Shirley (Left) and Melhado(Right)
THE Jamaican financial sector landscape is certainly changing. Last week two apparently unrelated financial institutions Manufacturers Merchant Bank and Sigma Investments announced a $20 billion merger the largest so far between two local profitable financial institutions.
The new merger was a major surprise as only days before Manufacturers Merchant bank had published its financial results for the year ended March 31, 2000 reflecting net profit of $69.2 million up from $29.8 million the previous year. The company argued then that it was a sleeping giant that had put systems in place and was ready to "rumble". For its part Sigma had the proud record of being a unit trust that was a consistent star performer, with $3 billion of assets out of a total of $10 billion assets under management by Sigma Management Systems. Then- presto!-the announcement of the proposed merger hit the headlines.
What is obviously unusual about the merger is that the market was unaccustomed to profitable companies deciding to come together to form a stronger single entity. In the past mergers tended to take place between two unevenly yoked companies (One clearly in a stronger position than another). This new merger is therefore a watershed development showing that two similarly strong companies can combine to further their mutual interests. In this regard the merger signals a new level of sophistication in the local financial system that augers well for the future.
To be fair however, it can be argued that the Manufacturers Merchant Bank/Sigma merger occurred in a market that was already showing signs of sophistication where mergers and acquisitions were concerned. One indication of this is the number of mergers that occurred among merchant banks. As companies in the sector reorganised to facilitate survival, the number of firms in this category was reduced from 27 at the end of December 1977 to 11 at present. The latest merger on which the ink has hardly dried is the Pan Caribbean Merchant Bank and Knutsford Capital Merchant bank consolidation. Before that there was the Dehring, Bunting and Golding and Billy Craig Merchant bank combination to cite a few examples. Of course the reduction in the number of merchant banks has led to an even more competitive environment, with larger stronger institutions, and where bankers have had to sharpen their pencils as margins on foreign exchange and other transactions dwindle.
In light of this competitive market and little opportunity for expansion of their loan portfolios, merchant banks have turned to asset management for clients with high net worth to grow their business. Capital and Credit Merchant bank's much publicised asset management service is the best example of this. This shift in focus was not limited to merchant banks as the building societies have also responded to this development. In this case Jamaica National Building Society has leap-frogged its competitors and moved into providing money management services.
The upshot of all this is that the market for attracting funds is extremely tight as institutions scramble to get their piece of the pie. In fact it can be argued that the Manufacturers Merchant Bank/Sigma merger is a tactical response to this heightened competition.
One controversial aspect of the new financial landscape is the issue of the role of foreign management in the sector. This has become critical as in the aftermath of the financial sector crisis the impression was given, largely by government spokesmen, that Jamaican managers cannot manage efficiently. Now, with the sector on the mend, NCB's decision to go for four foreigners to fill top posts at that institution has reopened debate on the matter of the effectiveness of Jamaican managers versus their foreign counterparts. This is an issue that will no doubt recur until the sector takes off again.
A point that should not be missed in all this is that the proposed merger of Manufacturers Merchant Bank and Sigma to form one entity providing a number of services, brings into focus the need to rethink our assumptions concerning amalgamations of financial institutions. Perhaps not surprisingly, in the aftermath of the financial sector crisis it became fashionable (especially among government regulators) to argue that financial institutions should not offer a range of services within a group structure. Instead it was suggested that there should be separate district institutions classified in tight compartments such as banks, insurance, companies, trust companies and building societies.
What seems to be emerging is that the financial institutions are themselves waking up to the synergies that can be gained from offering a range of services even if the focus is admittedly on services within the financial sector. This is the context in which the proposed merger should be interpreted.
It is a reminder that being big and offering different services within the same company can be a prudent option. Congratulations Manufacturers Merchant Bank and Sigma. Way to go!
