Korea Capital Market Institute

It is no exaggeration to say that the history of IBs(investment banks) or securities firms is the history of M&As. When we look at the IB industry, we notice that during the past 50 years, a small number of large companies accumulated huge amounts of capital and branched out into various kinds of new risk-taking businesses. Meanwhile, small and midium sized companies have focused more on the core business and developed into specialized firms. This report examines several important IB M&A cases and deduces the implications for the managerial strategies concerning M&As in the Korean securities industry. In general, we see the tendency for M&As to occur frequently when the industrial environment changes, the firm diversity within the industry increases, and the transaction costs are low. First, drastic changes in business environment due to regulatory and economic changes have instigated many M&As. Second, as more companies become differentiated in the industry, the need for M&As increases for the pursuit of synergy effects. Third, according to the transaction cost theory, M&As are easier to execute when the capital costs are low due to low interest rates or sufficient cash flow, or when M&A financing is facilitated by financial innovation. The finance industry, including securities business, is under stricter regulations and puts high priority on good reputation, client relationships, and expert employees. Therefore, compared to other industries, M&As among securities companies are more sensitive to alterations in rules and regulations and face more difficulties with regard to human resource management. The lessons from the case studies in this report can be summarized as follows. First, “M&A is a time-buying tactic”, that is, low competence can be supplemented through M&As in a short period of time. An example can be found in the history of Drexel Burnham Lambert. Burnham, a brokerage company, merged with Drexel, a highly credited firm, and easily became a leading IB company. Another case is Credit Suisse which strengthened its IB business through the merger of DLJ(Donaldson, Lufkin & Jenrette), a leader in high yield bonds. Second, since securities companies are highly regulated, M&A can be a very effective strategy to preemptively respond the recent regulatory changes in Korea. An example from abroad is the merger between Citicorp and Travelers Group which took place right before the enforcement of the Gramm-Leach-Bliley Act of 1999. The act allowed the integration of commercial banking, investment banking, and insurance business. Third, it is important to provide an appropriate incentive scheme to maintain the core personnel, the most important asset in banking, and to be successful in organizational integration after M&As. It is also necessary to nurture various sources of financial experts, including research institutes, think tanks, and universities in addition to existing securities companies. A case of poor human resource management can be seen in Bankers Trust, which merged with Alex Brown to obtain the specialty in stocks but failed due to the loss of core staff members during the transitional period. The failure of the integration between Morgan Stanley and Dean Witter is another example. Fourth, there are cases that focused on the strategic synergy but failed to evaluate the financial prospects. The winner`s curse should be avoided especially in times of high liquidity. The BZW(Barclays, de Zoete, Wedd) case seemed to be strategically successful, but the merger resulted in big losses due to the high acquisition payment and additional post M&A expenses. Fifth, business diversification through securities company M&As, especially by manufacturing companies, is less likely to succeed unless the acquirer has a clear vision and business model. For example, General Electric intended to enter into the securities industry through the acquisition of Kidder Peabody, but eventually sold it to PaineWebber after massive losses. The retailer Sears Roebuck was unable to successfully integrate with Dean Witter and sold it to Morgan Stanley. Sixth, the conflicts of interest among business entities can be resolved through M&As. For example, Citigroup swapped its asset management unit with Legg Mason`s brokerage arm. Merrill Lynch disposed its asset management entity to BlackRock for a significant stake. In the aforementioned cases, separating the business entities through M&As also recovered market trust.