The Merger between HSBC and Oman International Bank - Essay Example

? Evaluating the HSBC and OIB Merger: A strategic analysis BY YOU YOUR SCHOOL INFO HERE HERE EXECUTIVE SUMMARY The merger between HSBC and Oman International Bank maintained many opportunities for improving the financial and competitive position of OIB. Based on collectivist characteristics of the Omani culture, the disparity of power distance between customers and financial institutions, and the role of government as the sole owner of Oman International Bank set the foundation for many failures occurring in the business model. Unable to procure more deposits and gain asset improvement and growth, OIB was ill-equipped to sustain a strong competitive presence domestically and internationally. Synergies of the merger include better marketing prowess, how to utilise market research studies to create more customer-centric and relevant services, streamlining of the banking service model to include more electronic banking elements, and decentralisation of business practices to generate more innovative solutions supported by HSBC’s very strong economic portfolio to make changes necessary to adjust to changing market conditions. It is through the merger that the previous business entity Oman International Bank will be able to effectively compete with domestic financial institutions and prepare the organisation for building a global competitive presence. TABLE OF CONTENTS EXECUTIVE SUMMARY 1.0 Introduction.............................................................................................................. 2.0 The rationale for the merger – defining the problem............................................... 2.1 Government and institutional problems....................................................... 3.0 Achieving synergies through the merger – solutions to the problem....................... 4.0 Conclusion................................................................................................................ References 1.0 Introduction The Hong Kong and Shanghai Banking Corporation (HSBC) recently announced an approved merger with Oman International Bank (OIB) in an effort to improve the competitive and brand standing of HSBC and to provide Oman business customers and general consumers with improved banking services. Outside of the more obvious strategic intentions of the merger related to improving the financial portfolio of HBSC and OIB, it is anticipated that this merger will lead to a variety of significant synergies that will make the new entity, HSBC Bank Oman SAOG, more competitive in the Middle East. As a conglomerate whole, HSBC Holdings Plc earned total revenues of 75.6 billion USD in 2012, sustaining an asset valuation of 2.69 trillion USD (HSBC 2012), making HSBC the largest bank in the world in terms of revenues and total liquidity. HSBC is also the sixth largest publicly traded business in the globe as reported by Forbes Magazine in 2012, even larger than Royal Dutch Shell and Berkshire Hathaway (Forbes 2013). HSBC now owns 51 percent, a majority holding, of OIB (AME Info 2012). Established in 1984, Oman International Bank, a bank maintaining 82 different branches in Oman and four branches in Pakistan and India, maintained total assets of 703.7 million rial (the official currency of Oman) in 2011 (GBCM 2011). Until the merger with HSBC, Oman International Bank (OIB) was 100 percent owned by the Omani government. Unfortunately, OIB was the only bank operating in Oman that experienced a net loss in net income of 9.2 percent whilst other banks in the sector, including Ahli Bank and Bank Sohar experienced net income growth of 28.8 percent and 14.8 percent respectively (GBCM 2011). Because of this inability to improve net income growth, the merger between OIB and HSBC represented a significant opportunity to improve the bank’s financial position and liquidity. This merger between HSBC and OIB was only approved in June of 2012, making the merged entity now known as HSBC Bank Oman in the earliest development stages of the alliance. As such, there is limited published information about the merger and its recently experienced synergies. This report identifies the rationale for the merger, the expected economic and structural benefits of the alliance, and the potential impact of this strategic decision that is intended to provide the previous entity Oman International Bank with the financial and human capital resources to improve its competitive position in Oman and, potentially, abroad as the organisation seeks future expansion. 2.0 The rationale for the merger – defining the problem The CEO of the newly merged HSBC Bank Oman, Ewan Stirling, indicates that the merger was designed to improve HSBC’s long-term commitment to providing excellence in banking services to the Omani people. “This merger helps us rapidly grow our presence and provide our important Omani customers with an even wider range of banking products and services” (AME Info 2012, p.3). The main problem with Oman International Bank is that the business could not secure higher deposit growth and asset growth under the governance of the Omani government ownership. In fact, the stock performance of OIB, as compared with a respected and established international benchmark index referred to as the MSM30 Index, was significantly underperforming (Oman Equity Research 2011). Furthermore, the majority of financial and industry analysts had given OIB a rating of neutral, meaning there was historically no legitimate investor confidence that Oman International Bank would be able to achieve growth under its current operating structure. This has significant implications for capital procurement when the stock valuation continues to remain flat when other competing banks are able to improve their stock position and ensure better capital growth. The prowess of HSBC expertise in promoting growth, utilising marketing knowledge and diversification strategy development, was designed to provide OIB with a more proficient array of banking and investment strategies to improve competitive positioning. Furthermore, the Omani Rial has been historically flat in