Merger lessons from Spain


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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.

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.

There is another crucial factor. Spain experienced one of the ugliest mergers in banking history - between Bilbao and Vizcaya in the late 1980s - when the two institutions could not agree on the composition of the board. Eventually the central bank, the Bank of Spain, intervened and appointed Emilio Ybarra chairman (the current BBVA chairman) to sort out the mess, but hostilities lasted for years.

Four of the senior executives at BSCH, including CEO Corcóstegui, came from Vizcaya and went through that merger. Since Ybarra came from the Bilbao side the Vizcaya men were eVectively the losers, which probably made it even more painful for them. Alfredo Sáenz, chairman of Banesto, which Santander acquired in 1993; Luis Abril, chief of external communications at BSCH; Francisco Luzón in charge of Latin America; together with Corcóstegui all worked under Pedro Toledo at Vizcaya, which gained a reputation as a progressive place that attracted talent and also supplied it to other Spanish banks. Shortly after the merger Toledo died, which intensified the leadership difficulties.

The BSCH merger has been put together drawing on the lessons of the Bilbao Vizcaya Wasco as well as Corcóstegui's experience of becoming chief executive of Banco Central Hispano shortly after it was formed from Banco Central and Banco Hispanoamericano in 1992. Corcóstegui's task there was to turn things around and reverse the falls in income.

The success of the BSCH merger suggests the lessons were well learnt. Crucial elements were the secrecy and speed of the negotiations; the good chemistry between the senior executives; the announcement of who would occupy senior positions at the same time as the deal was made public, with second-tier and third-tier positions being decided shortly afterwards; the adoption of a multi-branding strategy that has enabled BSCH to keep market share while still pursuing cost cuts; and the determination to continue looking outwards and making new acquisitions.

"Both BSCH and BBVA (BBV and Argentaria merged last year) had the top level of management in place when they announced the deal and appointed the next layers soon after," says Gonzalo Gortazar Rotaeche, executive director of Morgan Stanley in Madrid. "With Deutsche and Dresdner it was going to take a year to do the merger - the Spanish banks were able to do it in three months." Says another observer: "With Deutsche and Dresdner they didn't realize that jobs must be allocated before signing the agreement. If you have been through one merger that was absolutely complicated, like the Bilbao Vizcaya one, you learn that things must be done differently."

The roots of a relationship:
What helped BSCH was that Botín and one of his senior executives, Matías Inciarte, were already well acquainted with BCH chairman José Maria Amusátegui and Corcóstegui. Before the merger they would often meet for breakfast. During the negotiations they did all the calculations on the share swap and other technical details themselves to avoid leaks. After the merger they make up what is known inside the bank as the G4, with Botín and Amusátegui as co-chairmen, Inciarte as vice-chairman and Corcóstegui as chief executive.

For Botín the difficulty was always going to be finding people he could work with in harmony in a more structured situation. His personality is that of the classic deal-maker and risk-taker. He likes to be in total control - though he is prepared to listen to advice and opinions, the final decision is his alone. According to one story, when Santander was bidding for Banesto, which had been intervened by the Bank of Spain, he held a meeting to discuss the price. After the executives had come to an agreement he asked everyone to leave the room. He then put his own price in the envelope and sent if off to the Bank of Spain.

No-one inside Santander knew exactly what the bid was until after the result.
"The secret of Santander was the rapid decision-making process," says a BSCH executive. "There was no committee, no thinking about it, in the end one person made the decisions - Emilio Botín. Botín was behind all the major initiatives and he knew all the detail as well. That's why the bank was number seven in Spain 10 years ago and is the largest now."

The merger with BCH involved a gamble of a different kind. This wasn't just a question of taking over a failing or weak bank and turning it into a mini-version of Santander with its emphasis on tight costs, prudent lending and aggressive selling. This had been done successfully with some of the Latin banks. With Banesto, the Bank of Spain installed as an interim measure a management team that Santander was able to keep. This meant that when Banesto came into Santander's hands it was already on course for a turnround. Since the team came from BBV and had been expected to return there after the sale - unless, of course, BBV acquired Banesto - Santander's major competitor was sore about the outcome for years afterwards.

