It is said frequently that mergers and acquisitions are difficult because of the culture of the Gulf – family owned businesses that are part of conglomerates are difficult to part with for founders who have an emotional connection to them, or who do not want others to equate their decision to sell with weakness. Another factor is that such owners typically have few minority shareholders to answer to, and that may prompt them to hang on longer. In many cases in the Gulf outside capital is not necessary. Even in the financial services sector, many of the firms that could be candidates for consolidation are privately owned, with perhaps a few minority shareholders or publicly traded ones holding only small stakes.
NEW DIRECTION: The degree of difficulty, however, does not diminish the need for mergers or obscure the widespread contention that the financial industry in Bahrain would be better off if the roster held a shorter list of larger institutions. The Central Bank of Bahrain (CBB) is also on the record as in favour of consolidation across various segments of the financial services industry, but the area in which the most activity and attention was focused was on Islamic banks.
At a financial conference in March 2013, Rasheed Al Maraj, the governor of the CBB, told attendees, “There is no room for small banks. The economic atmosphere is challenging, and the competition in the market is becoming very fierce.”
The good news is that merger talks are actually on the rise and there have been several successes. Al Salam Bank purchased Bahrain Saudi Bank in a deal agreed to in 2009 and completed in 2012, after talks with Bahrain Islamic Bank (BISB) were unsuccessful. The latter was subsequently sold in March 2013, when Kuwait’s Investment Dar sold its majority stake of 51.6% in BISB to the National Bank of Bahrain (NBB) and a Bahraini pension fund, the Social Insurance Organisation Asset Management Company, for $92m.
Abdul Razak Hassan Al Qassim, the CEO of NBB, said in a statement that NBB Bahrain Islamic, despite recent losses, was looking for a way to gain access to the retail Islamic banking segment of Bahrain’s financial services sector. Other potential consolidation candidates include the Khaleeji Commercial Bank, the major shareholder of which, the Bahraini wholesale bank Gulf Finance House, is on the record as saying it is exploring options for the bank.
GET THE BALL ROLLING: With examples of success to point to, the emphasis is now shifting beyond whether consolidation is possible and on to how to make it go faster. Though it was not the first merger in the sector, a combination approved by shareholders in 2012 had become the topic of discussions across the industry in early 2012 for its potential as an example to follow: that of Elaf Bank, Capital Management House and Capivest.
The combination of the three banks created a new bank with equity of almost $350m and assets above $400m, and was completed, with the three lenders’ systems and employees fully integrated by January 8, 2013. The new entity, for now, will retain Elaf’s name; a rebranding is on the agenda for the future.
“Given the improved capitalisation level of the merged bank, and therefore its improved financial standing, it may serve as a catalytic example for further consolidation across the industry,” Paul Mercer, chairman of Elaf Bank, told OBG. “This is something the sector would benefit from at the moment.”
Elaf, Capital Management and Capivest all shared a desire to boost capital, but each came with different core competencies, which made a grouping more attractive. Elaf had been focused on sukuk markets; Capivest, once a commercial bank, had increasingly shifted toward an investment-focused approach primarily in the Bahraini market; Capital Management was also using the investment model, but not Bahrain-focused, and was specifically targeting opportunities in the transportation sector, such as shipping and aircraft leasing. Capital Management also differed from the other two as it was licensed as an investment company, rather than as a bank. However, in Bahrain this distinction does not necessarily signify fundamentally different operations – significant overlap exists between wholesale bank licences and certain types of investment company licences.
SMOOTH TRANSITION: A common shareholder for each of the three was Kuwait Finance House, Kuwait’s largest Islamic bank, and that helped get the three parties started. Each appointed two board members to serve on a consolidation committee. Instead of each of them hiring a separate advisor on the transaction Kuwait Finance House served in that role for all three, reducing the potential for disagreements. Now that the three found each other to be suitable negotiating partners, the next step was to simplify the process, in hopes of avoiding ruffled feathers along the way. That meant ensuring that each negotiating partner had reasonable expectations from the beginning, but also, wherever possible, it also meant reducing the points upon which to negotiate.
The main areas of contention in a merger or acquisition are often price followed by redundancies and titles: Who becomes the new chairman or chief executive? Which side must shoulder more of the burden of redundancies? Will the combined entity take the names of the old ones? To negotiate on price, once the three banks reached the point where the idea of a merger was approved in theory they opted for an independent valuation by an outsider, and pledged to accept the numbers generated in that process, save for small negotiations fine-tuning the basic deal. The outsider tapped to do the work was Deloitte Dubai, and final values were set after discussions between Deloitte and the parties themselves.
MIXING IT UP: Titles and job redundancies had the potential to be more complex, particularly for combinations that are truly mergers, instead of acquisitions in which one company is clearly stronger. Elaf, Capivest and Capital Management’s consolidation committee opted for an election system for the chair, board and executive positions, with shareholders getting to vote on which people from the previous entities would fill those roles in the new ones.
Each of the three banks had had different board sizes, but decided on a 10-member board and agreed on a process in which current directors or others could nominate themselves as candidates. Eleven stepped forward for the 10 positions, and a vote was held. The next step, deciding on executives, also utilised the aid of an outsider. The Dubai office of the management and IT consultancy PA Consulting Group was hired for a human resources audit and to advise on an ideal corporate structure.
Interviews were conducted, and board-level meetings convened to pick a set of executives. In the process, two of the existing three chief executives decided to move on, and as of February 2013 the bank was set to hire a new CEO rather than pick from existing group. Another option can be to seek the counsel of the CBB, which exercises a degree of control over this already in its everyday functions, such as approving executive level appointments. The CBB would likely be interested in any positions that report to the CEO or the board, but not in those lower down the management structure, and officials told OBG they are willing to assist banks in sorting out these types of issues as merger discussions evolve.
CASE STUDY: The rest of the sector can benefit from the experience of Elaf, Capivest and Capital Management, or any of the other banks in the consolidation process. These recent moves make clear is that even at the early stages, more than merely one or two primary decision-makers are involved. Capivest, being one of the oldest banks in Bahrain of any nature, had over time taken on a diversified shareholder structure, and Capital Management as well lacked a shareholder with a stake greater than 50%.
As a result, in neither case did any single person or family suffer the stigma of selling that is so often cited as an obstacle to merging. However, with each party represented by multiple shareholders along the way, what is clear is that it was a very inclusive process that, either directly or indirectly, steered the principals away from any sense of winning or losing.
For the future, Bahrain’s banks, Islamic or otherwise, may wish to look for combinations in which the entities have different lines of business, and ownership structures that are diluted to the extent that the merging process cannot be misconstrued are ideal.