What made Manuel blow the whistle?

South Africa has had its share of wars, protests and punch-ups: Boer against Brit, black against white and black against black. But a scrummage between white-collar corporations was something new. Starting last September a war of attrition involving some of the country’s most influential power brokers dominated the banking sector. The issue: should two successful South African banks, Standard Bank Investment Corporation (Stanbic) and Nedcor, follow the global fashion and merge – or were they already an optimal size? One said they were, the other said they weren’t. A bewildered finance minister ended up making the decision for them. This June, he pulled the fighting packs apart. Chris Cockerill reports

Laubscher: "banks cannot stand alone"

Simmonds Street, Johannesburg, is the site of Standard Bank's sprawling headquarters, a biosphere full of bankers, high flyers, secretaries and their hairdressers. But this self-contained world, insulated from the day-to-day ravages of a restless city, came under siege last year. The invader, in the form of Nedcor - its smaller rival - was camped outside the gates for nine months.
As visitors approached the Stanbic complex a banner urged: "Hoot to give the Neds the boot!" Posters on the walls angrily demanded "Is this by Mutual consent?" (A reference to Old Mutual, the South African life assurer, which has a controlling stake in Nedcor and 22% of Stanbic, and saw their merger as a convenient exit.)
Nedcor's headquarters are in Main Street, just a short walk away. Richard Laubscher, chief executive of Nedcor, took that walk last October 5, three weeks after he had shocked Stanbic with an audacious bid. Stanbic had invited him politely to come and explain himself. The tall, bespectacled Laubscher, flanked by his management team, arrived at the gates of Stanbic to be faced by a phalanx of silent but angry Stanbic employees. Rumour said that 10,000 jobs between the two banks were on the line. The bank workers saw Laubscher and they saw his briefcase which could hold the key to their future. Grudgingly they stepped aside and let him and his crew pass.
"It was like a parting of the waters," says a member of the Nedcor team. Inside the building they were received by five burly guards. "We weren't allowed to veer from the chosen path, or to speak to anyone. We were put in the elevator and whisked to the seventh floor."
The Stanbic board had assembled, waiting for Nedcor's submission. Laubscher stood and presented his master plan. The board members listened to him politely. But their smiles masked considerable contempt for the arrogance of this man and his team. They had already made their decision. Some 21 days later, after a suitable interval leaving Nedcor to sweat, they delivered their answer in letter form.
Thanks, but no thanks.
From then, the lobbying, the press statements, the public slanging matches turned what was potentially the largest takeover in South African history into prolonged torture. In the words of one banker: "It was like having your wisdom teeth out. The pain never seemed to end."
The cure lay in the hands of one man: the minister of finance, Trevor Manuel. From the end of March, the arguments for and against the takeover were assembled and placed on the desk of this unfortunate politician. Manuel ultimately had to decide whether to give market forces their head and let the deal proceed, or give it the governmental thumbs-down. The issue involved possible systemic risks, with 10,000 workers facing redundancy, questions of excessive market share, and yet the need for South African banks to bulk up in the face of international competition.
The ANC, South Africa's ruling party, also had to reconcile the demands of its two basic constituencies: the people, and national business interests. The unions, in particular the South African Society for Bank Officials (Sasbo), were up in arms. If Manuel allowed the deal to proceed, he faced their wrath. If he blocked it, he risked losing the confidence of international investors. In the meantime the banking sector clamoured for a decision, any decision, so long as it was made soon.
The Nedcor bid was hardly unexpected, although Stanbic management protest they didn't see it coming. Stanbic in fact had made itself vulnerable by allowing one of its core shareholders, the assurer Liberty Life, to dump its 23% stake in the bank onto the open market at the end of September 1999: a plan that became well known by the rest of the market.
Since the beginning of 1999 Nedcor had been considering the possibility of a merger - "rather than a takeover", one Nedcor banker hastily adds. Global trends suggested consolidation was the way forward, and that the first line of consolidation is the home market. With the influx of foreign banks on its home turf, Nedcor believed that local banks must create a player of substance in order to compete, preferably in a friendly fashion.
On September 10 Chris Liebenberg, chairman of Nedcor, sent a letter to Conrad Strauss, his counterpart at Stanbic, requesting a meeting with the board to discuss a "value-enhancing merger".
Laubscher, nine months later, explains the rationale: "We understand that South African banks cannot stand alone. South Africa has one of the most open trading economies in the world and, fundamentally, business is given on the merit of size. When we fight for access to dollar trade lines we've got to make sure we've got an entity of a size and scale that is going to get more than its fair share of business."
Steven Nathan, head of research at Deutsche Bank Securities in Johannesburg, agrees. "The fundamental economic principles of critical mass and economies of scale should be relevant to every bank, and the principle of putting two good banks together has merit." He continues: "Nedcor has other very strong and logical reasons why it wants this merger. It is the fourth-largest bank in South Africa, which isn't very big, but in order to get unit costs down it needs to add volume through its systems. It estimates it can reduce costs by 75% if it gets the merger."
Nedcor has the technology and Stanbic has the business volume.
Another reason for the merger lurked in the shadows: Old Mutual, the London-listed life assurance company and owner of Nedcor.
Although Laubscher would like to take all the credit for bringing forth Nedcor's bold plan, Old Mutual has been described as the midwife.
With a 53% stake, Old Mutual has one third of its total assets locked up in Nedcor, an arrangement viewed by the markets as less than favourable. It also has a 22% stake in Stanbic. By pushing Nedcor and Stanbic together it would reduce its holding in the banking sector and unlock the value of its investment. Second, Old Mutual could gain control of its greatest competitor, Liberty Life. Stanbic owns Liberty and if Nedcor, Old Mutual's subsidiary, were able to gain Stanbic then Old Mutual would grab Liberty on the sly.
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