And that's clearly what is happening with the forced
merger of 58 financial institutions into six 'anchor banks.'
Bank Negara took the country's bankers aside and told
them who they would merge with. They were given until
the end of September to do all the necessary
paperwork. Deputy Prime Minister Abdullah Badawi
explained, 'The government wanted to see local banks
play a dynamic role which can accelerate development
efforts.' In other words, we know better than you or
your shareholders how to build a banking system that
will promote economic growth.
In itself consolidation is no bad thing, and analysts are
largely agreed that combining some of Malaysia's banks
could bring gains in efficiency, as unneeded branches
are closed down and some combined operations reap
the benefits of economies of scale. The same may be
true in the brokerage industry, or indeed in others Kuala
Lumpur has its eye on. So why worry if Kuala Lumpur
plays matchmaker?
The simple answer is that the way mergers take place,
and the management structures created in the process,
are critical to their success. Corporate mergers and
acquisitions usually happen when market signals lead
managers to believe that such combinations will allow
them to create more value with the same assets. For
example, a bank with untapped potential usually has a
depressed share price, which in turn makes it an
attractive takeover target for other banks that think they
can effect a turnaround. And a bank which is well
managed usually has a healthy share price, which
enables it to use the leverage of its own shares to
finance a takeover. The net result is that good managers
are given more to manage, and poor ones leave the
business. That's how you really build a banking system
that promotes growth.
The plan has no
logic
Unfortunately, market signals seem to have been
ignored in Malaysia, as bankers are left scratching their
heads trying to understand the logic behind the mergers
plans they now must follow. The speed of the process
suggests that creating bigger banks quickly was the
primary consideration, rather than value or management
expertise or synergy. The head of the opposition, Lim
Kit Siang, has pointed out that just two weeks before
the merger plan was announced, the central bank was
working on a different plan to reduce the number of
finance companies to 10 from the 39 at the time. A
hasty switch in policy, combined with Bank Negara's
poor record of bank supervision, leads Mr. Lim to
question whether it should be trusted to pick winners
and losers in the financial sector.
Questions also have been raised on whether the mergers
were designed to disadvantage ethnic Chinese bankers,
or reward Mr. Mahathir's political allies and punish the
friends of former Deputy Prime Minister Anwar
Ibrahim. Bank Negara has denied this, but Mr. Lim has
called for an independent commission to supervise bank
mergers in order to make sure that it is not the case.
Even if these allegations are untrue, the government has
only itself to blame for their spread since it has
conducted the decision-making process behind closed
doors. These questions not only aren't going away, they
will probably become more divisive as it comes time to
value the acquired banks.
Malaysia will be the poorer if it loses a banking system
that, for all its faults, did have a measure of market
discipline. What will the new order look like? The best
case scenario is Japan's convoy system, and we all
know how that turned out. The worst case is a
crony-run system like Indonesia's under Suharto. The
bank merger plan was cooked up in a matter of weeks.
Maybe the government should devote a few more
weeks, or years, to reconsideration.