Published: The Economic Times, May 20, 2005

By Pradeep S Mehta

How will the banking sector deal with the issue of retrenchment of workers made surplus as a result of mergers and acquisitions.

One of the downsides to a merger is the retrenchment of staff, which becomes surplus due to rationalisation of operations. The merged company looks at the type of functions which existed in both entities before the merger, and downsizes the staff numbers.

Managers look at it as an opportunity to cut down costs and increase profits (or decrease losses). They do not look at the plight of the retrenched employees, who will probably need to look for new jobs.

The proposed mergers in the banking industry in India are being opposed strongly by the Left parties. The government, who depend upon the Left’s support, cannot ignore this sentiment. Is there a way out?

Sometimes promises are made that there will be no job losses after such a merger, or closure. But the world over, mergers have always resulted in job losses.

The ILO, in a study done in 2000, painted a grim picture of ‘massive job losses’ and ‘loss of talent’ through increased mergers, with ‘anxiety and stress’ for those that were not sacked.

The study focused on the financial services sector, where the decade-long M&A binge showed an aggregate employment decline in an industry which was traditionally characterised by stable and even life-time employment. Sector experts predicted a loss of over 300,000 jobs in the banking sector between 1999 and 2002 as a result of M&As.

If we look at Germany, we find that in bank mergers, or for that matter in any merger, it is not easy to retrench workers. Early this year, when Deutsche Bank wished to retrench 1,920 jobs, it faced great difficulty in doing so.

Under German law firms wishing to cut jobs have to go through a painful negotiation with the works council; it cannot be done unilaterally as in the United States. In fact, Deutsche Bank had planned to cut 6,400 jobs globally to save $1.4 billion. How far they have been able to do so, is a matter yet to be reported. The bank’s drive was to lift the pre-tax return on equity from 19% in 2004 to 25% in future.

This was not a case of a mega-merger, which has become the flavour of the day in advanced economies. For instance, the Mitsubishi Tokyo Financial Group made an offer of $29 billion to UFJ, which might have resulted in the merged entity becoming the world’s largest bank with assets of around $1.8 trillion, beating the incumbent largest bank:

Citigroup, with total assets of around $1.5 trillion as on 31 December, 2004. Phew, just imagine the job losses which would have resulted from the mega merger of MTFG and UFJ.

As recently as early May, 2005, trade unions in Taiwan protested against government plans to force consolidation in the island’s overcrowded financial sector. In response, the government asked the banks to talk to unions and work out fresh agreements, which would not cause any hardship to workers.
Mergers of any kind have to clear regulatory hurdles and get competition authority’s approval. In January 1998 the Royal Bank of Canada and the Bank of Montreal announced their plans to merge. This merger would have created one of North America’s 10 largest banks.

The Canadian Imperial Bank of Commerce and the Toronto-Dominion Bank followed suit in April 1998. Earlier in the year Canada’s four large banks announced merger plans. But there were various arguments against the merger.

Canada’s fourth largest bank, Scotiabank, which is the only one among the big five not included in the merger plan, published a critical study. The study said that the merger will produce the most concentrated banking market in the industrialised world.

A separate study argued that between 20,000 to 40,000 jobs will be lost as a result of the proposed merger. It also argued that reduced competition will increase service charges to customers. Moreover, allowing only two banks to operate would have sharply increased the overall systemic risk in case one of them failed.

The Canadian Competition Bureau in a quick assessment pointed out that these merged entities would have an excessive market share, in sectors like retail banking, credit cards, wealth management and brokerage services. Furthermore, people marched on the streets to oppose the mergers, which did not go through.

Most competition laws in the world do not deal with employment concerns. But the competition law in South Africa is an exception. It has to be, because unemployment there is in the region of 30-40%. In a recent case, in February 2005, though not in the banking sector, the Competition Commission of South Africa cleared the acquisition by Harmony, a gold producer, of a rival: Gold Fields.

The matter is yet to be settled by the Competition Tribunal, the appellate body. However, what warmed the hearts of the workers’ bodies, is that the Commission put in a condition while clearing the hostile takeover that no more than 1,500 managerial or supervisory jobs would be eliminated.

In India, the extant competition law: the Monopolies and Restrictive Trade Practices Act, 1969 or its successor, Competition Act, 2002 do not have provisions to deal with retrenchment. However, the test of ‘public interest’ is prescribed to deal with such situations.

Further, the government can also issue ‘policy directives’ to the competition authority to override any concerns which they would not have dealt with. Both ‘public interest’ and ‘policy directives’ are a slippery slope, as the boundaries are not clearly defined and thus subject to political lobbying.

However, the government with the cooperation of the banking regulator, the Reserve Bank of India, is busy drafting guidelines for bank mergers. The initiative has its origins in the recommendations of the joint parliamentary committee that looked into the securities scam of 2001.

What the exercise is not looking at deeply is the issue of job creation or job losses, and that will be its challenge. The second challenge will be to understand whether big banks will be necessarily stronger. That may not often be the case.