The Deal Breaker Threatening Bank-Brokerage Unions:By giving cultural and people issues the attention they deserve, banks and brokerages stand a better chance of making their marriages work.

Even though their marriages of the 1960s, 1970s, and 1980s didn’t work out, banks and securities firms once again are smitten with the urge to merge. In 1997, at least eight acquisitions of investment banks by commercial banks were announced and more transactions are in the pipeline for 1998. The track record for prior deals is chilling. In the late 60s and early 70s, a key jumping-off point for newly formed bank holding companies seeking financial services diversification was discount brokerage, and a spate of acquisitions began with BankAmerica Corp.’s purchase of Charles Schwab & Co. But the banks soured on the securities field before too long and disengaged by divesting or cutting loose their discount subsidiaries. Non-bank financial organizations didn’t fare much better with investment banking in the 80s, and there were unhappy outcomes in such deals as General Electric Co.’s acquisition of Kidder Peabody Inc., American Express Co.’s absorption of Shearson Lehman Inc., and Sears, Roebuck & Co.’s purchase of Dean Witter & Co. Yet, they keep trying, and in one of the boldest deals to date, insurance/investment giant Travelers Group Corp., owner of Salomon Smith Barney, and banker Citicorp hammered out an $83 billion agreement that was destined to be the highest-priced m&a transaction in history. Will the partners of the 1990s learn from their predecessors’ mistakes? Or do they face dj vu? Although many factors contributed to the failures of the past, one of the biggest causes was the lack of attention paid to the pronounced culture clash and people issues. Managers of combined organizations rarely dealt with the fractious potential in merging organizations with diametrically opposed operating styles and, as a result, they often were unable to direct the merger process effectively and implement critical changes. Banking and brokerage combinations offer many potential economic and technological synergies. Banks can benefit from the securities firms’ performance orientation, flexibility, quick decisionmaking, marketing expertise, and focus on satisfying customer needs. Brokerage firms that link up with banks can become better at strategic cost management, leadership development, credit risk management, and other process management activities. In many respects, the timing for such combinations is ideal. Banks have been steadily losing market share and product advantage to financial services competitors, and rich stock prices of the 1990s make mergers particularly attractive for securities firms. Alex. Brown Inc. sold out to Bankers Trust for 2.6 times book value in April 1997. A few months later, BankAmerica paid five times book for Robertson Stephens & Co. and its eventual merger partner, NationsBank Corp., paid a whopping 10 times book for Montgomery Securities. However, banks and brokerages have distinctly different ways of doing things. While banks tend to reward seniority, operate through hierarchical organization structures, and emphasize process, brokerages tend to be performance-driven, decentralized, and people-oriented. To fully reap the merger benefits, executives must manage these cultural differences. Their challenge is to structure the two entities so that they can capture synergies without falling victim to opposing cultures and losing the best of both organizations. Credit Suisse and First Boston, for example, have made considerable progress in combining two distinct business cultures, but it has taken them almost 20 years to come this far and they still have a long way to go in sorting out cultural differences. The key to jumpstarting the process is to focus on issues that in the past were largely considered peripheral, such as vision, leadership, and culture. Cultural incompatibility, a leading cause of merger failure, is clearly a make-or-break issue that needs to be addressed before, during, and after implementing a merger. Senior management and boards need to consider cultural risk and how it will be dealt with when evaluating potential partners and developing integration plans. If warning bells sound during the preliminary assessment, management faces a choice: develop a clear action plan for encountering problems during the premerger phase or rethink the proposed combination. Perhaps nowhere are these differences more acute and critical than in the area of compensation, where vastly different structures exist at all levels of an organization. The bonus structure in brokerage firms makes it possible for securities firm vice presidents to earn more than bank CEOs a situation likely to cause resentment among senior bank executives. Even support staff at brokerages can earn substantial bonuses for performing virtually the same tasks as their banking counterparts who receive no bonuses. Managers must tread cautiously when addressing these issues. Having a plan for retaining key people is a must when a brokerage is acquired, since much of the firm’s value is tied to their skills and relationships. This lesson was learned the hard way in the Credit Suisse-First Boston merger, when efforts to cap bonuses led to numerous high-profile defections. Support staff compensation must also be dealt with early on to avoid problems with potentially alarming consequences. Even though jobs in depository institutions and investment banks might seem similar, differences in productivity, transaction complexity, and performance expectations may warrant the extra rewards. Quantifying those differences will help managers initiate measures that can alleviate problems before they arise. Given the cultural challenges to making bank-brokerage mergers work, managers have to carefully consider what kind of organizational structure will work best. The most common alternatives are: * Keeping the two separate organizations under a common holding company; * Making one of the organizations the dominant player; * Integrating both companies using the best practices from each partner; and * Integrating through use of the best practices from each entity plus external best practices. The structure that is chosen ultimately will depend on the acquirer’s strategy and capabilities. That, in turn, will reflect where the company falls within the financial services industry’s structure. One of the effects of consolidation has been a tiering of financial institutions into these four segments based on the firms’ competencies, capabilities, and geographic reach: Global Universal Chase Manhattan Corp., Deutsche Bank AG, Merrill Lynch & Co., Travelers Group. Wholesale Specialists J.P. Morgan & Co., Goldman, Sachs & Co., CS Holdings. Super Regionals First Union Corp., NationsBank Corp., PaineWebber Inc., Wells Fargo & Co. Regional and Local KeyCorp., PNC Banking Corp., Raymond James & Co. Super regionals and regional and local firms may have better success by keeping brokerage and banking entities separate and distinct because of the cultural differences. While autonomy may be least painful in the short term, the acquirer has trouble capturing efficiencies and the structure limits the potential for growth. The cultures of global universal and wholesale specialist banks are more like those of brokerage firms. Therefore, they are likely to be more successful in carrying out a full-scale integration that blends the cultures of both concerns, since each can learn from the other. Successful merger integrations share several similar characteristics: * Customers see a seamless integration with no effect on service. * Relationships with regional offices and branches remain clear. * Communications are open and people from both sides buy in to the new organization and its shared vision. * New structure, policies, procedures, and practices are defined sharply and rapidly adopted. None of these elements can be achieved, however, without a commitment from both parties to make change management a top priority. That means, management, cultural, and people issues cannot be left to “sort themselves out.” They require a systematic integration plan that is carefully implemented. By giving these issues the management attention they deserve, banks and brokerages stand a better chance of making their marriages work. Focus On PeopleOne of the most overlooked aspects in manymergers people issues is especially threatening to unions of banks and brokerage firms, which have distinctly different cultures and operating styles. If people issues are just anafterthought in these deals, management caneasily become mired in the stress, low morale,resentment, and frustration that their employees feel and lose the ability to direct the mergerprocess effectively and reap the benefits ofthe deal. The key to successful integration in bank-brokerage marriages is to focus before, during, and after the deal on issues that in the past havebeen largely considered peripheral, such as vision,leadership, and culture.