Best of enemies

Egypt's two largest investment banks, and once hated rivals, EFG-Hermes and CIIC, are to merge. For the merger to be a success, the bankers will need to put past sourness behind them, writes Jasper Thornton
Rapid growth, competitiveness, market conquest: These are some of the joys that mergers can bring. But bruised egos, redundancies and worried clients can also come. Investment banks usually advise other companies on mergers. But this week, it is the turn of the bankers to stand beneath the storms of change. Last Friday, directors from Egypt's two largest investment banks, bitter rivals EFG-Hermes and Commercial International Investment Company (CIIC), told their employees that the two financial institutions were to merge, sources in EFG-Hermes told Al-Ahram Weekly. The government was told on Sunday, and the banks will tell the press of the move some time after the coming weekend. The final agreement was due to be signed Wednesday.
The two banks have long struggled over market-share. They operate in largely the same fields, and at times the rivalry has been ferocious. But now they will need to work together. EFG-Hermes, whose major owners are Citibank and the active Heikal family, and which is managed by Mohamed Taymour, is considered Egypt's best investment bank by analysts. It has a strong brokerage arm, assets of half a billion US dollars under management, and Egypt's top corporate finance division. CIIC is owned by Commercial International Bank and a group of businessmen which includes the Mansour family. It is managed by Yasser El-Mallawani, and is strong in private equity. Sources have told the Weekly that EFG-Hermes' bankers will handle investment banking activities (brokerage, corporate finance, some asset management), while CIIC's teams will deal with investment activities (private equity investment and some asset management). The merger comes after CIIC failed earlier this year to merge with Scottish bank Flemings, through Flemings' emerging markets division, Flemings Mansour. As that deal was being drawn up, Flemings was itself bought. The new owners of Flemings, US bank Chase, declined to pursue any opportunities in the Egyptian market. An analyst at Chase told the Weekly that Chase saw, "no strategic mileage," in the Egyptian market at the time, choosing instead to concentrate on activities in Hong Kong.
Nashwa Saleh, an analyst at HC brokerage, told Reuters that the merger creates an institution with "the most muscle in Egypt and regionally, and this will help expansion plans." Amr Al-Alfy, another banking analyst, said that the banks' merger will "help them penetrate the Arab World and become (more of a) regional player." The two banks have plenty of complementary activities and harmonies, and will benefit from economies of scale and associated cost reductions. Formed from Egypt's two top investment banks, the new entity should have a wider spread of activities in which it is market leader. A bank-mergers specialist at a Swiss investment bank, who preferred not to be named, described to the Weekly how costs can be planed away. "Clients can be shared," he said, sometimes doubling the number of customers. "Expenses can be cut," he added. "The technology for trading and pricing is costly; after the merger, one platform can serve both institutions and their clients, thereby saving money. And with more clients, the cost of technology per client dramatically falls," he said. EFG-Hermes has lately been spending heavily on technology: Elwy Taymour, managing director of EFG-Hermes' on-line trading wing, Arab Finance, recently told the Weekly that Arab Finance, was preparing an on-line stock trading site for launch later this year, which will be promoted throughout the Middle East.
But it is not all thrills. Some observers hold that the marriage is one of "convenience and necessity, not love." They feel the failed merger between CIIC and Flemings made Egyptian investment banks realise that they are less tantalising fruits for multinationals than they hoped. International banks feel that Egyptian banks lack the asset muscle to make them worth buying. EFG-Hermes manages assets worth half a billion dollars. The largest US banks manage something approaching 800 billion dollars: 10 times Egypt's national yearly income. Lingering worries about the volatility of the currency also inhibit foreign investors. A seasoned Egyptian banker remarked to the Weekly ,"Foreign investors fear devaluation, which will aggressively cut the worth of their investments...and it is a question of when, not if, the currency devalues." Given the reluctance of foreign investors to buy into Egypt's investment banks and provide them with much needed mass, a merger between Egypt's two largest banks is a sensible move. Costs fall; assets climb; activities diversify; regional expansion steps closer. But the move may also be born of necessity not ambition. Analysts have been particularly concerned about EFG-Hermes lately: its activities make it utterly exposed to market whim. Egypt's listed market has fallen 50 per cent from its high, troubling the financial institution and its clients. The merger will help EFG-Hermes manage risk, as the new entity will have a broader spread of operations, including CIIC's private equity portfolio, which is less sensitive to changing market winds.
There are specific difficulties associated with this merger that analysts have noticed, too. A broker with a rival firm pointed out to the Weekly that Commercial International Bank, which part-owns CIIC, also owns another bank whose activities duplicate EFG-Hermes'. Commercial International Brokerage Company (CIBC) is smaller than EFG-Hermes, and will be dwarfed by the merged entity. To have duplicate operations in the same organisation is wasteful; one may have to go. More generally, mergers are disruptive and can agitate clients. When European investment banks UBS and Swiss Bank merged, some large clients were lost. UBS and Swiss Bank both worked for rival supermarkets. When the merger was complete, one of those clients left: they didn't want the same firm working for them and their competition, lest commercially sensitive information leaked. There may be similar chance problems with the Egyptian merger. A broader challenge faced by all merging companies is how to integrate their management structures. The past rivalry of the two banks has inevitably created bad odour among managers and owners who must now work together. A seasoned observer remarked to the Weekly, that some of the "egos involved are mega-inflated," and that it was going "to be an enjoyable political game, watching who eats who." Sensitivities will not be helped by the need to fire people: in some areas, the banks are running duplicate operations: to have two operating in tandem will undo the point of the merger, so there will be lay-offs. One of these areas is, of course, top management.
The merger of EFG-Hermes and CIIC is a sensible move, given Egypt's current economic climate, analysts say. Costs will be trimmed, and done right, the advantages of each bank will be enhanced in the new entity, while weaknesses are shed. The move will give EFG-Hermes and CIIC a better chance of surviving the squalls blowing through the market, and help their regional ambitions. The Heikal family, for example, part owners of EFG-Hermes, have a strong business reputation in the Gulf. But if the merged banks are to grow together, not become choked by the weeds of each others' weaknesses, previously feuding managers will need to work together; owners must forget old wisdom in favour of new necessities; anomalies like the existence of CIBC will need to be resolved; and during all the sound and fury of the merger, the bankers must not forget their biggest responsibility: their clients.
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