Emilio Botín, co-chairman of Banco Santander Central Hispano explains how mergers can help achieve shareholder value.

Let me start with the following thought: the value of merger transactions in 1998 and 1999 came to $5,000bn. But although this figure shows that mergers are now a common strategic option in US and European corporate life, published studies continue to underline that only 50 per cent of merging companies have outperformed their immediate competitors.

A 50 per cent success rate is low. In fact, it is so low that the first conclusion of any company focusing on shareholder value is that mergers involve real risks not least that of disappointing shareholders.

Obviously, not all mergers are the same. There are good ones and bad. There are those done at the wrong time and others with perfect timing. Some create value, and others destroy it in the medium term, and sometimes even quicker..

It is not so much a matter of whether or not mergers create value, it is rather that of deciding what type of merger will attract the shareholders. How and when to carry it out and, above all, what is the reason behind it.

Managing a merger is as important as the decision to merge in itself. Setting the timeframe, creating a new corporate culture, encouraging staff and offering credibility to investors, is all crucial.

The successful merger is one whose aim is to generate increased shareholder value, quality and efficiency in customer service, and career opportunities for staff, as well greater competitiveness in the financial sector and the economy as a whole.

One must first be fully convinced that a merger is the best use of available capital to achieve the strategic goals of the company. This would seem somewhat obvious but, as you will have seen, the motives behind corporate mergers are in fact quite diverse.

In some sectors – for example telecommunications – there are convincing technological reasons for concluding that mergers are the only way to achieve the economies of scale that permit significant cost savings and efficiency gains.

A similar picture emerges in the financial sector, where globalisation of the economy, technological advances and, in our case, European economic and monetary union, have profoundly altered the nature of the business. The speed at which the sector is consolidating can mean that mergers are a logical route towards achieving increased market share which, in turn, facilitates cost savings and creation of shareholder value.

In most cases, the best option is to buy the company that best complements your own competitive advantages, or which allows you to build these advantages in other markets and businesses.

Acquisition is the best option for growth. The only one that truly allows you to build your own corporate culture, especially where acquisition means not just control but also a clear majority stake.

The problem with acquisitions is that they are only viable for companies enjoying a very strong capital base. While the global economy has led to a much greater tolerance for highly leveraged operations, clearly limits still exist on borrowing in the capital markets.

For this reason, at Banco Santander Central Hispano we have always been extremely prudent as regards capital ratios. As soon as we have a project to finance we have sought the backing of our shareholders, and from the market, for any increase in capital. And we have done so in a disciplined way, sure of our ground, and giving the market the chance to evaluate our strategy.

But the acquisition route is not always possible. There are times when, for one reason or another, mergers among equals are the only viable option.

It is almost impossible for cross-border mergers in Europe to create true shareholder value if they are among equals.

A well-thought-out merger that creates value must lead to new business and also in time must produce significant cost savings. This means joining cultures, corporate visions and banking practices that are often very different, as well as establishing effective leadership procedures.

In the case of cross-border mergers, the opportunities for cost savings exist but are clearly inferior to those available within the same market. Also clear is that the major obstacles represented by differing business cultures, different languages and cultural differences in general, are important and greatly magnified. Extremely strong management is needed to guarantee the success of cross-border mergers.

A long time will pass before sufficient convergence occurs in Europe to overcome many of these obstacles.

If this is true, what is the alternative to cross-border mergers among equals? It is possible to progress gradually towards effective models of co-operation in Europe through strategic alliances. These alliances must not be defensive in nature. On the contrary, they should push hard to achieve the most efficient formula for unifying business lines, and to draw up strategic plans that make it clear how shareholder value will be created. They should also seek efficient mechanisms to take advantage of the huge economies of scale made possible by technology and know-how.

These alliances in time generate mutual confidence and understanding of different banking models, always a necessary condition for closer co-operation between two banks.

An example of this co-operation has been our experience with The Royal Bank of Scotland. In the more than 10 years that we have had this excellent relationship, we have proved the importance of working together and meeting once a month at the highest level to discuss specific business matters.

We have learnt a lot from each other during this period, we have learnt to avoid errors and at the same time we have carried out some very interesting and profitable joint ventures in structured finance and risk capital. At the same time, the agreement we announced on January 31 with Société Générale, opening the doors to alliances in Europe that we could consider as "second generation", is another good example of the gradual approach.

Our alliance with Société Générale is extremely pragmatic. As its chairman, Daniel Bouton, has said, we have rejected grandiose schemes that would have meant serious management problems and major risks in execution.

We have preferred to define specific projects capable of generating new business and saving costs practically across the board. By identifying our respective strengths, we have committed to developing businesses capable of generating attractive results in the short and medium term. This is being reinforced by cross-shareholdings.