terms of its exchange value with major global currencies such as the USD and the British Pound. Currently, the rial is valued at only 38 cents as compared to the United States dollar (Yahoo! Finance 2013). This valuation has been almost flat over the last five years, which is yet another government issue associated with GDP growth in the country and the nation’s role in limited international trade and domestic industry growth. This is a strong indicator that the government forces in Oman that maintained 100 percent ownership of OIB were not only inefficient in providing the bank with the tools required to ensure asset growth and liquidity improvements, but also in improving the comparative economic value of the Oman Rial to make the nation (and its institutions) a more potent force in a global business and investment environment. By removing government influence from the Oman International Bank model, OIB will experience new opportunities, utilising HSBC’s vast financial, human capital and operational competencies to grow the business’ assets and gain new market interest in utilising the new HSBC Bank Oman for their commercial and personal banking needs. 2.1 Government and institutional problems Oman is a monarchy, governed by the absolute power of the Sultan of Oman who maintains all executive and most legislative powers in the country. It is considered an absolute monarchy which allows the Sultan to rule by order of decree and impose punishments deemed appropriate for civilian or commercial agent non-compliance to Sultan rule. This absolute authority system driving Omani government contributed, likely, to the problems occurring with Oman International Bank as the regulatory environment is dictated by a singular hierarchy which can often provide limited scope of business development if the ruling entity is ill-equipped to provide diversity of strategic growth imperatives for institutions under the governorship of a national leader. Whilst non-government-owned banks experienced ample growth, OIB as a 100 percent-owned institution was in a limited position for improving its competitive standings. Oman is a very collectivist nation, one in which group membership and building personal identity through group orientation and group sentiment are primary drivers of the social condition (Cheung et al. 2008; Hofstede 2001). As such, these values are infused into the business model of the institution by which individual contribution to problem-solving or innovation development are not promoted without a collectivist, group-oriented philosophy of organisational structure and culture. It is common for collectivist organisational cultures to become complacent when there is not an infusion of individualistic concepts and values brought into the organisation. The government influence and collectivist mentality of the commercial business culture seems to have contributed to some of the financial losses experienced by OIB prior to the merger. Innovation is regularly considered a main competitive advantage of businesses operating in highly competitive industries. Stover (2004) indicates that in order for business innovation to occur, interaction with other organisational stakeholders must occur in order to develop a knowledge management and knowledge transfer system. In the institution, there are individual stakeholders maintaining tacit knowledge, which are competencies held by the individual difficult to express to others that do not maintain specialised talents (Stover 2004). The absolute monarchy in Oman also distinguishes cultural characteristics common within the organisational business model. Oman scores very highly on Geert Hofstede’s index for power distance, which is the level to which disparity of authority is tolerated and deemed normal by citizens in a nation (Hofstede and Hofstede 2005). What this instils in the organisational culture is that employees are expected to comply with top-down, highly centralised authority hierarchies and not given opportunities to express their individual creativity and business problem-solving solutions. In such an autocratic and rigid institutional hierarchy, it is not surprising that Oman International Bank had not, historically, been able to improve its financial and competitive positioning in Oman as innovation is highly limited by these centralised structures. As such, the merger with HSBC would maintain a strategic focus to begin breaking down the long-standing, culturally-driven values of collectivist complacency and inject a new Western model of business in which collaboration and innovation through individualism are embraced and promoted in HR and governance policies. HSBC could inject an entirely new and autonomous organisational structure, a proven model with HSBC, to improve OIB relationships with the Omani citizens and commercial customers utilising the bank for their wealth management needs. 3.0 Achieving synergies through the merger – solutions to the problem Change, in a variety of dimensions, was the first requirement in order to make OIB more sustainable over the long-term; much driven by the centralised and collectivist complacencies common in the Omani business environment. OIB was not, in its current form, equipped to provide adaptable services to a changing national banking landscape. Bridges (1991) offers that change must be externally-focused whilst also considering the transitional psychological processes that employees and managers undergo within the business during a change activity. Under a collectivist, autocratic business structure, Oman International Bank was not accustomed to making risk-oriented and adaptable process and structural changes that are required for a developing consumer and business client culture. Though Oman is considered a developing nation that is taking the stage as a global trading and business partner, there are still deficiencies in modernisation that tend to restrict being able to adapt to change driven by changing consumer needs associated with wealth management and financial services. HSBC, experienced with change and equipped with superior capital resources to ensure change is launched