BCH, however, was a very different proposition. Santander had modelled itself on Anglo-Saxon lines with emphasis on shareholder value, short-term results and investment banking but BCH adopted a German model. It had big industrial holdings and prided itself on long-term relationships. The bank was conservative and slow moving. Decisions were taken in a gentlemanly way over long Spanish lunches.

Nowhere is the contrast greater than in the different attitudes to lending. Central Hispano would lend unprofitably for the good of a relationship and supported companies through difficulties. Santander lent only to make a profit and was quick to pull the plug on any company that looked like failing.

The reason no-one suspected that the BSCH merger was on the cards was because the difficulties of putting together these opposite cultures seemed insurmountable.

One conclusion from the BSCH achievement is that personalities are more important than culture and though Botín may be a dominant personality he has always recognized the value of attracting and keeping talent. He persuaded Franscisco Luzón, for example, to quit his position as boss of Argentaria and move to Santander where he was considered a potential CEO had Botín decided that he needed one. Now, Corcóstegui's relationship with Botín is critical. A single meeting with Corcóstegui shows why it works. Unlike many chief executives he is neither flamboyant nor arrogant. His style is rather modest, unassuming and academic. He has a doctorate in finance from the Wharton School, trained as an engineer and began his commercial banking career with Chase in New York. His systematic approach and ability to build consensus was exactly what Santander needed, especially since before the merger the succession issue was starting to create tension. "The engineer will make sure that the machine is working," says Corcóstegui in explaining how he works with Botín. "It's a perfect fit. Imagine that Emilio and I were the same age and had the same way of thinking, the same type of management style, it would have been very difficult. We are very complementary." With Corcóstegui to take care of operations, Botín is left free to carry on deal-making and there has been no let-up in that over the past 18 months. Since the merger, BSCH has backed Royal Bank of Scotland in its bid for NatWest in the UK, it has defended Société Générale from a hostile bid from Banque National de Paris, acquired the financial services internet portal to spearhead its internet initiative, bought the Meridional group which includes Bozano Simonsen in Brazil, acquired Banco Totta and Crédito Predial Português in Portugal which involved a lengthy dispute with the government, merged Banco Tornquist into Banco Rio in Argentina and acquired the 28% of Banco Rio it didn't already own. BSCH has also acquired pension fund managers in Peru and Colombia, Merrill Lynch's asset management business in Puerto Rico and last month won the auction for Serfín in Mexico.

"We (the G4) meet every Monday morning. It lasts for several hours and we discuss everything from results to strategy," explains Corcóstegui. "The truth of the matter is that we see everything the same way. When we decided to make the bid for Serfín it took only half an hour to agree on everything."

Corcóstegui may not be a showman but nor is he as conservative as BCH's pre-merger image might suggest. He is open to new ideas and a great internet enthusiast. "It's changing the way people live and do business," he says. "The internet is changing both the demand side (of banking) from investors and the supply of products and services to customers."

With the purchase of, BSCH's strategy is to use this brand (Corcóstegui says BSCH is the only bank in the world to have such a strong internet brand) to generate traffic, some of which will find its way to Open Bank, BSCH's transaction-oriented internet operation. Corcóstegui says the question of whether $550 million was too much to pay can only be answered after BSCH's internet operation is floated.

Corcóstegui's other big strength, say analysts, is his ability to talk to institutional investors, a role that takes up an increasing amount of a bank CEO's time. Amusátegui, who is 68 and intends to retire in two years, performs a lot of ceremonial functions for the bank as well as meeting politicians, an important role but one that Botín, who is 66, prefers not to spend time on. Inciarte is in charge of risk management at the bank and is noted for his diplomatic skills. A former government minister, he joined the bank in 1983 and is one of Botín's most trusted lieutenants.