Another option is the merger within the same country. This is feasible and can be successful, as is the experience with Santander Central Hispano. A year after this merger among equals, the results show that Banco Santander Central Hispano has had a magnificent year, both in terms of profits and also its strategic goals.

A 26 per cent increase in net attributable income confirms what we promised in January 1999 when we announced the merger: by joining forces we were able to create shareholder value.

The market has recognised this. Our shares have appreciated 50 per cent in the first year – the strongest growth among large Spanish banks – and our market capitalisation has reached e40bn. Without having to put dot.com to our name, we have become the third largest bank by market capitalisation in the euro-zone, and 14th in the world: and we still have room to improve.

We live in a global era, and our customers obviously have global requirements that cannot be met without sufficient size and geographical and business diversification. This is essential, in order to acquire know-how on a global scale, and a profitable and efficient use of new technology.

It is not possible for all banks to achieve the size and diversification needed for this new business dimension. In order to grow, you need capital and confidence among shareholders that their money will finance profitable investments. This is precisely the meaning of creating shareholder value. It also means allowing the capital markets to be the final arbiters of our actions.

Not all financial systems, nor all businesses, have the same level of profitability or risk. For a financial institution which wants to create shareholder value, the key to success is having the best possible mix of presence in countries and businesses. In the case of Santander Central Hispano an excellent combination was possible because BCH was strong in the industrial sector and Banco Santander was strong in Latin America.

We have all worked hard to offer shareholders the most attractive combination of business and geographical diversification. One that offers the best mix of profitability and risk. And if you want to be in a position to make the best choice, it is better to be the first to make it.

Having agreed the merger, first we had to consolidate our position in the Spanish financial market as our first value block. A mature and profitable market, provided we achieve the levels of efficiency that we aspire to.

We have created a recurring income base capable of supporting the group’s fixed costs and also ensuring our shareholders an attractive return on capital via dividends, by adopting four major lines of action.

First, retail banking in Spain through our three branch networks – Santander, BCH, and Banesto. We believe in a multi-brand strategy and this has been vindicated by the fact that in the first year of the merger not only did we not lose market share, in fact we gained it. Second, a portfolio of industrial shareholdings concentrated in technology and high-growth sectors.

Third, in asset management, which we have built up both in Spain and also in Latin America. And last, in investment banking, where we have achieved clear leadership in Spain, Portugal and Latin America, with a highly efficient structure that builds on a strong corporate client base and on investor clients in our natural markets.

We have also made a commitment to excellence in Internet on three very specific fronts. First, by developing multi-channel banking, offering customers of the three brands access to all group products and services via Internet.

Second, by developing an independent platform through Open Bank, the first branch-free telephone banking operation

in Spain. This is now an established brand name, something that will help in our plan for it to become the group’s Internet bank.

And finally, through investments in Internet and telecommunications-related companies, as with the 30 per cent we hold in Airtel, the second largest mobile phone company in Spain, in line with a strategy of positioning the group in the vanguard of technology.

Our second value block is Latin America. We are a financial group in two continents: Europe and Latin America.

We have always had close ties to Latin America. This has enabled us to detect that the continent had begun to integrate into the world economy and was firmly committed to adopting the policies and structural reforms needed to reduce economic instability. We were the first not only to see this, but also the first to position ourselves for the opportunities that were to open up.

Today, Latin America for us is more than just a good business that improves each year. Latin America is one of the signs of our identity. Something that differentiates us from other financial groups that also aspire to becoming banks of reference at an international level.

This is a competitive advantage that we are reinforcing each year and which in 1999 brought us nearly $600m in net attributable profit, 30 per cent more than the previous year.

You may ask how we were successful last year in Latin America. The answer is simple: we did the groundwork when we needed to and right from the start we have introduced our banking culture in areas such as risk management and technology. This has been possible thanks to the freedom to act that came from holding majority and controlling stakes in each of our banks in the region.

Our third value block is represented by wholesale activities and the network of alliances with top flight banks in the leading European markets.

For us, alliances are nothing new. We understand them well because more than 10 years ago we forged the first important European alliance with The Royal Bank of Scotland.

It is precisely because we know what it means to build a lasting alliance that creates real shareholder value – that we fully understand the importance of choosing the right partner and identifying the reasons for the alliance very carefully.

Not all mergers, nor all alliances, create shareholder value. And above all, I am very sceptical towards cross-border European mergers among equals. I believe that many years will pass before we see a cross-border merger of this type that creates value for shareholders.

One thing is that in Europe we are creating a single financial market. Another, very different, is that the differences of an economic, social, legal and accounting nature, that characterise the 11 euro nations, will disappear overnight. This unification of Europe will come one day but it will not be tomorrow, nor the day after.

Emilio Botín is co-chairman of Banco Santander Central Hispano.

This is the text of a speech given at a Les Echos conference in Paris on February 24

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter