Cross-Border Bank Mergers and Acquisitions in the EU

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Cross-Border Bank Mergers andAcquisitions in the EUTed Lindblom & Christopher von KochPublished online: 08 Sep 2010.

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Cross-Border Bank Mergers andAcquisitions in the EU

TED LINDBLOM and CHRISTOPHER VON KOCH

Beginning at the end of the 1990s the banking industry enteredinto a new phase of consolidation. The US market isexperiencing an increasing number of inter-state bank mergersand acquisitions, whereas cross-border mergers between banksin different countries are becoming ever more common in theEU. This paper examines the motives and gains from large cross-border bank mergers by using what has been called a ‘balancedscorecard approach’. It assesses firm performance by using bothfinancial and non-financial (strategic) variables. The paper isexplorative and covers a select literature review of bank mergersand acquisitions in general and an analysis of the Nordbanken-Merita merger based on the balanced scorecards approach inparticular. It is shown that the balanced scorecard may be a veryuseful technique to analyse the complexity of large cross-borderbank mergers and thereby it adds to our over-all understandingof bank mergers across borders. Furthermore, we demonstratehow the growth strategy behind the merger of the two banks maybe organised within the framework of a balanced scorecardhighlighting the strategic fit between them. Our findings implythat the strategic fit was of a complementary nature. The bankswere completing each other rather well in the differentperspectives of the model. The success of the merger willtherefore very much depend on the capability of cross-utilisingthe different characteristics and strengths of the merging banks.

INTRODUCTION

Worldwide, the banking industry is currently experiencing an intensifiedand most interesting phase of consolidation. In comparison to earlierrestructuring phases in the 1970s and 1980s, recent bank merger and

Professor Ted Lindblom and Christopher von Koch BSc are at the School of Economics andCommercial Law, Gothenburg, Sweden.

The Service Industries Journal, Vol.22, No.4 (October 2002), pp.41–72PUBLISHED BY FRANK CASS, LONDON

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acquisition (M&A) activities appear to involve an ever-escalating numberof large financial institutions. In a survey of all bank M&As in the USmarket from 1980 through 1994 (in total 6,347 M&As), Rhoades [1996]observes a substantially increased number of commercial bank M&As inwhich the involved banks each had more than $1 thousand million in assets.1

During the last five years of that period 75 such M&As occurred, while only67 large M&As were carried through during the whole decade of 1980s.2

This tendency has continued with another 61 large M&As during the shortperiod from 1995 to 1997.3 Some of them were extremely large andinvolved bank institutions with assets over $100 thousand million each.These latter M&As, like the ones between Chemical Bank Corporation andChase Manhattan in 1996 and between BankAmerica and NationsBank in1998, are therefore referred to as ‘supermegamergers’ by Berger, Demsetzand Strahan [1999]. In Europe, the largest bank merger until 1998 was themerger between the two Swiss banks, Union Bank of Switzerland and SwissBank. By this ‘supermegamarriage’ the largest bank in the world up to thatpoint was created [Olsson, 1998]. During the last two years theconsolidation wave has continued world-wide and almost intensified inmagnitude [Guzman, 2000].

So far, cross-border mergers have primarily taken place in regions withcultural links. Belgian and Dutch financial institutions have joined togetherand there has been consolidation in Scandinavia [Nellis, McCaffery andHutchinson, 2000]. In Northern Europe the consolidation process has nowreached a pan-Nordic level, in that several Nordic banks have boughtcompetitors in neighbouring countries [Lindsten, 2000]. The Swedish SEBis so far the only bank that expanded outside the Nordic market, by buyingthe German BFG. Lately, the Swedish/Finnish MeritaNordbanken is tryingto fulfil its strategy to became a pan-Nordic bank by bidding on bothNorwegian Kreditkassen and Danish Unidanmark.

In the financial literature the current wave of consolidation within thebanking industry is contemplated with great interest, but also with a bit ofconfusion and scepticism. In terms of economic value added or increasedshareholder value, the overall gains from bank M&As in general and fromlarge bank consolidation in particular are far from settled. On the contrary,these gains have been strongly questioned by the vast majority of bankindustry observers and academic writers that have studied the phenomenonin the 1980s and early 1990s [Berger, Demsetz and Strahan, 1999;Milbourn, Boot and Thakor, 1999]. The outcome of this earlier empiricalresearch of bank M&As generally indicated almost no or negative gains, atleast in terms of cost efficiency, rather than increased shareholder value[Berger, Hanweck and Humphrey, 1987; Ferrier and Lovell, 1990; Houstonand Ryngaert, 1994]. The only ones to benefit were occasionally the owners

42 THE SERVICE INDUSTRIES JOURNAL

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of the target bank, especially if it had shown bad performance because of X-inefficiency [see e.g. Houston and Ryngaert, 1994]. These findings seem tobe independent of whether the studies were based on ordinary cost ratioanalysis/stock market analysis [e.g. Houston & Ryngaert, 1994; Pilloff,1996] or more production economic oriented (translog) cost functions [e.g.Peristiani, 1997]. Apparently, large bank M&As do not make an exception.Houston and Ryngaert [1994] lend support to prior research that cannotdistinguish any significant cost reductions from large bank consolidations,after undertaking a study explicitly focusing on the gains from large bankM&As based on data concerning acquisitions of publicly traded banks in theUS market during 1985–91.4

THE RATIONALE FOR LARGE BANK MERGERS AND

ACQUISITIONS

The empirical evidence from early cost efficiency studies raises the obviousquestions of why the pace of bank consolidation has been at such a highlevel in practice and why bank M&As have escalated in size. In otherwords: what is the rationale for large bank M&As? As Berger, Demsetz andStrahan [1999] point out, shareholder value maximisation is only one ofseveral plausible motives for banks to consolidate. This motive may defacto be attained in two different ways – by strengthened market power insetting prices or by improved efficiency. The market power motive maythen explain large in-market M&As that substantially affect marketconcentration within a certain (local) geographical area.5 However, many ofthe recorded large and very large M&As in the US during the 1980s and1990s concerned banks located in different states. According to Ferrier[1999] this is especially true for these events in the 1990s, where almost 70per cent of all bank megamergers were characterised as inter-state bankmergers, i.e. they occurred across a state border.6

Apparently, other motives than shareholder value maximising motivesare more likely to be the main reason for large inter-state bank mergers. Onesuch motive is of a principal agency problem nature and linked to theinterest and individual objectives of managers. In this perspective, theoccurrence of large inter-state bank mergers may very well be a product ofa classical managerial objective; empire-building in order to gain higherstatus and reputation. Provided that existing managerial bonus systems arerelated to firm size, executives may also obtain increased monetarycompensation by sticking to the motto ‘big is beautiful’. In this contextMilbourn, Boot and Thakor [1999] emphasise the importance of whetherexecutives are able to judge correctly how talented and skilful they reallyare. The authors arrive at the conclusion that those executives that are

43EU CROSS-BORDER MERGERS AND ACQUISITIONS

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overconfident in their ability to successfully manage very large banks willdisplay a strict preference for size even though this may be directly inconflict with the best interest of shareholders. This may in turn beinfluencing decision-making by managers in other banks and eventuallylead to ‘herd behaviour’ within the whole industry.

In their extensive review of financial service research literature on theconsequences of consolidation, Berger, Demsetz and Strahan. [1999] attractattention to the fact that a major part of this literature is based on studies ofdata from the 1980s concerning the US financial industry. They argue thatthe economic environment has changed since then and that financialinstitutions now are facing altered constraints for the provision of services.Five important changes are identified that have contributed largely to theintensified restructuring of the banking industry. These changes aretechnological progress, improved financial conditions, excess capacity,international consolidation and deregulation of financial markets. Recentstudies based on 1990s data imply that there may exist a great potential forcost efficiency improvements from consolidation due to new technologiesand lessened regulatory constraints [e.g. McCormick, Bowen and Taylor,1995 and Berger and Mester, 1997]. This cost efficiency potential of about20 per cent or even more is, however, hard to achieve for a newly createdbank organisation, due to managerial problems and difficulties inmonitoring a larger organisation and integrating existing administrativesystems as well as different corporate cultures.