That's why when Botín came to the conclusion late in 1998 that the way forward was a merger with BCH he asked Inciarte to discuss it with Corcóstegui. "In 1998 everyone in Spanish banking was talking to everyone else. The BCH chairman and myself were committed to making a move and were trying to understand the best move for us in terms of both hardware (the financials) and software (skills and people)," recalls Corcóstegui. "I got a call from Matías who said, 'Are you considering doing something?' I said: 'Of course'."

Secret meetings, stunning result:
There followed 10 meetings between the two men over a six-week period that ended on January 15 with a merger announcement that had other bankers stunned. Sitting in his oYce in the former BCH headquarters, Inciarte recalls visiting the same office, then occupied by Corcóstegui, to discuss the merger. To preserve secrecy, says Inciarte, "we never had two meetings in the same place, we had meetings here, in my old office in Castellana, we went to lunch and we met in my house outside Madrid. The final meetings were held at the headquarters of Arthur Andersen, the auditor for both banks. We also talked on mobile phones rather than go through secretaries who might get suspicious if there were too many phone calls between us." The talking went on right through and including Christmas Day. "What we considered critical was not just to reach agreement on financial matters and the structure but to go deep into cultural issues." Meetings of the entire G4 were kept to a minimum also to avoid attracting attention.

Inciarte recalls that matters related to the price of the share swap and the divisions and who would head them were discussed longest. That may be so but it seems few if any changes were made to Corcóstegui's original proposal on the structure. "I proposed to the G4 an organization for the company and there was not one single modification to the proposal, not even to the names," says Corcóstegui, who sits in Banesto chairman Alfredo Sáenz's old oYce. The grand old offices of BCH and Banesto sit side-by-side in Madrid's Plaza de Canelejas. To create the new BSCH headquarters the wall between them has been knocked down and the art collection rearranged.

Corcóstegui's proposal consisted of the G14, the executives who would head the 13 new divisions plus himself. None of these senior executives, which included such Santander luminaries as Luzon and originally Ana Patricia Botín, is believed to have known about the merger until the day before it was announced. Some didn't Wnd out until hours before. Luis Abril, who was Banesto's head of external relations, got a call from Corcóstegui, his old Vizcaya colleague, offering him the external communications role. It's not every day an executive learns that his bank is merging, not from his own boss but from his friend at a rival bank who is about to become his new boss.

Emilio Botín had put the interests of the bank completely above the interests of his family and would continue to do so over the next few weeks when Ana Patricia would resign. In Corcóstegui's plan Ana Patricia was given charge of global wholesale banking - effectively a demotion since she had been managing Latin America as well. She had responsibility for almost the whole bank apart from Spanish retail. She reported directly to her father and was running areas close to his heart - investment banking and Latin America. In the 1980s, when Santander got its first major foothold in the region in Chile, the project was very much Emilio's baby, say bank insiders, as was the setting up of the investment bank in 1985 originally run by Juan Inciarte, Matias's brother, now in charge of the industrial group, asset management and private banking. Everyone assumed that in following the favoured strategies of Emilio, which also happened to be her own specialist areas, Ana Patricia was en route to eventually succeeding him and taking the Botín dynasty at the bank into a fourth generation.

This assumption caused friction between Ana Patricia and other senior executives at the bank when she arrived, aged 28, having previously worked at JP Morgan, and began running the investment bank. The standard jealousies that exist whenever an investment bank forms part of a commercial bank - over salary levels, degree of freedom at work, etc. - were overlaid with the resentment that Ana Patricia hadn't served time in the ranks.