successfully, provided Oman International Bank with the change-centric cultural foundation absolutely critical to achieve market success. For instance, electronic banking (e-banking) is becoming a widely-accepted method of conducting banking activities as it provides convenience to the consumer and allows them a better perception of scope of control over their regular and routine financial activities. Consumers across the world are adopting e-banking as it often represents personal cost savings and the technological environment is now supporting more user-friendly applications (Luarn and Lin 2005). E-banking represents new service channel development that allows the institution to maintain cost controls by streamlining services to include self-service characteristics. This has implication to the business model in terms of labour payments and costs associated with tangible service delivery processes. Though e-banking systems covering deposits, credit card usage and debit card usage represent one-time expenditure in technology procurement, the long-run gains for operationally-related cost savings are substantial. Under the government-owned structure, OIB was not equipped to provide these enhanced and modernised services, thus not being able to provide OIB with sustainable cost-centric competitive advantages compared to other rival institutions. Furthermore, customers of Oman International Bank did not have access to diverse ATM machine availability that is provided with the capital resources of HSBC, thus being forced to conduct all of their business activities along a limited infrastructure of service channels. This is likely the primary rationale for why HSBC demanded absolute control on the governance board and maintains, via alliance contract, total managerial control of the merger so as to be equipped to respond to changes in the consumer environment related to convenience banking. Research indicates that a country that maintains a competent banking industry has a directly positive effect on supporting national economic growth through the provision of more efficient and modern financial services (Salehi and Zhila 2008). Furthermore, countries such as Malaysia, Saudi Arabia, Thailand, Singapore and even Nigeria have been utilising new business models that provide e-banking services as a means of bolstering national economic health and better satisfying diverse consumer markets (Mia et al. 2007). Oman International Bank, before the merger, had expanded some of its presence into India and Pakistan in an effort to improve its economic position, but had utilised the pre-existing, standardised business model of face-to-face financial services. Without the presence of HSBC, the business would not have been equipped to compete in a global environment where even emerging nations such as Nigeria had maintained the capability to modernise its financial institutions. Michael Porter, a respected business theorist and practitioner, identified his Five Forces Model that describes the risks posed to businesses operating in an industry. Of relevance to Oman International Bank along this model were threat of new entrants and intensity of competitive rivalry. Porter (1998) indicates that threat of new entrants give consumers more choice, ultimately leading to them sustaining higher buying power in the industry. Buying power translates into the ability to force businesses to offer lower prices by threatening to make purchases from rival firms offering better price-oriented services. This was a major threat to OIB which is the first of the synergies that will be achieved through this new and developing merger with HSBC. Omani citizens and businesspersons were longer constrained to utilising domestic banking institutions and financial services companies with the provision and market entry of electronic banking from a variety of global financial institutions. However, Omani International Bank was not equipped with the modernised systems required to gain more market interest and attention. Only through the utilisation of the capital resources of HSBC could OIB properly serve domestic markets without ongoing risk of defection to other international financial services companies. International banks maintaining prowess in marketing were also able to entice Omani consumers to consider the benefits of international banking and other wealth management services that could all be facilitated using electronic systems. HSBC, as the controlling management entity and governance team in the business, set up the foundation to erect moderate barriers to new market entry by making domestic banking more appropriate and relevant to a changing consumer and commercial client sentiment about convenience banking. Zhang and Chan (2009) indicate that when a business brand is able to provide consumers with important perceptions of self-growth and expansion, they are likely to establish brand connections that influence future purchase intentions. These attachments, when accompanied by superior service dimensions to that of rival institutions, leads to long-term loyalty toward the marketed brand identity (Greenwald et al. 2002). Under the Sultan-centric governance structure of the firm with limited tacit knowledge in marketing capability and strategy, was not able to outperform establishing a positive brand that had been achieved by many other international banking institutions now capable of targeting the Omani consumer and commercial markets. HSBC, however, maintains not only a vast array of tacit knowledge holders in this important marketing and advertising venture, but the resources that make differentiation of services against competition possible. Therefore, one of the most critical synergies achieved through the merger between these two institutions was allowing Oman International Bank to experience the benefits of concentrated and well-invested marketing strategies that are able to create long-lasting psychological connections with consumers that improve their willingness to make more sizeable future expenditures to seek the service of the provider. There is a respected model of consumer psychology that is based on Maslow’s