The complicated nature of bank consolidation also makes it difficult foranalysts to investigate and distinguish possible gains, let alone themagnitude of these gains. This has paved the way for more strategic-oriented studies that are trying to find out the strategic fit of merged banks.The regression analysis by Ramaswamy [1997] represents one kind of suchstudies. He uses a set of ratio indicators for five strategically important areasdefined as market coverage, operational efficiency, market activity, clientmix and risk propensity. His findings lend support to the hypothesis that thegains from bank consolidation are highest if the involved banks displaysimilar strategic characteristics regarding these areas. Chatterjee et al.[1992] instead focused on corporate culture and the significance of culturedifferences between top management teams of merging banks. Theirfindings suggest that these culture differences are important to investors andmay thus have a negative impact on shareholder value. In a recent paperHughes et al. [1999] stress the importance of considering the risk level ofbanks. The risk aspect has often been neglected in prior empirical studies.Therefore, these authors try to apply an alternative approach. They identifybanks by their structural characteristics that are correlated with each of theirprior M&As. Then they examine how the performance of these banks is


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affected by the characteristics of different consolidation strategies.According to their findings, particularly, inter-state bank consolidationcreates shareholder value, especially if it leads to a diversifiedmacroeconomic risk for the bank. Finally, there are also more case-orientedstudies, which are primarily emphasising and stressing the importance ofthe merger type, the underlying motives behind a certain merger, and howthe merger is implemented and carried through by management [e.g.Rhoades, 1998].

Most strategic-oriented studies have in common the use of dynamicanalysis methods, i.e., they evaluate the motives for as well as the economicconsequences of bank M&As by examining and comparing the behaviour ofbank organisations ex-ante and ex-post a merger event. These studies, thus,help to improving our understanding of those bank M&As that have takenplace. However, further research is still required in order to be able to tellwhich mergers will be sustainable in the longer run and, eventually, to makequalified predictions of which banks are strategically fitted ex-ante.7

PURPOSE

This paper reports the main findings from a research project which isfocusing on a contemporary M&A phenomenon that is related to the largeinter-state bank mergers that have taken place within the US financialmarket – namely, large cross-border bank mergers.8 Lately, the financialindustry has experienced a growing interest among banking firms to mergewith or acquire banks in other countries [Vander Vennet, 1997]. Althoughsuch cross-border consolidation of banks is still a comparatively rare eventand not always successful [Nellis, McCaffery and Hutchinson, 2000], thiskind of M&A activity is very likely to accelerate in certain regions, as forinstance within the European Union as a consequence of the realisation ofthe European Monetary Union (EMU).9

The research project aims at exploring the motives behind and theoverall gains from large cross-border bank mergers in the EU. This paperwill be concerned with the first large cross-border bank merger in NorthernEurope – the merger between a Swedish bank, Nordbanken, and a Finnishbank, Merita. The background to and rationale for this merger, together withsome initial post-merger experiences, have already been elaborated andexamined in a previous paper by Gardener and Lindblom [1998]. It wasthen apparent that technology and EMU were two strong external strategicdrivers of the merger and that scale was an important consideration for bothbanks, together with the increased opportunities for cross-selling within thenew banking group. After that a series of additional interviews has beenconducted with top and middle management of the new bank in order to


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develop a summarised ‘balanced scorecard model’ for evaluating thestrategic fit of large cross-border bank mergers. The aim of this paper is,thus, to complete the prior examination with a partial analysis of thestrategic fit of this merger by employing an approach that is inspired by thebalanced scorecard concept. This will mean that special attention will bepaid to the vision and strategy underlying this bank merger.

ANALYSING A LARGE CROSS-BORDER BANK MERGER THROUGH

A BALANCED SCORECARD APPROACH

The complicated nature of bank consolidations in general, and mergersacross borders in particular, requires an extended use of more sophisticatedand detailed analysis methods for the examination of such events. Largecross-border bank mergers are not only a question of bringing together andjoining separate corporate cultures, but it is also a matter of bridging the gapbetween different country cultures (Marquardt, 1994). The conditions forconducting banking business may be rather distinctive for each country dueto differences in traditions, market characteristics, and legal rules andregulations.10 Hence, the consolidation process takes time and may concernall from the implementation and unification of new and old operativeprocedures to the communication and adaptation of tactical and strategicvisions.

The balanced scorecard concept was introduced by Kaplan and Norton[1992] as a means to communicate an organisation’s vision and strategy toits business units, such as responsibility centres, by identifying key successfactors and measuring related key financial and non-financial performanceindicators in a single document. It may be characterised as a multiple-objective measurement instrument that combines a set of financial and non-financial (strategic) objectives into an well-organised structure. The leadingargument is that managers cannot conduct their businesses successfully inaccordance with the overall strategy focusing on only one objective or evena set of financial objectives. First, the measurement of financialperformance objectives is generally lagging in time, i.e. a financialperformance measure shows the past financial outcome of earlier decisionsrather than the impact of current decisions and actions on futureperformance. Secondly, it is evident that it is almost impossible to capturefully the complexity of managing a business in only one performancemeasure.

‘Managers are like pilots. Navigating today’s enterprises through complexcompetitive environments is at least as complicated as flying an airplane.’

[Kaplan and Norton, 1996: 55]


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The idea of using several measures, including non-financial measures, inorder to evaluate and control business units is not unique and far from new.According to Epstein and Manzoni [1998], for instance, a related multiple-objective performance instrument, tableaux de bord, has been used inFrench business firms since the 1950s. The novelty of the balancedscorecard approach is that these measures are organised into four differentperspectives that are linked to each other and, above all, related to the visionand strategy of the company in a logical manner (see Figure 1). This impliesthat it is not only an evaluation and controlling tool, but also a means for topmanagement to illustrate and communicate the overall strategy into theorganisation in order to make all business units strive in the same directionand thereby obtain goal congruence.

The structure and content of the balanced scorecard (BS) is appealingand appears to be a well suited framework for the accomplishment of adetailed study of the strategic fit of banks that merge across a border. In thecontext of such a bank merger we may explain and describe the fourdifferent perspectives in Figure 1 as follows:

The financial perspective focuses on the economic performance of thebank(s) before and after the merger event. It may be seen as the tuningindicator of whether the overall strategy is leading to shareholder valueimprovements through the fulfilment of financial objectives. Theseobjectives may be of both a short-term and a long-term nature. In thefollowing analysis special attention will be paid to which financial


FIGURE 1TRANSLATING VISION AND STRATEGY INTO FOUR PERSPECTIVES

Source: Kaplan and Norton [1996: 54].

FINANCIAL

‘To succeed Objectives Measures Targets Initiativesfinancially, howshould we appearto our shareholders?’

FINANCIAL


LEARNING AND GROWTH

‘To achieve our Objectives Measures Targets Initiativesvision, how will wesustain our ability to change andimprove?’

FINANCIAL


CUSTOMER

‘To achieve Objectives Measures Targets Initiativesour vision, how should we appearto our customers?’

FINANCIAL


INTERNAL BUSINESS PROCESS

‘To satisfy our Objectives Measures Targets Initiativesshareholders andcustomers, whatbusiness processesmust we excel at?

