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It’s not clear how long it will take, but it’s inevitably going to happen. Some time soon, one big European bank is going to take over another big bank from a different European country. The acquirer will argue that, with the introduction of the euro and the fast growing flow of business within the EU, a bank with a leading position in two or more major countries will be at a big advantage over its competitors. The bank will be making a big mistake. It’s very tempting to think that Europe (or at least north-west Europe, particularly France and Germany) will become a single financial market. After all, large companies such as Nestlé, Unilever or ABB increasingly think of themselves as European rather than as Swiss, British, Dutch or Swedish. A single currency will certainly accelerate that process. But commercial banks do not make much money from servicing such companies. Their investment banking arms might do but, as the Wall Street firms have shown in the past five years, longstanding relationships and a presence on the ground throughout Europe don’t necessarily count for much in winning this business. The banks’ more profitable retail customers, however, have very little need of cross-border services (and that situation will continue, euro or no euro). A big German retail bank that buys a big French retail bank will find little synergy between its two set of individual customers. The dangers in the merger would be far higher than the opportunities. The number of cross-border bank mergers which have worked is tiny. We can think only of National Australia Bank’s three small UK subsidiaries, the US operations of Royal Bank of Scotland and the two big Irish banks and, perhaps, HSBC’s purchase of Midland Bank (although, arguably, both are British banks). Culture and language clashes are too great. There is always the risk that remote operations evade central controls. The alternative dual headquarters merely creates stifling bureaucracy. And it would be particularly hard to control costs in such a bank. When Deutsche/Barclays/ABN announces it is buying BNP/Commerz/Generale Bank, don’t forget you read the warning here first. A financial transfer market?Last month, British soccer player Alan Shearer was headhunted by Newcastle United from his former club, Blackburn Rovers. Newcastle paid Blackburn a world record £15 million transfer fee for taking its star player. Shearer himself got a signing-on fee of 10% of the transfer fee, plus a salary of £25,000 a week. Coincidentally, last month also saw the resolution of the dispute between ING Barings and Deutsche Morgan Grenfell. ING had sued DMG in the US courts for poaching most of ING’s Latin American equity team. The practice of hiring whole teams and of the raided bank moaning about the ethics of the action has a long history. But this was the first time a bank has been sued for the practice. The law suit was dropped only when DMG agreed not to hire any more ING staff until the end of the year. Is there a lesson for the financial markets in the way football transfers work? Should Deutsche Bank have paid Merrill Lynch a transfer fee when it poached Edson Mitchell to run its debt operation, for instance? The economics of soccer and of financial institutions are not dissimilar. Both rely for success on a few highly-paid stars; skills in both are easily transferred from one firm/team to another (or even from one country to another). Soccer players (and other entertainment professionals, such as pop singers) tend to be on fixed-term or permanent contracts. When a club forces a player to break his contract, by convention it pays a fee to his former club. Could this system not be transferred to the financial world? Few investment bankers have a contract of any sort (besides a signing-on agreement). This allows them to move freely. But suppose a top firm Morgan Stanley, say, or Goldman Sachs started to require a long-term commitment, such as a fixed-term contract, from the staff it hired. Suppose further that, in return, it paid them higher-than-average remuneration. It could then probably demand compensation if another firm poached these staff. Perhaps, even, the top firms could get together and agree to pay transfer fees when they hired top staff from each other. That would dramatically reduce the poaching of whole teams, as few banks would agree to such a big transfer. It would also mean direct financial reward for training staff: at the moment, it’s easier to wait for someone else to do that, and then poach. It might not be long before the transfer of an Edson Mitchell creates as many headlines in the popular press as the transfer of an Alan Shearer. |
