Merging 58 multicultural financial institutions into just 10 anchor groups at breakneck speed is a monumental undertaking.

For a case study into the complexity of mergers in the Asian banking sector, it would be difficult to find a more compelling example than the experience of Malaysia. The country's 58 financial institutions raced the clock to complete the mergers by 31 December 2000. The names of the 10 core anchor banks had only been confirmed on 14 February 2000.

Whether Saint Valentine's Day was an appropriate date to announce such a hurried and largely unwanted union will depend on just how well the banks manage the phenomenal challenges. Never before had the global banking industry seen mergers of such a magnitude.

Malaysia's 58 financial institutions operate a total of 2,712 branches, serving a population of 22.5 million. Each new anchor group now operates one commercial bank, one merchant bank and one finance company. The decision to consolidate the banking industry was made in the wake of the Asian financial crisis. The turmoil exposed the weakness in the domestic banking sector and consolidation was the prescribed cure.

While the mergers were to be completed by the last day of 2000, the banks were given until well into 2001 to merge operationally. The process of integration poses significant challenges for the banks in terms of the organizational and people issues, especially given the involuntary nature of the exercise.

Hewitt Associates recognizes three crucial keys to success in any merger, regardless of the industries the companies operate in. These are: selection of the best people in pivotal roles, retention of the most talented employees, and the integration of the cultures of the merging parties.

Three Steps to Success

To ensure the success of a merger, three issues are of paramount importance. They are:

• Selection of best people in pivotal roles
• Retention of key talent
• Integration of cultures

Pivotal People

One of the first major decisions an anchor bank must make concerns the question of leadership. Key positions must be assigned because doubts over leadership will add to the uncertainty felt by employees. It is an issue that must be addressed even before the merger begins. Financial institutions that value teamwork, or believe that "the whole is greater than the sum of the parts", may choose to select the entire team of high performers from one of the organizations when deciding how to staff a merged unit. This enables swift staffing of the new bank, and conventional wisdom on the criteria for a successful merger indicates that speed is of the essence to fully realize synergies. Conversely, there is a possibility that the team's culture and operating style are not aligned to that of the new entity. The 'cherry-picking' approach ensures that the best talent is retained within the new bank, but may also mean that the new team does not immediately attain the highest level of productivity. The drawback here is that this process takes time, during which productivity will not be as high as it could be.

The Bonus of Talent Retention

Mergers are a time of great uncertainty and anxiety for all staff. An added complication for retaining key talent in the Malaysian banking sector is the advent of some strong forces of demand that have created a tightening in the Malaysian banking labor market and provided them with the opportunity to seek alternative sources of employment very easily. These forces include the recovery of the Malaysian economy, demand for foreign talent among Singapore banks, the proliferation of dotcom companies, a renewed focus by some foreign banks on Asian markets, and the extended economic expansion in the U.S. (which has led many Malaysians to choose to remain in the U.S. after completing their tertiary education).

A possible solution may be the provision of retention bonuses aimed at securing the services of key talent through and beyond the merger process. Asian financial institutions have been reticent to consider this option, primarily because it conflicts with the prevalent collectivist culture within Asia (rather than the individualist culture more common in Anglo Saxon countries). Nevertheless, retention bonuses proved successful in Deutsche Bank's merger with Bankers Trust and in many other global mergers.

Key Aspects of a Retention Bonus Program

Eligibility:

Conventional wisdom states that these programs should be targeted at top executive talent rather than be broad based. Nevertheless, the drawback of a targeted approach is that there is a strong possibility of alienating other employees.

Amount:

This should be large enough to encourage the desired behavior, which in this case is not only retention but also maintaining productivity through the merger period. As such, the payment should also be tied to key merger success indicators.

Payment Schedule:

To ensure that the twin motives of retention and productivity are achieved, payments should be scheduled throughout the period of the program but the larger payments should be held back until the end of the program.

Cultural Scan Nets Differences

Research by Hewitt Associates shows that, especially in Asia, cultural integration is the biggest barrier to the success of a merger. Cultural integration issues are greatest in global cross-border mergers, such as that of Credit Suisse and First Boston, but also occur in regional cross-border mergers, such the acquisition of Kwong On Bank in Hong Kong by Development Bank of Singapore. The reason for this is that, in these types of mergers, one has to face differences in both organizational culture and the national culture.

While mergers between domestic financial institutions do not raise issues on the national culture front, they do present challenges in terms of differences in organizational culture. Furthermore, Malaysia has historically had problems associated with trying to balance the interests of a multicultural society.

An example is that a number of the anchor groups contain merger partners in which one institution has a dominant culture that reflects a particular race in Malaysia, while the other merger partner may have a dominant culture that reflects the value system of a different race. These differences in culture can lead to several common problems in merger situations. The most serious of these are:

• Dysfunctional teams
• Grid-locked decision making processes
• Reduced productivity
• Confrontation and conflict with the attendant workplace stress
• Lost business development opportunities

In order to overcome these differences, the organizations involved in the current merger process should consider undertaking a cultural scan. This is designed to capture the prevalent values, beliefs and attitudes with respect to such factors as propensity for teamwork, management style, performance orientation, communication approach and decision making processes. Such a scan highlights areas of differences that can be reconciled through team building workshops and areas of common ground that can provide the foundation to build a new culture that will support the new strategic direction of the merged organization.

The consolidation program designed by Bank Negara, to ensure that the Malaysian banking and finance sector becomes more competitive domestically and in the global marketplace, is ambitious, progressive and timely. In order to ensure the success of this program, both consultants and bank management alike must pay special attention to the people and organizational challenges that arise from this program.

The anchor groups that deal most effectively with these issues will develop a strategic advantage in the new global competitive landscape that is already sweeping Malaysia.