Visionand

Strategy

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objectives and performance measures the bank management is emphasisingin order to add to economic value. What is its overall financial performanceobjective? How and when is it measured? What other financial measures areused to stimulate profitability and revenue improvements or to bring aboutcost reductions? This exploration of management objectives or key successfactors will be followed by a complementary analysis of the financialperformance of the bank(s) based on accounting data. Bearing in mind theearly stage of the merger, an important aim of this analysis is to demonstratehow such an external analysis may be structured and conducted rather thanto evaluate whether or not the merger has been successful. It is important totake into account the fact that the obtaining of economic value added is atrade-off between a bank’s profitability and its risk-taking [see Wagner,2000]. For this purpose, the financial performance of the bank should belooked upon from a risk perspective. This may be accomplished by breakingdown the bank’s return on equity (ROE) into the two components; return oninvested funds (ROIF) and return on financial leverage (ROFL).11 The ROIFis defined as the ratio between revenue (interest as well as non-interestincome) deducted by non-interest expenses, and total assets, whereas ROFLis defined as the product of the leverage spread (ROIF – interest expenses)and the debt/equity ratio. The ROIF may then be related to the bank’soperative risks as well as credit and liquidity risks, whereas ROFL may beused to analyse its interest rate risk and capital risk.

The customer perspective attracts attention to the customer and marketsegments that the bank is targeting and the key performancemeasures/indicators it uses to control how successful the bank is in thesesegments. The underlying assumption is that customer value creation ispositively correlated to the financial performance of the bank. Customerloyalty may here be a leading key performance indicator. It is generally ofvital importance for customer profitability in a bank’s retail business [see e.g.Bergendahl and Lindblom, 1999]. Loyal customers will thus contribute to animprovement of ROIF. Therefore, it is interesting to investigate whether themerger has had an impact on which customer segments are targeted and howthe bank is ensuring that customers are satisfied and customer relationshipsare strengthened. How does the bank follow up and measure customersatisfaction and profitability, customer retention and acquisition, and itsmarket share in targeted customer segments? Which product services andservice attributes are used to attract new customers? What measures aretaken by the bank to ascertain that its image and reputation lie in conformitywith how the bank would like to appear to its customers?

The internal business process perspective is related to the internalefficiency of the bank. It focuses on the most essential internal processes orkey success factors for attaining financial objectives and satisfying


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customer demand. Customer value creation will hardly lead to improvedfinancial performance without effective and efficient internal processes.These processes may be assigned to three sub-processes – innovation,operations and post-sales service. The innovation process is forwardlooking and concerns what actions bank management takes in order toidentify future customer needs and markets, but also the actions taken inorder to develop tomorrow’s banking products and services that shouldmeet those needs in an efficient manner. The analysis will therefore focuson how well the bank management understands the customer need indifferent segments. Which are the leading key performance indicators? Howmuch research is made in this area? How much is invested in productdevelopment? On what organisational level are product innovationsinitiated? The operations process is concentrated on the production anddistribution of products and services that the bank is currently providing.How has the merger affected internal operations and the supply of productsand services? What measures are taken by the management to improveoperating efficiency? Finally, the post-sales service process refers to whichactions the bank takes after a customer has received a required product orfinancial service. For banks it is essential with frequent customer contactsin order to cultivate the relationship with customers. How does the bankmeasure service quality? However, follow-ups are also necessary forensuring that lenders are paying off their loans in due time. What steps havebeen taken by the bank concerning these issues?

The learning and growth perspective is future-oriented and attractsattention to the need for improvements of the bank’s infrastructure in orderto accomplish long-term growth and shareholder value improvements.Generally, there exists a gap between available and required capacity thathas to be closed. Therefore, this perspective emphasises three key successfactors; employees, administrative systems, and organisational procedures.For a merging bank it may be of utmost importance that its personnel arequalified for cross-selling products and services of the former banks, butalso that employees are backed up by administrative (information) systemsand organisational procedures. This part of the analysis will thereforeemphasise the need for improving the bank’s infrastructure. What is theneed for development of personnel and recruitment of new personnel? Whatkinds of education programmes are needed and have been started inconnection to the merger? How does the bank measure employeesatisfaction? How large investments are made in new (information)technology? Which impact has the merger had on organisational proceduresand routines?

In the following section the balanced scorecard (BS) approach will beused as a framework to analyse the cross-border bank merger in 1998


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between Nordbanken in Sweden and Merita in Finland. Special attentionwill be paid to how each bank was performing and conducting its bankingbusiness prior to the merger event and how the two banks are beingintegrated after the merger. The analysis will start with a brief examinationof the very reason for the merger from top and middle management’s pointof view and what they regard as the single most important key success andfailure factors in the merger process. After these introductory comments andviews about the merger, the remaining part of the analysis will be devotedto the BS approach in order to distinguish and identify key success factorsand relevant performance measures/indicators. This means that the mergerwill be analysed from the four different perspectives: financial, customer,internal business process, and learning and growth perspective.

ANALYSIS OF THE MERITANORDBANKEN CROSS-BORDER BANK

MERGER

This analysis of the recent cross-border bank merger between Nordbankenand Merita is based upon personal interviews with four members (two fromNordbanken and two from Merita) of the Group Executive Board of thenewly created MeritaNordbanken, and seven regional and local managers inFinland (four) and Sweden (three). The outcome of the interviews with thefour executive vice presidents will hereafter be referred to as the view oftop-management (TM). Accordingly, the opinions expressed by therespondents at branch and regional bank levels will be referred to as theview of middle management in Finland (MMF) and Sweden (MMS),respectively. All interviews were carried out after the merger event andlasted for about one to two hours.12 Prior to each interview a questionnairewith open-ended questions was sent to the respondent at the bank. Theinterviews were semi-structured in order to allowing the respondents toelaborate their answers to the questions. Together with follow-up questions,this gave us a more comprehensive understanding and discription of themerger, which may be regarded as prerequisite for conducting a balancedscorecard analysis. In addition to the interviews, we have also usedaccounting data from annual reports of the bank(s) in order to complete theanalysis.

What was, then, the main reason for the cross-border merger betweenNordbanken and Merita? At the TM level the common view was that neitherof the two banks regarded themselves as big enough to be able to face theharder competition from larger European banks that was generally expectedto arise after the imposition of a common European currency. A furtherreason was that both banks needed to find a way to grow in order to achievethe larger volumes that are required for managing large future investments


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in new information technology, particularly, in the retail banking business.Prior to the merger Nordbanken had had far-reaching negotiations with theSwedish SE-banken. However, according to the two Swedishrepresentatives, Merita was regarded as a strategically better choice,because it was big and had a strong corporate banking business. The twoFinnish representatives made clear that there existed no domesticalternatives for Merita. The bank was simply too dominant domestically.One of them also emphasised the importance of the bank managementhaving a common view and vision of the future of banking. ‘Merita andNordbanken were of similar size, but the most essential thing was that it waseasy for us to agree upon a vision of the future since our view of the marketdevelopment was pretty much the same.’

A common opinion of TM was that the single most successful factor inthe merger process was that the new bank had been able to reach customerswith information on a stronger business concept. This was expressed by oneof the representatives in the following way: ‘we were breaking into a newfield, but we were still able to earn money’. The general view was that thenew bank, in a short time period, had succeeded in integrating the centralparts of the organisation. In this context, they were all careful to declare thatthe local branch network in each country in principle should operate asbefore under the former bank’s name. Legally there was no merger between


FIGURE 2MERITANORDBANKEN’S ORGANISATION STRUCTURE IN 1998

Source: MeritaNordbanken [1998: 5]

Merita Plc(Helsinki Stock Exchange)

(commonshares)

Other businesses(incl. real estate)

Merita Nordbanken

Merita Bank Nordbanken

Merita Nordbanken Group

40% (commonshares)

20%(preference shares)

40%

Co-operation AgreementJoint Boards

One Management

Nordbanken Holding(Stockholm Stock Exchange)

Shareholders Shareholders

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Nordbanken and Merita, which may explain why both banks continued tooperate as separate banks domestically (see Figure 2).

