By Hamza Hendawi
MERGER ACTIVITY involving European companies has reached nearly $300 billion since the start of the year – up 120 per cent over the same period in 1998. Cyprus has contributed to this consolidation drive inspired by an increasingly globalised market, albeit in a very small way.
Still, bankers and economists believe many sectors of the island’s economy are suffering from fragmentation and that mergers and acquisitions constituted the only way ahead to consolidate them before the onset of full integration with Europe and the ensuing foreign competition that will come with it by 2003.
The local media label of ‘deal of the century’ used in reference to the Popular Bank’s £47 million acquisition of Nicos Shacolas’ insurance business in January is undoubtedly exaggerated, but the takeover has highlighted a sector in which consolidation and the gradual disappearance of small players are happening at a quickening pace.
Last month, a smaller though significant acquisition in the insurance sector was made when Alpha Bank Ltd, a subsidiary of Greece’s giant Alpha Credit Bank group, bought Metropolitan Insurance for an undisclosed sum.
“I think mergers is the only forward for most sectors. There are a lot of medium and small size companies in Cyprus and not all of them are profitable,” said Koullis Panayiotou, a mergers and acquisitions specialist at CLR, one of the island’s top brokerage and investment houses.
“With or without European Union accession, there is a need for consolidation,” he said.
But mergers and acquisitions alone don’t necessarily guarantee success, as Panayiotou and others are quick to point out. In fact, some note, some mergers take place for no good practical reason and many fail to meet their declared aims of increased profits through cost-cutting and restructuring.
“Some are merely the result of boardroom boredom,” said one economist. Another said that big – the inevitable outcome of a merger – is not always beautiful and that small, on the other hand, still has its place in a globalised market.
“There is always a place for medium-sized and small companies with a special niche to play alongside the big ones,” said a senior government economist.
Mergers and acquisitions can also be a nightmare to sort out before a final picture emerges of how the two companies which have become one will operate.
Sources at the Popular bank, for example, speak of an awesome task to amalgamate the operations of Interamerican and Philiki, daughter companies of Shacolas’ Paneuropean, with the bank’s own insurance arms Cyprialife and Laiki Insurance.
“You need to unify the accounts, unify the technology and address the question of human resources,” said one source.
There is also the thorny issue of who gets to be number one from two pre- merger number ones at departmental level, and the likely departure of those who lose out to join rival firms or become independent.
Another question-mark over mergers is the possibility of an erosion in profit margins or failure to increase the combined sales of the two companies that have joined forces.
Much to the discomfort of the top brass at the Hellenic Bank, many of the island’s economists see its acquisition of Barclays Bank onshore operations in Cyprus as an example of a less than smooth takeover.
“Barclays was overstaffed and Hellenic was overstaffed, and they both lacked upgraded technology,” said Panayiotou of one of the largest deals in Cyprus’ short history of corporate takeovers.
“They seem to be have had a lot of trouble digesting the whole thing and they had to lay off people. We don’t expect any improvement in results until next year,” he told The Sunday Mail.
Hellenic, which is just starting to adapt to life in the uncustomary position of a sought-after blue-chip on the Cyprus stock market, remains a distant third after the takeover of Barclays. However, it does appear determined to match product by product its much bigger brothers the Bank of Cyprus and Popular Bank.
Hellenic is known, for example, to be prowling for an insurance arm to buy, although bank officials maintain that the process of establishing an insurance subsidiary is also under way. It is also planning a rapid expansion of its four-month-old retail operations in Greece and plans to venture into factoring.
“The island is overbanked in terms of branches,” said Yiannos Tirkides, the Popular Bank’s chief economist. Seven banks currently serve a population of no more than 700,000.
“Perhaps the entire island can be served by just two banks,” he said. “I can see future mergers between banks that will rationalise costs.”
He cited the agriculture sector as another sector in which fragmentation, in this case many people owning many small plots of land, is hurting its prospects and preventing sizeable investment in machinery to increase productivity.
