John S. Hunkin President, CIBC World Markets
WHAT'S BEHIND THE PROPOSED BANK MERGERS?
Chairman: Gareth S. Seltzer, President, The Empire Club of Canada
Head Table Guests
Blake Goldring, President and COO, AGF Management Limited and a Director, The Empire Club of Canada; Marilyn Areias, Student, Bloor Collegiate Institute; Rev. Vic Reigel, Honorary Assistant, Christ Church, Brampton; Robert Grandy, Chairman, Merrill Lynch Canada Inc.; Mark Yamada, Managing Director, Guardian Capital Advisors; John MacNaughton, President, Nesbitt Burns Inc. and a Past President, The Empire Club of Canada; Stephen Donovan, Partner, Tory Tory DesLaurier and Binnington; Patricia Meredith, Executive Vice-President, Corporate Strategy, CIBC; Charles Winograd, Deputy Chairman, RBC Dominion Securities; and John Sadler, Executive Vice-President, Corporate Affairs, Newcourt Credit Group and a Director, The Empire Club of Canada.
Introduction by Gareth Seltzer
Well, today's luncheon is well timed as the characteristics of the market could not be more complex and yet inviting around the globe. In North America, it appears that we may be gaining some
Let me say it is a great pleasure to be here and Gareth thank you very much for a wonderful introduction.
In recent weeks various interest groups have gone to great lengths to analyse the benefits and costs of allowing banks to merge. My ability to objectively add anything to this analysis is probably suspect. After all we are really deciding the future of my bank and my industry. So my intention today is to step back and look at what's behind this desire to merge.
The real driver behind the desire to consolidate is globalisation--a force that is dramatically changing how companies compete and succeed. If you look around you'll notice that most scale-driven industries have already grown to global proportions. These include the oil, mining, forest products, aircraft and pharmaceutical industries--the list goes on. Industries involving many consumer goods--PCs, cars, TVs, soft drinks, shoes and even movie production--have also globalised. Goods and services that are harder to brand or regulate are just beginning to globalise--banking, legal and accounting, education, medical care and utilities. Companies in all industries are getting much bigger with greater reach than ever before. Northern Telecom now derives two-thirds of its revenues from outside Canada. Business books and magazines are packed with discussions on why globalisation is happening. I'll give you the Coles Notes edition:
• Deregulation. Government deregulation is a way to achieve higher standards of living through greater competition.
• Technology. We now have the ability to send information around the world in a nanosecond.
• New risk management and financing tools. These are making financial activities more lucrative and less risky.
• And convergence. Financial markets are merging into one global capital market.
These events have created two new opportunities. One--the opportunity for companies to grow well beyond their borders. And two--the opportunity for investors to seek out the highest-yield company in the world. Both opportunities are being seized. There is hardly an industry in the world that is not in the process of consolidation.
A company can achieve scale in two ways: by internal growth over a period of years or by an immediate shot in the arm through mergers and acquisitions. As we see in the daily newspapers, more and more companies are opting for the shot in the arm. Even industry giants in their own right, like Microsoft and Intel, are continually making acquisitions to fuel their growth. Last year we watched a record level of takeovers throughout the world including World Com's US$37-billion offer for MCI Communications. If that wasn't enough, this year we saw an even bigger announcement--the US$165-billion merger proposal between Glaxo and SmithKline. In 1997 merger activity globally generated more than 4,000 deals.
The pursuit of size is really the pursuit of profitability in a much larger, more competitive battlefield. Faced with limited ability to raise prices, thanks to low inflation, companies are working at becoming super efficient to bulk up their bottom line. They're streamlining, looking for better efficiency and entering new markets. In doing so they're disrupting the balance between domestic players.
We saw the Japanese auto industry dislocate the U.S. auto industry and Wal-Mart dislocate independent stores throughout North America. In my business, investment banking, foreign competitors have made significant inroads into Canada. Last year CIBC Wood Gundy was first in corporate debt underwriting but hot on our heels were Goldman Sachs and Merrill Lynch. U.S. players now occupy the three top rankings in international equity and debt underwriting for Canadian issuers. We worry about this in much the same way as Canadian retailers worry about Wal-Mart.
As this foreign competition and domestic dislocation escalates so does pressure from shareholders and customers. Shareholders want performance and customers want better service, price, convenience and choice. Both will move quickly to those who can meet these expectations. The airlines and telecommunications industries have undergone significant deregulation and consolidation. As a result, consumers saw prices fall by 20 per cent in the first five years after deregulation, and a further 20 per cent in the following five years.