One of the TM-respondents stressed that two legal units could lead toproblems with tax authorities. Another respondent was to some extent alsoconcerned about how the staff would react to changes. ‘With no bank crisesit is harder to make changes.’

At the regional and branch levels the representatives both of the MMFand MMS informed us that, locally, the employees in each bank were muchrelieved when the merger was announced. They saw this merger as anoffensive merger and that the risk of losing their jobs would have been muchgreater if their bank had instead made a defensive merger with a bankingfirm or another financial institution in the domestic market.

A majority of the respondents argued that, hitherto, the biggest failure orproblem with the merger was related to the bank’s preparations for the euroand the millennium. Top management respondents in particular, but alsosome of the respondents of MMF and MMS, were concerned about how thecapacity requirements for these activities negatively affected integration andthe necessary development of administrative (information) systems, as wellas the implementation of ‘best practice’. Planned data projects were beingdelayed due to lack of capacity. As a consequence, they claimed, the bankwas less able to provide sophisticated customers with sophisticated productsand services at the right time.

The Financial Perspective

According to TM, the overall objective of the merger was to createshareholder value. Each representative was clear on that this should beobtained by profitability improvements. One of them added: ‘We must havea better understanding of how we make profit.’ The most importantprofitability measure was regarded to be ROE. MeritaNordbanken hasconcrete targets at the board level, but none of the representatives werewilling to expose these targets publicly. It was clarified, however, that mosttargets are related to the performance of other banks.

The explicit financial objectives that MeritaNordbanken wants tocommunicate to the external investors/potential investors (and perhaps forinternal operation control) may be found in its annual reports etc. In oneof its first reports [Merita-Nordbanken 1998] it is declared that the overalleconomic objective is to achieve at least 15 per cent return on shareholderequity over a business cycle. The importance of controlling the bank’sfinancial risk-taking is thereby emphasised:

The overall financial objective is to sustain a core capital ratio wellabove 6.5 percent, thereby ensuring a high rating and cost-effective


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financing. Fulfilment of the economic and financial targets requiresthat the following benchmarks be observed for banking operations: anincome-to-cost ratio of at least 1.8, after loan losses of a maximum of0.5 percent over a business cycle, as well as limited and controlledinterest-rate, currency and liquidity risks [MeritaNordbanken,1998:12].

However, in the first annual report after the merger, it was indicated that theabove mentioned economic and financial targets may be changed: ‘theeconomic and financial objective are at present under reconsideration’[MeritaNordbanken, 1999: 15].

The interviews with representatives of TM brought an interestingdifference between the banks into light. Evidently, pre-merger Nordbankenemphasised long-term profitability, whereas pre-merger Merita appeared tobe more focused on annual profit. This observation was confirmed at theregional and local levels, particularly in Finland. The general opinion wasthat the Swedish business culture was more oriented towards long-termprofitability. One MMF-respondent made the following remark: ‘In Finland,if we now make this simple, we searched for maximum yearly profit.’

Another important difference between the two banks was that pre-merger Nordbanken focused on product profitability, whereas pre-mergerMerita was more oriented towards customer relationships and theprofitability it made on customers. After the merger one of the MMSrespondents was a bit surprised that Merita knew rather well how profitableeach customer was to the bank. In the context of a BS framework thisdifference may be seen as a financial performance measure that also islikely to have impact on the customer relationship as well as the internalbusiness process.

How, then, should the bank achieve its financial objectives? Followinga BS concept, a distinction may be made between improvements in revenuegeneration, cost efficiency and risk-taking.

Revenue Generation. In short, the representatives of TM shared the opinionthat the most important financial performance measures of revenueimprovements were business volume, number of customers and customerprofitability. They strongly emphasised that the synergy of the merger willbe on revenue generation rather than cost reductions. They believed inincreased revenue through cross-selling, primarily by offering Merita’scorporate products and services to Swedish corporate customers andNordbanken’s retail products and services to Finnish households. However,the goal should not be to grow in terms of balance on the corporate business,


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which is around a third of the bank’s business (mainly through Merita).Instead, the corporate business should grow in profitability with respect torisk-taking. This was explained by one of the respondents: ‘ROE may foolyou, because there is a difference between a large and a small companyconcerning credit risk. So it could be better to earn 10 percent in terms ofROE on a big customer than 14 percent on a small one’.

Regarding the bank’s strategy concerning market coverage, themeasurement of key products and their market share within differentgeographical areas were considered to be the most important variables. Itwas also clarified that a further ambition for the bank was to increaseInternet and telephone banking. One representative explicitly declared: ‘weshall increase the number of Internet and telephone customers by X personseach year’.

The interviews with representatives of MMF lead to the conclusion thatthe measuring of business unit performance has been slightly changed. Oneof the representatives said: ‘perhaps the biggest difference is in the way ofthinking about customer relationships. We now measure the amount ofservices sold and volume’.

In Sweden, the MMS respondents were giving prominence to theirimpression that the merger had made Nordbanken more attractive tocorporate customers. They experienced many companies turning to the bankwhen they considered doing business in Finland or Eastern Europe.However, it was also emphasised that the bank’s reputation has beenpositively affected on the retail side, too.

Cost Efficiency. At the TM level the importance of the income-to-cost ratiowas stressed in each interview. However, it soon became evident that therewas no specific target set for this ratio. The general opinion was that themerger would lead to better cost efficiency due to the fact that developmentcosts now could be allocated on a larger volume basis. There was apronounced difference between middle managers in Finland and Swedenabout how they appreciated the ability to reduce cost. A common opinion ofthe MMF-respondents was that ‘best practice thinking’ would eventuallylead to cost efficiency improvements. Certainly, the traditional financialperformance measures that pre-merger Merita were using still remainedunchanged, but the importance of the ratio between income and costs hasbeen actualised by the merger. In Sweden, the opinion of two respondentsof MMS was almost the opposite. They argued that the importance of theincome-to-cost ratio had diminished rather than increased after the merger.They did not believe that the merger would have any major impact on thebank’s cost efficiency. Computer software development, however, was oneaspect that they believed could lead to improved cost efficiency.


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Risk-taking. The representatives of TM stated that concrete objectivesconcerning international and commercial lending, in terms of maximumlevels of credit losses and bad debts, were continuously determined.According to the following complementary analysis based on accountingdata, both banks were profitable in the years prior to the merger event. Interms of ROE, pre-merger Nordbanken was superior to pre-merger Merita,but this may partly be explained by a much higher financial risk taking (seeTable 1).

In Table 1 it is shown clearly that the major part of pre-mergerNordbanken’s higher ROE in 1997 may be explained by a considerablyhigher contribution from ROFL. This is even more evident in a comparisonwith the average financial performance of Nordic banks. The analysis alsoimplies that the new bank’s financial risk-taking is more in line with therisk-taking of the former Nordbanken than the one of Merita. During its firstyear MeritaNordbanken even appears to have increased its financial risk-taking, which led to an improved ROE despite a lower ROIF than pre-merger Nordbanken.

Table 2 shows that neither pre-merger Nordbanken norMeritaNordbanken was actually taking a higher financial risk than the other


TABLE 1THE TRADE-OFF BETWEEN PROFITABILITY AND FINANCIAL RISK (BEFORE

TAX)

Nordbanken Merita Nordic banks MeritaNordbanken Nordic banks1997 1997 1997 1998 1999 1998 1999

ROE 30.0% 18.6% 18.0% 30.7% 26.9% 15.1% 17.6%ROIF 5.1% 3.4% 4.5% 4.8% 4.2% 4.9% 4.5%ROFL 24.9% 15.2% 13.5% 25.9% 22.7% 10.2% 13.1%

Source: Bank Scope. The comparison measure ‘Nordic banks’ is an unweighted average of the50 largest banks in Denmark, Finland, Norway and Sweden.

