ABN Amro and Barclays: Will bankers ever learn?

It is an interesting coincidence that, as the senior managers of ABN Amro and Barclays continue to discuss their merger, Citibank in the US is preparing to announce substantial job cuts, of 15, 000 jobs. This announcement highlights the pitfall of a big universal bank strategy, of which Citibank was probably the most often quoted example. As long as it was run by Sandy Weil, who over his long Wall Street career, acquired an unique reputation as a merger wizard, capable of spotting value, cutting costs and mitigating internal strife, the concept had a degree of credibility. However, even under Weil, question was being raised whether Citibank has not increased in size and diversity to the point, where it became unmanageable. In the 1980s and 1990s, some banks were TBTF (Too Big Too Fail). These included Citibank, Credit Lyonnais or HSBC. I now looks like those very same banks (with Credit Lyonnais now part of Credit Agricole, the largest French bank by assets) became TBTGSV: Too Big to Generate Shareholder Value.

The point that size is not everything and is not a substitute for a focused strategy should by now become largely uncontroversial. Investors discriminate against big lumbering giants and reward well-run banks. Yet, as the ABN Amro–Barclays idea shows, this reality has not percolated to the Board level of many large banks.

The economic logic of the potential deal is hard to fathom. Barclays has a first rate wholesale operation, built around Barclay Capital and Barclay Global Investors. Those are tightly focused, well-managed and have little synergy with the retail network, which is, at best, of average quality (and I should know, having the misfortune of being their client). No do they really need ABN Amro, a perennial also-run even in the Netherlands (compared say to ING). Hedge funds demand for its break up makes economic sense. And their track record, particularly that of the TCI, is quite good in bringing power-hungry managers to account is worth noting.

ABN Amro is now in play. Let’s hope that the result of market manoeuvres will make more sense than the proposed merger.