In this environment executives in boardrooms around the world are wrestling with growth strategies--whether to merge or acquire, to undertake a joint venture or to make a foreign investment; how to deal with new risks, build market share, and distribute to new markets; and how to manage the complexities that comes with growth.
Today a big part of the answer is scale. Scale makes possible large investments in research and development, technology, people and marketing. It increases one's ability to absorb risk, to generate net income growth, to protect against being acquired and to grow through additional acquisitions. These are all things that shareholders want and expect. The furious rate of consolidation is redefining what scale really means.
Twenty years ago being one of the world's top 20 non-financial companies meant having a market task of about $1 billion. That number is predicted to climb to more than $100 billion over the next six years.
Recently people have questioned whether it is necessary for banks to be big in order to be profitable. The short answer is yes. The longer answer is that size doesn't guarantee profit, but it does set the stage for being able to compete on more aggressive terms. In our submission to the task force on financial institutions we address the issue of size in detail, and there are copies at the door for those who are interested.
As I have described, in virtually every industry scale has become the admission price to the game. To me it just makes sense for countries to encourage their strong industries to grow and flourish globally. And we are seeing this growth. In Canada last year more than 1,200 merger-and-acquisition deals were transacted with a total value of more than $100 billion. This year already The Bay and K Mart, Novell and Trans Canada and my competitors have made the front-page news, but there are many less familiar Canadian companies that are laying down global stakes through acquisitions.
Today most countries have a critical stake in the global market and not just as exporters. Look at the video games your children play with, the newspapers you are reading today, the stocks that make up your mutual fund portfolio and the furniture, food and clothing you buy. They come from all over the world.
The companies of one particular country provide Canadian consumers with a myriad of products and services--salt to electronic equipment, gasoline and financial services. It is very similar to Canada in GDP and population, and like Canada its small, domestic market forces this country to look abroad for growth. A long time ago Holland recognised how important it was to participate in the global marketplace. It has built a prolific role for itself worldwide. Its citizens have benefitted through a high standard of living. The Dutch view their home-grown world-class companies, even the banks, with pride. They see them as a trademark of their country's success.
Size and scale. You can hate it, you can curse it, but you can't shut the door on a world trend. Investors haven't; neither have my competitors. They recognise scale as an important base for cultivating growth. Canadians worry about becoming a branch-plant economy. We don't have to be. Canada is more than equipped to be a significant global player in several key areas. We have not begun to reach this potential. In banking the combination of any two banks in Canada will not create the necessary global scale. The merged entity would have to follow with a series of acquisitions or mergers to be in the same league as the major U.S. and the major European banks. This series of acquisitions would focus on gaining size and efficiency, broader product capabilities, market share and the ability to make massive technology investment, all of which will lead to greater customer service, shareholder values and market capitalisation.
But just as size breeds strength, it also breeds discomfort in Canada. This discomfort comes at a time in the world's history when size is paramount. Perhaps we are uncomfortable because we are a small nation. A company of the size necessary for world-scale success may be simply too big in our terms of reference. Or perhaps we are uncomfortable with bigness because of our proximity to the U.S. or our historical suspicion of big business, big government, big profits and, yes, big banks.
It is not surprising the banks get singled out for special attention. We touch every individual and every company in this country. I suspect that every person in this room owns a piece of one of them through his or her pension plan or mutual fund. As shareholders you may feel inclined to support scale. As customers, you may be concerned about reduced competition. That is why the task force is important. To a large extent its very existence recognises that our national interests are now closely meshed with the global community and must be examined in the light of the world we live in. The task force also underscores the need to identify all the stakeholders and the impact of them, both positive and negative. Bank consolidation outside Canada is happening so rapidly that the gap in scale between Canadian and foreign banks is widening dramatically.
As we debate this issue in Canada, foreign acquisition opportunities are being seized by those with the scale to do so. We must decide with full information with dispassion and with dispatch. The consolidation race is on. The Canadian banking industry wants to enter the race. If we are given a level playing field we believe we can win and our success will be Canada's success. Thank you very much.
The appreciation of the meeting was expressed by John Sadler, Executive Vice-President, Corporate Affairs, Newcourt Credit Group and a Director, The Empire Club of Canada.