TABLE 2FINANCIAL RISK DIVIDED INTO ITS TWO COMPONENTS: CAPITAL RISK AND

LEVERAGE SPREAD

Nordbanken Merita Nordic banks MeritaNordbanken Nordic banks1997 1997 1997 1998 1999 1998 1999

ROFL 24.9% 15.2% 13.5% 25.9% 22.7% 10.2% 13.1%D/E 19.7 24.6 17.2 20.5 19.2 15.7 16.9 Leverage spread 1.3% 0.6% 0.8% 1.3% 1.2% 0.7% 0.8%

Source: Bank Scope. The comparison measure ‘Nordic banks’ is an unweighted average of the50 largest banks in Denmark, Finland, Norway and Sweden.

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banks. In terms of an increased debt/equity ratio, pre-merger Merita was farriskier and, in terms of leverage spread, both Merita and other Nordic bankswere riskier. Thus, the data in Table 2 imply an even higher average risk-taking by other Nordic banks.

Further analyses of the accounting data from the annual reports ofNordbanken, Merita and MeritaNordbanken (not shown in any tables)indicate that pre-merger Nordbanken was much more dependent on interestincome than pre-merger Merita. Apparently, Merita had been moresuccessful in expanding non-interest income products and services, likecommission income and income from foreign exchange. These moredetailed analyses also show that Merita had a much lower income-to-costratio than Nordbanken in 1996, but that this ratio was improvedsignificantly the last year prior the merger.

The Financial Performance Measures Organised in a BS Model

Evidently, the overall objective of the cross-border merger between Meritaand Nordbanken was to increase profitability and thereby shareholder value.This implies that the merger is a part of a growth strategy. In order toaccomplish this strategy, the management regarded return on equity (ROE)to be the most important financial performance measure. We have shownhow this performance measure may be broken down into the two keycomponents; return on invested funds (ROIF) and return on financialleverage (ROFL). It is primarily the first component that is accentuated bythis cross-border bank merger. During the interviews the income-to-costratio was stressed as an important financial performance target, whereby themanagement strongly emphasised that the synergy of the merger should be


FIGURE 3THE RELATIONSHIP BETWEEN MERITANORDBANKEN’S FINANCIAL

PERFORMANCE OBJECTIVES

Focus onCustomer

Profitability

Revenue generation

Growth in Earning assetsand in Other income

Cost efficiency

Income-to-cost ratio

Control credit risk

Loan losses/Total loans

ROFL

Leveragespread

Capitalrisk (D/E)

ROIL

ROE

Improveshareholder

value

Interest expense

�

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on revenue growth rather than on cost reduction. However, they were alsovery concerned about controlling credit risks. The corporate business inSweden, for instance, should grow in volume with respect to bothprofitability and risk-taking. This implies a demand for measuring customerprofitability as well as ranking credit risks. Figure 3 shows howMeritaNordbanken’s overall objective of improving shareholder value maybe related to a set of key financial performance indicators in the context ofa growth strategy. All of these performance indicators are time-lagged andmay only be observed and evaluated ex-post by an external analyst.

The Customer Perspective

From a customer perspective an important qualification of a bank is itsaccessibility for customers. Pre-merger Nordbanken was the fourth majoruniversal bank in Sweden and the largest one in terms of distribution networkin 1997. It had 281 branches and access to 1,177 Post Office outlets. In co-operation with other commercial Swedish banks it could also offer itscustomers access to a nationwide network of ATMs. In this respect thecharacteristics of Merita is similar, if not even more pronounced. Pre-mergerMerita was the largest bank in Finland. It was the obvious price leader in thedomestic market and had a nationwide distribution network of 478 branches,2,000 ATMs and 1,400 self-service outlets in different locations.

A marked difference between the two banks was that Nordbanken wasprimarily a retail bank oriented towards the mass market, whereas Meritawas first of all a corporate bank and, contrary to Nordbanken, itconcentrated its retail business on affluent customers. Furthermore, therepresentatives of TM pointed out that Nordbanken was more advancedregarding market asset management, capital funding and other differentforms of savings products. On the other hand, it was a general opinion thatMerita had better knowledge in property (capital) management.

The two Swedish representatives of TM emphasised that an importantcountry-specific difference between Finland and Sweden is that Swedishcustomers prefer long-term lending, while Finnish customers are only usedto short-term lending. This fact may have had an impact on the banks’ retailbusiness, especially in mortgage lending. Furthermore, it was explained thatthe retail market was more deposit driven in Finland. This may very well bea reason for a pronounced difference in the practice of arrangingappointments with customers. When customers need to meet with a branchmanager in Sweden they can reserve time for that meeting in advance, butfor some reason this is not very common in Finland.

Customer Acquisition. Each TM-respondent stressed the importance ofhaving good business concepts. Their arguments are clearly summarised in


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the following statement made by one of the respondents: ‘A product couldbe copied easily within a few weeks, but a business concept is much harderfor competitors to appropriate’. Nordbanken’s ‘Plus-customer’ concept wasput forward as an example of a concept that probably would work well inFinland, whereas Merita’s greater knowledge of corporate banking might beexported to Sweden. It was generally believed that there was a greatpotential for the bank to develop a much stronger corporate bankingbusiness in this market.

In Finland the MMF respondents argued that the merger had led to animprovement of the bank’s internal and external credibility. One of themdeclared:

we have helped our corporate customers to open up new relationships,for example, to take care of the whole ‘concern’ business (parent inFinland, subsidiaries in other Nordic countries etc). We have alsoassisted them in acquisitions of Swedish companies. Furthermore,international customers have already showed their interest for doingbusiness in the Nordic countries. We have got more customers butcannot support this by any numbers.

At the same time it was feared that customers might counter-react and thinkthat Merita had become too big.

At the regional and local levels in Nordbanken the representatives ofMMS thought that the main challenge of the merger would be to develop anew customer service concept for attracting corporate customers. Part ofthis concept was going to be imported from Merita and a main feature in itshould be to create new relations with potential corporate customers. Aproblem is that the concept requires a lot of resources. Therefore,Nordbanken is not able to work with too many customers at the same time,even though each representative was confident that an increased corporatebusiness would also benefit the bank’s retail business. An acquisition of acorporate customer does lead to new retail customers, since manyemployees of the company are likely to be joining the bank as well.

Customer Satisfaction. A dominating opinion at the TM-level was that pre-merger Merita examined its customer’s attitude towards the bank morerigorously than Nordbanken. It measured customer satisfaction as well asemployee satisfaction frequently. In order to improve customer satisfaction,an important ambition for MeritaNordbanken is that customers should get aquick reply as to whether a lending request will be approved or not. For thatreason only one person should be responsible for a corporate customer thatis a customer to both Nordbanken and Merita. However, since the banks had


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very few customers in common, there has not been much ‘double work’after the merger.

The MMF respondents explained that Merita measured customersatisfaction by sending a questionnaire to a large sample of customers oncea year. However, one of the respondents foresaw some changes in the futuredue to the merger with Nordbanken. ‘The clustering of customers will bemore specific in the future. There will be a change from traditional savingsaccounts to mutual funds and insurance savings products, and in that respectthe merger has changed the goals.’

None of the MMS respondents disagreed with the opinion that pre-merger Merita more frequently examined and measured customersatisfaction. However, they underlined that they also measured customer’ssatisfaction in different customer segments or clusters, albeit perhaps not asrigorously as Merita.

Customer Retention. On all levels the respondents were quite confident ofthe prospects of the new bank to retain customers by establishing astrengthened relationship with them. They appeared to be rather confidentthat the means to achieve an improved customer relationship wouldprimarily be by cross-selling each other’s products and services. Merita hadalready been able to cross-sell some of Nordbanken’s services to itscustomers (fast payment service for corporate customers, monthly savingsin mutual funds and long-term mortgage loans to private customers).Several of the MMF respondents stressed that the customers appear to be‘delighted’. The bank has also utilised the fact that it has nationwidedistribution networks in two countries. Private customers are, for instance,provided with ATM services in both countries free of charge, whereascorporate customers are offered enhanced cross-border paymenttransmission services between the two countries.

