Merger lessons from Spain

The Spanish have proved themselves masters of the bank merger. Successfully integrating two differing cultural entities, the merged Banco Santander Central Hispano has within a year become a European force to be reckoned with. Neighbours take note.

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The old Banco Santander did not always have a chief executive to act as second in command to its powerful chairman Emilio Botín. Botín was hands-on and other senior executives were assigned tasks when necessary. But as Santander grew in the 1990s, Botín saw the need to bring in new talent.
He was particularly keen to have Ángel Corcóstegui, chief executive of Banco Central Hispano, work at Santander. One story has it that he asked him to join three years ago and Corcóstegui replied: "OK but can I bring my team?" "Certainly," replied Botín, "who does it consist of?" "The entire bank," said Corcóstegui in declining the offer. The result, say humorists, was that Botín had to buy the whole of BCH in order to get Corcóstegui.
It's an appealing image: the mild Cocóstegui astonishing the powerful and intimidating Botín with a softly-spoken rejoinder.Corcóstegui says the story is an exaggeration.
The two men are very different. But Botín, the deal-making autocrat and Corcóstegui, the more thoughtful and detail-oriented manager are making the new BSCH into a powerful new force among European banks, an influential player in takeovers in France and the UK. This was a merger that transformed the two parties, raised them to a higher level and has given other European banks a new model.

The culture at Santander was loose and informal, allowing a quick response to opportunities and fast growth. The result was a big bank run like a family business. By 1998, management style had moved on little from the early 1980s when credit meetings were held around the lunch table at Emilio's father's house. For years Santander's lending success depended largely on Emilio. When there were concerns about whether or not to roll over a loan he would give a decision - usually the right one - within the hour.
It could not carry on indefinitely. The bank had grown from being a regional player with national ambitions into a national player with global ambitions. The complexities of running the domestic franchise, together with Latin American acquisitions and investment banking, were becoming too great. Santander needed a structure that could squeeze out maximum value from its many parts and that didn't depend so much on one person.
Many family-run companies have arrived at this position and usually resist change. Family bosses reluctantly cede power to professional managers and the early signs were that Botín was no different. When questioned in early 1998 about when he would appoint a chief executive, he said an announcement would be made before the end of 1999 - an answer most observers read as never. The common assumption was that his daughter, Ana Patricia Botín, who ran the investment bank and was pivotal in the Latin American strategy, would one day be CEO, carrying on the family tradition. Botín also said that Spanish banking was sufficiently consolidated, a statement that analysts interpreted as ruling out a large-scale merger.
With hindsight it's clear that Botín's audiences should have dismissed the declaration they chose to believe and accepted at face value the statement they didn't take seriously. They should also have given Botín marks for displaying a rare quality among bosses of family companies, that of perceiving his institution in a different mould from the one in which he originally fashioned it.
By early last year Santander had merged with Banco Central Hispano, a bank with a completely opposite culture and which no-one had considered a likely partner; BCH chief executive Corcóstegui was installed as the CEO of the new joint entity Banco Santander Central Hispano (BSCH); and Ana Patricia Botín had resigned her executive role, ostensibly because of an article in the Spanish press that portrayed her as very much first among equals in the new bank, but in reality because she had lost a power struggle with Corcóstegui.
Says a banking analyst in Madrid: "Emilio Botín is capable of doing the highly unexpected if he thinks it's in the bank's best interests and often when he states openly his intentions everyone thinks there must be something behind it and searches for a deeper meaning which isn't there."
Gain without pain:
More than one year on, Botín's bold gamble is paying off. BSCH is Spain's largest bank by assets and deposits and the sixth largest in Europe by market capitalization. More important, it has busted through the profit target it set itself by increasing profits by 26% in the first year. At a time when banking mergers in other European countries are a source of conflict and even fail - Deutsche and Dresdner in Germany, for example - putting together BSCH has been relatively painless and gains have been quickly realized. Leading Spanish banks BSCH and Banco Bilbao Vizcaya Argentaria (BBVA) are now way out front in Europe. Although national consolidation has yet to get started or is still under way elsewhere in Europe, in Spain the top banks are now in a position to move on to cross-border mergers.
But they are finding that no-one else is advanced enough to join in and that legal and tax frameworks are too backward. BSCH has had to limit its ambitions with Société Générale, in which it holds a 6.01% stake, because of the lack of harmonization in tax and corporate laws (see box page 66).
Ten years ago no-one would have predicted that Spanish banks would be leading modernization in Europe. "Spanish banks are fast developing themselves as a model for European mergers," says Steve Hussey, director, financial institutions at Fitch IBCA. "They have a much more precise approach than in other countries. If a leading Spanish bank says it's going to integrate all its branches on a particular day then it usually happens."
BSCH's chief economist, Fernando Fernández, says that Spanish banks have excelled because they were forced to respond to the opening of the domestic market to foreign competition in the late 1980s. "We modernized and increased our efficiency and now there are no foreign banks still remaining in Spanish retail with the exception of Deutsche. Even Citibank has pulled out of retail," he says. Fernández also thinks Spanish banks learnt a lot from the country's banking crisis in the late 1980s and early 1990s and from their more recent forays into Latin America.
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Merger lessons from Spain

The Spanish have proved themselves masters of the bank merger. Successfully integrating two differing cultural entities, the merged Banco Santander Central Hispano has within a year become a European force to be reckoned with. Neighbours take note.

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