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BUSINESS | FEBRUARY 2, 1998 VOL. 151 NO. 4 |
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Why Don't We Elope? The Royal and the Bank of Montreal announce a megamerger, leaving Ottawa feeling upstaged By ANDREW PURVIS
Time to redo the stats. Last week the Royal and the third-ranked Bank of Montreal startled virtually everyone with their plans to pool shares to form a colossus with a stock-market value of $26 billion and assets of $312 billion. The yet-to-be-named superbank would rank 2nd in North America, according to a listing released last year, and 20th in the world, at least until the next megamerger. Executives spoke of vast economies of scale and bulked-up competitive muscle. "It means a made-in-Canada response to globalization," effused Royal chairman John Cleghorn, who will head up the goliath. Bay Street was ecstatic. In record trading on the Toronto Stock Exchange, Bank of Montreal shares leaped 18% on the day of the announcement, the Royal's jumped 4%, and those of the banking sector as a whole climbed more than 7%. The move fueled expectations that No. 2-ranked Canadian Imperial Bank of Commerce, among others, would have to find a partner. Amid the happy hubbub, it was sometimes hard to recall that banks seeking union are not allowed to elope. The Royal-Montreal merger must still be approved by shareholders (few could be found immediately objecting) and by Ottawa. Moments after the announcement, Finance Minister Paul Martin said he would not okay the merger until at least September, when a federal task force on the future of the financial-services sector issues its final report. That document will have to take into account objections to bigness raised by consumer groups and labor unions, among others. Said Martin, visibly annoyed at the sudden merger announcement: "We are not prepared to consider such a fundamental change in the financial structure of our country until we know that it is in the best interests of the Canadian people. One might say that their actions are somewhat premature." Perhaps, but also not a surprise. The move came just a month after the announced merger of the Union Bank of Switzerland and Swiss Bank Corp. to form a monster second in size only to Japan's Bank of Tokyo-Mitsubishi. And that deal came only a month after more than 100 nations signed a global treaty liberalizing international financial services, which may inspire more mergers in the near future. In Canada, by contrast, existing bank rules, introduced in the nationalist heyday of the 1960s, aim to limit foreign ownership and prevent excessive consolidation by decreeing, more or less, that "big shall not buy big." The Royal and the Montreal clearly feel that whatever the task force thinks, the rules will change. But speculation as to what made them jump the gun was rife. A frequently cited cause was the Asian financial meltdown, which splashed red ink across bank ledgers worldwide. Says William Krehm of the Committee on Monetary and Economic Reform, an independent think tank: "I'm sure the banks have sustained undeclared losses in the Far East. The merger is like a shot of steroids for an aging athlete." Whether the fix is in remains to be seen. Critics like Canadian Labor Congress secretary treasurer Dick Martin were calling for a full parliamentary debate and nation-wide hearings on the merger. He placed little credence in assurances from the banks that they do not expect "significant job displacement." A financial analyst in New York City was equally skeptical. "The deal makes sense only if you improve your efficiencies, which means laying off large numbers of employees," he said. For their part, the banks argued that consumers would reap the rewards of efficiency, and that an improved share price for the new creation would benefit a surprising number of small investors. (Through rrsps and pension funds, one in two Canadians are bank shareholders.) Provided that they don't work at a redundant branch bank, there might be truth in that. Whatever the task force decides to say about locking or unlocking the barn doors of finance, it was abundantly clear that two of the biggest farm horses have already bolted.
HOW MUCH IS IN THEIR ACCOUNT Banking assets, in billions of U.S. dollars
The Bank of Montreal-- $143 OTHER MAJORS:
CIBC-- $164 *1996 assets --With Reporting by Peter Boisseau /Toronto And Margaret Feldstein /New York |
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anadians call their banks many things, but puny isn't usually
one of them. The combined assets of the top five of the eight
chartered banks total $690 billion and dwarf any other sector of
the economy. The league-leading Royal Bank of Canada alone holds
15% of Canadians' total financial assets. But in the expanding
global arena, all those numbers are less and less to brag about.
In 1970 the Royal ranked 12th in the world in terms of assets;
by last year it was 52nd.