The Customer Performance Indicators Organised in a BS Model

The perceptible growth strategy behind the merger becomes even moreobvious in the light of a customer perspective. Management generallybelieved that there was a great potential for the two banks to cross-sell eachother’s products and services, but also to develop a much stronger corporatebanking business in Sweden and introduce new retail products in Finland.Furthermore, they were holding out the prospect of the new bank creatingcustomer value and satisfying customer needs by carefully developedbusiness concepts for different customer segments. In the long run theestablishment of a strengthened customer relationship is of vital importancefor acquiring, satisfying and retaining bank customers. Clearly, themagnitude of this relationship could be measured internally by some kind of


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customer loyalty index. However, external observers will have to rely onalternative measures, like size of bank, number of branches or other outletsand ATMs. Such measures or performance indicators may be regarded asgood proxies since customer satisfaction and retention is related to thebank’s accessibility to customers. Accordingly, the bank’s revenue-generating activities, in order to acquire new customers and improve salesto existing customers, may be measured by the bank’s share of differentmarket segments (corporate/retail), the ratio of corporate loans to consumerloans, the income from customer segments and the revenue per customer.

In Figure 4, the growth strategy of MeritaNordbanken is summarised inthe context of the customer perspective. (The performance measures writtenin italics should be regarded as alternatives that may be accessible toexternal observers. However, these proxies are to a great extent time-lagging financial performance measures rather than leading strategic keyperformance indicators, why they will show the financial effect of earlierdecisions rather than decisions made today.)

The Internal Business Process Perspective

At the TM level it was pointed out that pre-merger Nordbanken was a moredecentralised bank than pre-merger Merita. One respondent stated: ‘inSweden branch managers have profitability responsibility. In Finland it isthe region manager that is responsible’. Accordingly, Nordbanken allocatedall common costs to branch offices, whereas Merita did not. The Swedishrepresentatives also argued that Nordbanken was more focused andstraightforward than Merita. The latter bank was regarded as a diversifiedbank with a complicated business structure. However, much of the


FIGURE 4MERITANORDBANKEN’s GROWTH STRATEGY IN THE CUSTOMER PERSPECTIVE

EmphasiseCustomer

Needs

Develop and refinebusiness concepts

Corporate/retail market shareCorporate loan/Private loans

Cross-sell products andservices

Sales of price bundlesRevenue/Customer

Customer segmentationCustomer satisfaction indexIncome/customer segment

Strengthen Customer

RelationshipCustomer loyalty index

Number of branches

Focus onCustomer

Profitability

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difference in degree of decentralisation was believed to disappear as themerger process proceeds.

The general opinion of the representatives of MMF and MMS was thatthe two banks to a large extent might be regarded as similar banks. Onerespondent suggested they were alike to as much as 80 per cent. Animportant similarity between the banks that was brought forward was thatboth banks had recently experienced a large ‘in-market’ merger. Thus, thebanks had already proved and demonstrated that they were able to handle amerger process, even though the merger between Unitas and Kansalis (thatformed Merita) has left some doubt about the branch network. A FinnishMMS respondent made the following comment: ‘when Merita was born wegot a branch network structure that was ready. Now we are wondering whatkind of branch network we would like to have.’ This statement implies thatthe future branch network in Finland may be restructured considerably.

Innovation. The general theme concerning the merger process is to use ‘bestpractice’. Hence, the things that Nordbanken are best at should beimplemented in Merita and vice versa. Nordbanken’s effort to copy andimplement Merita’s concepts regarding sales, marketing and customer caretowards corporate customers was put forward as an example of a synergeticproduct development project. However, Nordbanken is also interested inMerita’s private banking. One of the Finnish respondents in TM said: ‘toSweden we have exported Solo-bank knowledge, managing business clientsskills and treasury competence’.

Operations. Each respondent declared that the bank, in order to improveoperating efficiency, measures the profitability of business units frequentlyas well as the quality of lending. It was emphasised that the bank wasaiming at a control system based on ROE. Equity should be distributed toresponsibility centres in accordance with their risk taking. Furthermore, itwas stated that the overall ambition of the bank is to become a Nordic bankthat is growing in pace with the market, which is expected to become largerin the future. The ambition of becoming a Nordic bank implies thatMeritaNordbanken wants to expand in Norway and Denmark as well.

One MMF respondent pointed out that the internal routines had becomemore systematic and followed some certain formalities in Merita. ‘Thingsare not much different in Sweden but they have many good routines that wehave learned. Solutions to different processes and office routines,documentation and the order to do different tasks.’ An MMS respondentgave an example of one attempt to stimulate operating efficiency. Thebank’s local branches as well as its regions are divided into different groups


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for benchmarking. Every group has to fulfil certain quality goals that havebeen defined in the budget process. They are then evaluated and comparedrather frequently (three times a year) in terms of financial performance (e.g.ROE, income-to-cost ratio, expenses/service, and revenue/employee).However, these performance measures are not regarded as equallyimportant by bank management. As mentioned earlier, for instance, ROE isregarded as the most important one.

Postsales Service. The bank’s segmentation of customers into differentcategories affects how the individual customer is approached. Premiumcustomers, like private-plus customers and major corporate customers, aregiven priority with regard to service efforts and follow-ups. This isaccomplished through a special banking contact for each premiumcustomer. It is regarded as an important part of the growth strategy toincrease the volume of business to these customers, but also to stimulateother customers to qualify as premium customers. In this context theimportance of avoiding credit losses by continuously controlling the currentcredit stock was emphasised explicitly by two representatives of TM. Thismay be seen as a reason for the implemented policy of the bank that onlyone person should be responsible for lending to a corporate customer,regardless of whether the company is a customer of both Nordbanken andMerita. This person could be located in either Finland or Sweden. It wasalso stressed that managers that have customer responsibility must getaccurate support and that there is a need for a well-defined decision-makingprocess at each level in the bank. Therefore, MeritaNordbanken has built-incredit limits and combined credit limits for different customer segments inits decision-making process. Credit scoring is used in the retail business,whereas credit limits are used for corporate firms.

The Internal Business Process Performance Indicators Organised in a BSModel

Apparently, a far-reaching decentralisation of responsibility is considered tobe an important management concept for the new bank. The focus shouldthen be on customers rather than products, which is fully in line with themanagement’s desire to strengthen the relationship with customers. Thedivision of customers into different segments may be seen as a reflection ofthe focus on customer responsibility within the organisation. The delegationof authority may here be a leading key performance indicator, albeit thiskind of indicator would probably be difficult to approach externally.Irrespective of that, the value of the customer responsibility concept ishighly dependent on the ability of the bank to meet customer needsefficiently. This explains why the respondents repeatedly emphasised the


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importance of implementing ‘best practice’ whenever the two banks wereusing different information systems or decision rules.

Presumably, the use of best practice would result in improvedproductivity for the bank. The frequent evaluations of local branches as wellas regions may be regarded as other important steps taken by topmanagement in order to stimulate operating efficiency. These efforts arelikely to result in a declining ratio between overhead expenditures and totalrevenue, as well as income improvements at the branch level. Finally, it isalso worth noting that every business unit now has to fulfil certain qualitygoals. The importance of avoiding credit losses may be seen as a reason forthe implemented policy of the bank that only one person should beresponsible for lending to a corporate customer.

Figure 5 shows how the internal business process key performanceindicators of MeritaNordbanken may be linked to each other in order toaccomplishing the bank’s growth strategy. As in Figure 4, we have alsosuggested alternative performance measures of which most are time laggingand, thus, should be regarded only as externally observable proxies for thekey performance indicators used internally.

