Suddenly, just about every major Wall Street bank either has a wedding booked or is close to holding an engagement party.
But history suggests many of these couplings can end up in miserable unions.
“You’re talking about kind of oil and water, and trying to mix that,” said Chuck Carlson, portfolio manager of Horizon Investment Services in Hammond, Ind.
One overriding problem has been a clash of cultures, particularly when companies run by more conservative retail bankers combine with more aggressive institutions operated by investment bankers.
Bank of America Corp is buying Merrill Lynch & Co., Barclays is acquiring the North American investment banking and capital markets operations of Lehman Brothers, and the government is taking over insurer American International Group and top U.S. thrift Washington Mutual.
Meanwhile, Japanese bank Mitsubishi UFJ Financial Group plans to acquire up to 20 percent of Morgan Stanley. Also, Lehman’s Asian and European units are being bought by Japan’s Nomura Holdings.
The trigger for the frenetic round of dealmaking: The collapse last Monday of 158-year-old Lehman after a frenetic weekend of talks failed.
When Lehman went down, other banks with substantial exposure to toxic mortgage-related debt became fearful they could be next unless they found a strong partner.
Unhappy Marriages
But in the recent past, even well-crafted deals between major commercial banks and investment banks have led to infighting at the top. In many cases, lawsuits and big write-downs have hurt shareholders of the acquiring companies.
American Express Co. struggled when it purchased Lehman in 1984. The parent company’s more buttoned-down style clashed with the buccaneering ways of Lehman and led to constant fights between top executives. A decade later, American Express spun off Lehman – undervalued and unwanted.
Swiss-based UBS bought U.S. brokerage PaineWebber in 2000 to gain a foothold in North America. But eight years later, the unit suffers from higher costs and thinner margins than the lucrative Swiss business. UBS has recently mulled a spin-off of the division, according to sources.
“The strategic rationale (in many of these deals) continues to be questionable … because of the cultural clash issues,” said Jay Ritter, professor of finance at the University of Florida.
Out-sized egos are a hallmark of Wall Street, which often leads to clashes when power-sharing is attempted in the board room.
Brokerage Dean Witter’s 1997 merger with investment bank Morgan Stanley was praised as a game-changing combination, but the two sides never came together.
Dean Witter Chief Executive Philip Purcell took over the company and prevailed in a power struggle that sent Morgan Stanley President John Mack packing in 2001.
Mack returned as CEO to an underperforming Morgan Stanley in 2005 in large part because the blue-chip investment bank’s culture never melded with Dean Witter’s blue collar-focused brokers and mutual funds.
After Citicorp merged with Travelers Group in 1998, John Reed and Sanford “Sandy” Weill, who led the respective companies, shared power. But their contrasting styles and visions led to Reed’s departure in 2000.
Rarely easy to execute, mergers often come with big job losses, and create internal tensions that start at the top and reverberate through management layers.
In 1999, Deutsche Bank AG suffered amid a loss of talent when it acquired U.S. financial group Bankers Trust. One year later, Credit Suisse saw a similar rush to the exits after it bought Donaldson, Lufkin & Jenrette.
“You will see issues pop up. I think these culture clashes will be something that will arise,” said Arun Shastri, managing principal of consulting firm ZS Associates.
The track record of more recent bank deals, some made at the peak of the housing boom, hasn’t been much better.
Wachovia Corp. acquired Golden West, the option adjustable-rate mortgage specialist, in October 2006, and Merrill bought subprime housing lender First Franklin in December 2006, shortly before the subprime crisis took hold.
The acquisitions were presented as great growth opportunities, but ended up punching big holes in the acquiring companies’ balance sheets.
Some of the industry’s strongest performers have shied away from major deals.
Wells Fargo Corp. hasn’t done any megadeals, but emphasized small acquisitions and organic growth. Its shares have been stable in the past year, while Bank of America has lost one-third of its market value, and Wachovia stock sank 70 percent.
(Reuters)
