition of CoreStates Financial; and NationsBank's $14.8-billion bid for Florida-based BarnetBanks. The Financial Times writes that many bankers now believe the battle for membership of a "global bulge bracket" of dominant firms is now reaching its closing stages. "In a lot of industries - telecoms, pharmaceuticals, for example - it is not unusual to see five global giants survive. Five seems to be the magic number," says Hans de Gier, head of investment bank Warburg Dillon Read. Some banks have already reached the conclusion that they cannot realistically hope to be part of that select group, and have scaled back their investment banking ambitions in accordance with the size of their cloth. In the UK, both Barclays and National Westminster have sold most of their equity operations and now concentrate solely on debt - more closely linked to their traditional banking businesses. Spiralling pay packets for traders and investment bankers have made it difficult for the mid-sized contenders to stay in the race. They have to pay people just as much or more, but don't get as much revenue out of them as a global firm. In the US, there remains plenty of room for this kind of consolidation. The number of commercial banks reporting to the Federal Deposit Insurance Corporation shrunk to 9 215 from 11 462 in 1992, but that still leaves the US with far more financial institutions in proportion to its population, though with fewer branches, than comparable countries.
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Bankers and insurers believe the table is being cleared for a handful of giants, with room still for niche players but little space for the middle-sized.
This piece of up-country arrogance aside, it is the first step in creating the mooted financial services giants. Both Old Mutual's Mike Levett and Sanlam's Marinus Daling stated as their rationale for demutualisation "the creation of an integrated financial services group".