Learning and Growth Perspective

According to the representatives of TM, the general competence of the staffin the two banks was at the same level. However, the banks appeared todiffer regarding the measuring of employee skills. Such measuringprocedures were more developed in pre-merger Merita than in pre-mergerNordbanken. Several representatives also pointed to differences between


FIGURE 5MERITANORDBANKEN’S GROWTH STRATEGY IN THE INTERNAL BUSINESS

PROCESS PERSPECTIVE

ImproveInternal

Efficiency

Implement best practice

Operating efficiencyOverhead expenses/Revenue

Evaluation of branch/region performance

Branch/region profitabilityIncome/Branch

ImposeCustomer

Responsibility

Delegation of authorityIncome/loans losses

EmphasiseCustomer

Needs

Follow-up service quality

Customer quality indexRevenue/branch

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the banks regarding the development and implementation of newdistribution forms. Merita was regarded to be more advanced in the field ofInternet banking, whereas Nordbanken was better on telephone banking.

At the local level the two MMS respondents were not fully convincedthat Merita’s Internet solution was superior to the one of Nordbanken, butthey thought that it was quite reasonable and important that the two banksonly used one common system. Customers appreciate uniformity.

Employees. Each representative of TM emphasised the need for improvingoverall competence within the organisation. They suggested that one way toget there would be through the creation of larger business units.

At the regional and local levels, the MMS respondents added that thereis a need for employing well-educated persons as well as educating theexisting staff. However, there were already such education programmes inoperation. For example, personnel were being offered a course in marketingin order to be able to cross-sell products and services more efficiently.

Administrative Systems. On all levels, there was a general opinion that thebank must develop the current data processing system and impose commonadministrative systems in order to be able to improve cost efficiency andobtain a strengthened ability to develop the banking business in the future,particularly regarding IT. This may be illustrated by the following commentby a representative of TM: ‘we have a very long list of data processingprojects that would have been profitable to carry through since they havepay off times of less than a half-year. But there is no space for them’. Asalready has been mentioned, at the time of the interviews there was notmuch data processing capacity available in the bank over and above thecapacity required to handle the euro and the turn to year 2000.

Organisational Procedures. A strategically important decision inconnection with the merger was that the bank chose to only use Swedishas a language at all board meetings. According to the Swedishrepresentatives of TM this was a request from Merita. However, they alsoemphasised that it is important to understand how the other part thinks andworks. In this context one of the Finnish representatives made thefollowing remark: ‘maybe (the president) Hans Dalborg’s main task is tocreate unanimity’.

At the regional and local levels the MMF respondents generallyconsidered that leadership and support activities have moved further awayfrom them after the merger. One respondent explained: ‘we are more on ourown now’. They thought that the vision, business idea and strategy of thenew bank were different from the one that pre-merger Merita had. But this


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was not regarded as disadvantageous. On the contrary, they seemed toappreciate that these matters now were communicated through the wholeorganisation. This had never been done earlier. Pre-merger Merita had astrategy that was widely spread in the bank. Now all employees are includedin the development of the new bank, which was emphasised explicitly byone of the respondents: ‘some kind of openness has appeared and there aremore discussions now after the merger.’

In Sweden the MMS respondents expressed the opinion that it isimportant to avoid increased bureaucracy. There are already a lot ofdocuments to handle for responsible managers of business units. On theother hand, the staff that is working in business units is also getting bettersupport from central offices in the form of special knowledge. For example,they may get assistance with the measurement of credit quality and otherdifferent performance variables. In order to avoid risky lending,management has also reduced all bonuses related to lending. The formerbonus system was regarded as stimulating reckless lending.

The Learning and Growth Performance Indicators Organised in a BS Model

Evidently, managers on all levels were fully convinced that skilled andhighly educated personnel would be of vital importance for accomplishingthe bank’s (growth) strategy and vision. They all emphasised the need toimprove overall competence within the organisation by employing well-educated people as well as educating existing staff. Eventually, this wouldlead to an increasing share of staff with university degrees, but alsorelatively higher staff training expenditure.


FIGURE 6MERITANORDBANKEN’S GROWTH STRATEGY IN THE LEARNING

AND GROWTH PERSPECTIVE

New Educationprogrammes

Educationdays/Employee

Other adm.costs/Employee

Develop commoninformation systems

Improved decision-makingOther adm. costs/Total costs

Employee satisfaction

Employee satisfaction indexRevenue/Employee

EnhanceCompetence

Level

Share of staff with auniversity degreeSalary/employee

ImproveInternal

Efficiency

Adjust bonus systems

Risk adjusted bonus indexLoan losses/Employee

�

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In combination with the openness and determination of management tocommunicate the bank’s strategy and vision, the imposition of neweducation programmes is very likely to have positive side effects on anemployee satisfaction index. It is of course essential that administrativesystems are appropriate. This was also obvious to the respondents, whenthey expressed the opinion that the new bank has to develop the current dataprocessing system and impose common administrative systems as a tool tobe able to develop its banking business into the future. Their particular


FIGURE 7MERITANORDBANKEN’S GROWTH STRATEGY ORGANISED IN A

BALANCED SCORECARD MODEL

Add to Shareholder Value, (Market Value)

Improve Pro-fitability, F2

OVER-ALLOBJECTIVE

FINANCIAL

PERSPECTIVE

CUSTOMER

PERSPECTIVE

INTERNALBUSINESSPROCESS

PERSPECTIVE

LEARNING ANDGROWTH

PERSPECTIVE

Control Credit Risk,F6

Increase Revenue,F4

Focus on Costefficiency, F5

Strengthen CustomerRelationship, C1

Customersegmentation, C3

Develop and refinebusiness concepts, C2

Cross-sell products& services, C4

Customer Responsibility, I1

Frequent evaluationsof branches/regions, I3

Implement”Best Practice”, I2

Follow-up Servicequality, I4

Enhance CompetenceLevel, L1

Adjust Bonussystems, L4

Develop Common in-formation systems, L2

Employeesatisfaction, L3

New educationprogrammes, L5

Contribution from Financial risk-taking, (ROIF - kd)*D/E F3

Communicatestrategy & vision

Capitalrisk

Attain the requiredReturn On Equity, F1

Interest expense

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concern about the development of IT systems seems rational and hardlysurprising. Expectedly, this concern will result in a more qualified anduniform decision-making process within the bank as well as growing ITexpenses/administrative costs in relation to total costs.

A final remark of importance for how the growth strategy of the bankshould be accomplished is the announced change of the current bonussystem towards a reduction of bonuses related to lending. This change isvital since the current bonus system apparently stimulated reckless lending.

Figure 6 shows how the identified key success factors for the growthstrategy of the bank may be organised and measured within the context ofthe learning and growth perspective. As for previous perspectives, theinternal key performance indicators have been complemented withsuggestions of possible alternative proxies that would be accessible forexternal observers.

THE FOUR PERSPECTIVES INTO ONE BALANCED SCORECARD

MODEL

Figure 7 shows how the identified objectives and related performancemeasures in the four perspectives may be linked to each other in a full-scalebalanced scorecard model. The starting point is the wish of the bankmanagement to communicate the strategy and vision of the bank thateventually should lead to the fulfilment of the overall objective of the bank:to improve shareholder value. Table 3 summarises the internal measures orleading key performance indicators (KPI) that have been related to thebank’s different objectives or key success factors (KSF) for accomplishing


TABLE 3KEY PERFORMANCE INDICATORS RELATED TO KEY SUCCESS FACTORS

IN A GROWTH STRATEGY

KSF KPI KSF KPI KSF KPI KSF KPI

F1 Return On C1 Customer I1 Delegation L1 Share of staff with Equity (ROE) loyalty index of authority a university degree

F2 Return On C2 Market share, I2 Operating L2 Improved decision-Invested corporate efficiency makingFunds (ROIF)

F3 Return On C3 Customer I3 Branch/region L3 Employee Financial Leverage satisfaction profitability satisfaction index(ROFL) index

F4 Growth in Earning C4 Sales of price I4 Customer L4 Risk adjusted assets & other income bundles quality index bonus index

F5 Income-to-cost ratio L5 Education days F6 Loan losses/ per Employee

Total loans

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its growth strategy. Each performance indicator is, thus, linked to a box inFigure 7.

