Imagine you’re in the market for a second round of equity financing to kick your new company into the next gear. Imagine you’ve had meetings at Chase Manhattan Corp. and at Donaldson, Lufkin & Jenrette Inc. (DLJ). Imagine you’ve also talked to bankers at J.P. Morgan & Co. and Credit Suisse First Boston (CSFB). Imagine you’re optimistic that the $30 million in private-placement funds you’re seeking will come through. Now, imagine that it’s August 30, when CSFB announced that it would buy DLJ for $11.5 billion. Or perhaps September 13, when Chase said it would pay a tidy $36 billion to gobble up Morgan.
“We’re in a tumultuous time,” says David Farber, a veteran CFO of start-ups and established companies. As the new finance chief at Urban Data Solutions, a New York-based application service provider, he had contacted all four banks last summer about backing for the one-year-old firm. But as soon as those mergers were announced, progress on any deal stalled. At least the DLJ bankers were up front with him. “They were completely sidetracked,” recalls Farber. “They said they would be doing us a disservice by pursuing our business.”
Farber remains upbeat about Urban Data’s prospects, but nevertheless worries that these merged monsters will look to do bigger and bigger transactions. “We will get our financing done,” he says, “but there are fewer top-tier players, and that makes it more difficult.”
After all, the CSFB/DLJ and Chase/Morgan combinations are just two of many notable banking and financial services mergers that have been announced since July. Also part of the mix are UBS AG’s $12.2 billion acquisition of Paine Webber Group Inc., Citigroup Inc.’s $31.1 billion purchase of Associates First Capital Corp., Dresdner Bank AG’s $1.4 billion offer for Wasserstein Perella, and FleetBoston Financial Corp.’s $7 billion bid for Summit Bancorp. And speculation in recent weeks has it that Lehman Bros. Holdings Inc. and Bear, Stearns & Co. are destined to be the next pairing to be announced.
Of course, such deal-making among deal makers is nothing new. The overarching idea is to combine commercial and investment banking activities under one roof to create a financial supermarket that offers customers the promise of one-stop shopping. Like Farber, CFOs and treasurers cannot afford to ignore these moves, but they tend to see them as largely inconsequential blips on their radar screens.
“It is a major event when two world-class banks merge,” says Geoffery Merszei, treasurer and vice president of The Dow Chemical Co., in Midland, Michigan, “but it’s just a continuation of a trend that started quite a few years ago.” So far, says Merszei, “the impact [on Corporate America] has been less than I’d expected.”
Moreover, some anticipate positive benefits from lever-aging their relationships with fewer financial institutions. “As these entities consolidate, I look forward to going to a single source for multiple products and services,” says Craig Monaghan, CFO of Fort Lauderdale, Florida-based AutoNation Inc. “I will have questions about whether we’re getting best-in-class in every category,” but in the long run, he adds, “we’ll end up with stronger, more-qualified partners.”
Typical Rough Spots
That’s not to say that these mergers can’t cause some short-term inconveniences. Typical trouble spots, finance executives agree, concern credit availability, analyst coverage, and confusion over contacts.
Credit Availability. Back in 1996, Affiliated Computer Services Inc. (ACS), of Dallas, had a syndicated $200 million credit facility that included First Chicago and BancOne at the time of their merger. When fast-growing ACS looked to increase its borrowings this year to $450 million, bankers at the combined entity balked. “We had to scramble to bring in another bank,” says CFO Mark King, “but it was a mild blip.”
Today there are fewer banks around, and as those banks get bigger, they tend to focus more on their bigger customers. “I don’t know if there are enough places to go out and get credit,” says John Morse, CFO of The Washington Post Co. As a CoreStates client when it was swallowed by First Union in 1998, Frank Gatti, CFO of Educational Testing Service, in Princeton, New Jersey, soon began to see the effects of being a smaller customer. “There’s an unconscious diminution in the value of service,” he says. “You no longer are the number-one call that gets returned.”
Analyst Coverage. Consolidation can also leave a void for companies with a small following on Wall Street. “There is the potential loss of analyst coverage” when the merging firms overlap on research, notes Monaghan. ACS’s King says that coverage on his company was dropped a few years ago when Salomon Brothers acquired Smith Barney, because Salomon didn’t already follow the company. “Analyst coverage is the first thing to go,” he observes, “and in many cases it’s dropped based on equity financing” done with the firm.
So far, ACS has not been affected by the recent CSFB/DLJ and Chase/Morgan deals–only DLJ currently follows the company–but he worries about what would happen if the much- talked-about acquisition of Bear, Stearns were ever to occur. “That’s the next likely target, and our leading analyst, who’s covered us for five years, is there,” he says. “If Bear, Stearns is acquired, that could have a big impact, depending on who the buyer is.”
Confusing Relationships. The one area in which every CFO has experienced grief when financial services firms merge is maintaining effective relationships with bankers and other personnel. As with mergers in any industry, chaos usually reigns as organizational structures are shuffled and employees worry about their future–not just the question of whether they will have a job, but what the pecking order will be once the dust has settled.
Dow’s Merszei once got separate calls from his account officers at two merging banks, with each claiming that he would be the surviving relationship manager. “I’ve seen cases where it took six to nine months for officers to figure out who’s responsible,” he says. But as banks have gotten a few mergers under their belts, they’ve realized the importance of clear communication with customers and of speeding up the integration process.
Merszei, for instance, praises both Chase and Morgan for their service in foreign exchange and interest rate risk management, and on visits to both banks soon after the merger announcement, he was briefed on the plans in progress for the combined treasury services group. “People have learned that speed is a necessity,” he says, “[as is] being clear to clients who the key relationship officers are.”
One month after the announcements, however, Merszei was still waiting to hear who Dow’s account managers would be. “I’m curious,” he notes, “to see how long it will take.”