Some time in 1998 Emilio Botín clearly had a change of mind about Santander's strategy. The bank was perceived by investors as too dependent on volatile Latin American earnings and risky investment banking. He may also have wondered whether his daughter was quite ready to run the whole show. A merger with BCH, however, could solve both problems. It would pump up Spanish retail and reduce the proportion of Latin American earnings as well as bring management talent and structure to Santander. If it could be done as an agreed merger there would be no premium to pay and BCH's management talent would not rush for the exit. But that also meant offering a leading role to BCH's most senior executives, which is why Botín's eagerness to recruit Corcóstegui was probably an important factor in his choice of BCH as a partner. With this in mind he instructed Matías Inciarte to talk to Corcóstegui and kept the move a secret from Ana Patricia.

"The merger with BCH wasn't just about doubling the size," says a Spanish banker, "it was also about finding managers. Santander was quite thin at senior level because many bankers did not like working with Emilio Botín as he took all the decisions."

When the deal was done it was clearly going to be tough for Ana Patricia to settle into her new, rather reduced role. There were reports of clashes with Corcóstegui, who wanted to have a team in which everyone played equally. Ana Patricia wanted to carry on as before but, say her friends, she was far less adept at corporate politics than those she was up against. The article in El País's Sunday magazine that caused so much fuss had resulted from an interview done months before but released then because of its topicality. It was mostly a lifestyle piece. With the emphasis at BSCH on presenting a united front, the timing was bad, but more seriously the article seems to have been exploited internally by Ana Patricia's critics to push her to resign. When asked why he wasn't able to work with her, Corcóstegui says only that he can't stop anybody leaving and that no-one should have a guaranteed future.

Ana Patricia is now involved in a venture capital fund, Suala Technology Capital Fund, investing in telecoms, media and internet companies and an e-commerce consulting firm, Coverlink, which is being turned into an internet incubator. Some feel she will eventually return to an executive role in Santander. Much may depend on the success of her internet ventures and how much that experience becomes essential for running a bank. "Not even Ana Patricia knows what is in Emilio Botín's mind," says a Madrid banker.

BSCH is emerging as a different animal from Santander or BCH. It is still acquisitive but it is more cautious about risk, especially in investment banking. Investment banking competitors say that even in its home markets such as Spain the bank is far less visible. Retail customers, however, have stayed with the bank and only a 1.6% market share has been lost.

"Santander Investment was more aggressive with potential for trading gains. We have made a strategic decision to have a lower risk profile," says del Valle. He and other executives emphazise that the investment bank's role is to stick to its franchise in Spain, Portugal and Latin America. "We can't compete with Goldman Sachs or DLJ selling tech stocks in the US. We would be crazy to do that. But our research capability in Spain, Portugal and Latin America is second to none."

Cooler on investment banking:
Rather than the Ana Patricia philosophy of leveraging oV the commercial bank to produce investment banking business, these days the investment bank is regarded as just another product arm. Position-taking has been reduced to a minimum and in the first quarter BSCH's market risk averaged $33 million out of a capital and reserves base of $10 billion. The market risk Wgure is half the level of a few years back. Says a BSCH insider: "There was a time when it was perceived that Santander Investment could grow out of Latin America to become a global investment bank but that idea was growing thin even before the merger."

With the prospect of less exciting times in investment banking, the division, headed by Manuel Arrojo, a former head of European equities at Santander Investment and a CFO, is one area where staV have left in New York and Madrid.

The decision to keep the BCH, Santander and Banesto brands intact while integrating back-office operations, has avoided huge losses in market share. Says Matías Inciarte:"In previous mergers the idea was also to merge brands. Our idea was to profit from the expansion of the Spanish economy. We thought it would be a mistake to be too inward looking and be changing the names of branches. Our strategy was not to lose market share and to concentrate on cost savings." BSCH has closed some 450 branches and plans to shut a similar number this year. By redirecting customers to other branches - even if of a diVerent brand but close by - it has been able to keep market losses to a minimum.

It's not clear how long it will be before BSCH can be as dynamic cross-border in Europe as at home and in Latin America. Spanish banking is far ahead of European regulation and, on the whole, other European banks. To keep up to date officials in Brussels and executives at German and Italian banks should ensure Madrid is on their itinerary.