To a high degree the key performance indicators in Figure 7 areaccessible to internal users only. Irrespective of that, the organising of theMeritaNordbanken merger in the framework of a balanced scorecardmodel contributes to our understanding of how the strategy behind themerger may realised. How well the bank succeeds with its growth strategymay also be controlled and evaluated in the context of the balancedscorecard model. However, as external analysts we will then have to relyon time-lagging financial performance measures as proxies for most of theleading internal key performance indicators. Even though such proxieshave been identified in the previous section, it is still to early to evaluatethe merger thoroughly.

CONCLUSIONS

The restructuring of the banking industry appears to have entered into a newphase. Rapid progress within the information technology field, togetherwith deregulation of financial markets, has opened the door for inter-statebank mergers in the US market and cross-border mergers between banks indifferent countries. Academic writers are still puzzled about the motives andgains of such mergers. Bank consolidation in general, and mergers acrossborders in particular, are of a complicated nature, containing a variety ofdimensions and aspects that may easily conceal the existence of multiplemotives. This complexity points towards the use of more longitudinal anddetailed studies of a strategic kind when examining a large cross-borderbank merger. A strategic-oriented approach may contribute to reducing theconfusion and add to the overall understanding of the very rationale forlarge bank mergers across borders.

The interviews with top and middle management strongly imply that theMeritaNordbanken merger can be characterised as an offensive merger,which is well in line with a growth strategy. We have demonstrated that thestriving within the bank to realise this growth strategy may be visualisedand organised in the framework of a balanced scorecard consisting of fourdifferent perspectives [cf. Kaplan and Norton, 1996]. This has beenillustrated separately for each of the four perspectives in the previoussection (see Figures 3–6), and combined in Figure 7.

The balanced scorecard approach may be seen as an example of a detailedstudy approach that may be used to analyse the strategic fit between mergingbanks. It organises and structures financial and non-financial objectives aswell as other aspects of the merger in accordance with the underlying strategyand vision. When applying this approach on the Merita-Nordbanken merger,


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the first impression may be that the strategic fit between the two banks wasalmost insignificant. However, as is shown in Table 4, another and a morelikely interpretation is that pre-merger Nordbanken and pre-merger Meritawere completing each other rather well in many areas and respects, which willbe of great importance to the group if the banks are able to cross-utilise theirdifferent characteristics and strengths.

In Table 4 characteristic differences have been interpreted as either of acomplementary or a non-complemantary nature to the new banking group.In the case it has appeared to be non-complementary, our findings implythat bank management is giving priority to the characteristic or strength ofone of the banks based on a ‘best-practice’ concept. For instance, the newbank will focus on long-run profitability, decentralisation anddiversification. In the case it is a question of complementarity, the emphasisis put on sharing and cross-utilising each other’s differences. The fact thatpre-merger Nordbanken may be defined as a retail oriented mass-marketbank and pre-merger Merita mainly as a corporate bank, which is alsostrongly oriented towards affluent private customers, has severalimplications for the new bank. Apparently, the most outstanding one is thatthere may exist an opportunity to improve revenue by cross-selling eachbank’s products and services at the same time as the macroeconomic risk forthe bank thereby may be reduced [cf. Hughes et al., 1999]. Hence, cross-selling may certainly be regarded as a success factor in cross-border bankmergers [c.f. Nellis, McCaffery and Hutchinson., 2000]. The analysis showsthat this opportunity has also been recognised by the bank management asan important synergy effect of the merger. Furthermore, it is shown that topmanagement is determined to chose ‘best practice’ consistently wheneverthey implement or integrate common standards (e.g. uniform financialperformance measures) or administrative systems and routines.


TABLE 4IMPORTANT CHARACTERISTIC DIFFERENCES BETWEEN THE MERGING BANKS

IN A BS FRAMEWORK

Pre-merger Pre-merger Merita Perspective InterpretationNordbanken

Product profitability Customer profitability Financial ComplementaryLong-run profitability Yearly profit Financial None-complementaryLong term lending Short term lending Customer ComplementaryMass market (retail) Affluent customers Customer/Internal Complementary

(retail)Retail bank Corporate bank Customer/Internal ComplementaryAsset management Deposit driven (retail) Internal Complementary(retail)Decentralised Centralised Internal/Learning None-complementaryFocused Diversified Internal/Learning None-complementary

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The many close points of similarity between the banks further support apositive interpretation of the revealed dissimilarities between them. First ofall, both banks were large players on the domestic market and possessed a nationwide distribution network of branches, ATMs and banking (self-)service outlets. Secondly, the representatives of TM in each bankshared the same vision of the need to grow in order to become a competitivebank on the emerging European banking market. Thirdly, each bank hadrecently been going through a major restructuring of its business inconnection with in-market mergers and acquisitions [see e.g. Gardener andLindblom, 1998].

We may draw attraction to the finding of a growth strategy behind themerger [c.f. Hughes et al., 1999]. This implies that cross-border bankmergers are offensive mergers rather than defensive ones. We should, thus,search for the prospect of cross-selling products and services rather thancost cutting by down-sizing the branch network, when examining the‘strategic fit’ between potential cross-border merger candidates ex-ante.Paradoxically, one should look for dissimilarities instead of similaritiesbetween the banking business – at least what regards certain strategicvariables or key success factors. We have tried to demonstrate how a balanced scorecard model may be used in order to distinguish suchvariables.

NOTES

The authors wish to thank Dr Michael Rafferty, University of Western Sydney, for valuablecomments on an earlier version of the paper and Dr Merja Mankila, Gothenburg School ofEconomics and Commercial Law, for research assistance. We are also very grateful to StiftelsenRichard C. Malmstens Minne for financial support.

1. See Table 1 in Rhoades [1996: 4]. In his paper Rhoades also makes some comparisons withdata from an earlier study of his [Rhoades, 1985] covering the period 1960–82.

2. See Table 4 in Rhoades [1996: 9].3. See Table 2 in Berger et al. [1999: 140].4. It should be mentioned that the findings of some earlier bank consolidation studies more or

less contradict the reported evidence of bank mergers lack of cost efficiency [see e.g. Cornett& Tehranian, 1992].

5. This is especially true for retail services [see e.g. Kwast, 1999]. Larger commercialcustomers are more likely to have access to alternative suppliers as well as to the financialmarket.

6. See also Table 2 in Berger, Demsetz and Strahan. [1999: 140].7. This is not to say that there does not exist studies which are examining gains from

hypothetical bank M&As, but as in Altunbas, Molyneux and Thornton. [1997] these analysesare generally based on external financial data.

8. This project started in the mid of 1998 as a joint research project between the University ofWales in Bangor and the School of Economics and Commercial Law in Gothenburg.

9. As e.g. Boot [1999] points out such a development may be slowed down or limited bypolitical factors, but also by other factors, like differences in institutional and cultural


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patterns, payment systems and settlement methods.10. See e.g. Peek, Rosengren and Kasirye [1999], who study the poor performance of foreign

bank subsidiaries in the US.11. This alternative way of breaking down ROE was introduced by Alberts [1989].12. Each interview was recorded, printed out and sent to the respondent. This made it possible

for the respondents to correct any errors or misunderstanding, but also to make furtherclarifications when desired.

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Documents

Cross-Border Bank Mergers and Acquisitions in the EU