Hierarchy of Needs which states that one of the most universal and fundamental needs of consumers is to have a sense of belonging both social and professionally. When customers feel a sense of belonging and ownership of the company, they are more likely to participate in loyalty programs (Hart, Smith, Sparks and Tzokas 1999). The previous entity known as Oman International Bank did not have this loyalty established as the business was not investing appropriate funds and labour into differentiating the business from competing financial institutions. Customers were not being targeted with lifestyle-centric advertising or other relevant promotions that were aligned with the social and psychological needs of important target markets, which is likely why the business was not able to experience industry-comparative deposit growth and asset procurement. HSBC, however, maintains significant experience in relationship marketing, using this targeted approach and promotional systems development that make the financial services brand stand out amid growing competitive forces. Essentially, the synergy achieved as it relates to competitive marketing is attributable to the competency and capacity of HSBC in this area of brand-building that will, in the long-term, translate into a more effective industry position for the new business entity known as HSBC Bank Oman. Furthermore, HSBC maintains the internal capabilities to align market research findings with new service philosophy development that is necessary to be adaptable to a changing industry environment. This is accomplished by performing a variety of qualitative and quantitative research studies targeting many diverse consumer segments about their sentiment toward the business brand, their needs associated with wealth management, and the relationship to the financial services sector to their lifestyles. There was no evidence provided in research literature indicating that Oman International Bank understood its diverse market segments or had been conducting appropriate research to gain important knowledge about real-time customer segment attitudes, values and needs related to financial services. The merger with HSBC will equip OIB with the internal competencies needed to perform these studies and effectively translate findings into more workable and relevant service programs targeted specifically at the diverse Omani consumer and commercial customer segments. As it relates to the aforesaid marketing research and metrics establishment, the new HSBC Bank Oman has the opportunity to be a domestic first mover in this area, providing a new type of relationship management system that Omani customers are not generally accustomed to having with financial institutions or other business organisations. As previously indicated, the collectivist culture with a high acceptance of power distance often prevents businesses from being concerned about establishing a sense of personal belonging or providing consumers with psychologically-centric marketing concepts to gain their business and loyalty. Other competing banks do not take this approach domestically in Oman, thus making the HSBC Bank Oman an innovator in the minds of many profitable customer segments. First movers with a new innovation “define the product category” through which later entrants are compared by customers usually unfavourably (Agarwal and Gort 2001, p.169). HSBC, by injecting a new type of relationship marketing system into the OIB business model, equipped Oman International Bank with the ability to be considered a pioneer in person-centric financial services. This is highly unusual in a cultural environment where business authority and the consumer are segregated by considerable authoritarian and power distances. Under the government rule (Sultanism) it is highly unlikely that OIB would have been able to successfully create market-centric innovations that would lead to better brand attachments and, ultimately, better asset growth and deposit strength. Komninos (2002) strongly emphasises that it is difficult for many industry players to recognise when their products or services have reached their decline stage along the product life cycle model. It is not until assets begin to fall and revenues begin to slip that a business realises that the demand for its products and services have declined. It is during this time that a business should be withdrawing underperforming products and services from the market and replacing them with more relevant and innovative offerings to avoid collapse of the profit model. OIB had been offering services that were very standardised, ranging from traditional in-house deposit services and face-to-face interactive wealth management consultations. However, emerging competition and existing domestic competition were diversifying their services and products to include a variety of new wealth management strategies (i.e. collateralised debt swaps, money market funds, and other international hedge fund investments). OIB had been running on the same model since its inception in 1984, thus making competitive forces seem more relevant and modern to a changing and developing Omani business and consumer culture. This is yet another significant synergy of the merger: HSBC consistently upgrades existing products to extend the life cycle and provides new strategies and opportunities for customer wealth management using the foundation of relationship marketing strategies. HSBC will be able to effectively teach the complacent OIB culture with new methodologies for service delivery and product offerings that differentiate the newly merged entity from other domestic competition. Furthermore, prior to the finalisation of the merger, the inflation rate in Oman was extremely high, ranging between 5.2 percent in October 2011 to 4.5 percent in January 2011 (Trading Economics 2013). This is much higher than many other European, Asian and North American countries that generally sustain much lower quarterly inflation rates. When inflation impacts a variety of consumer products and services, it reduces the disposable income levels of buyer segments that limit their expenditures in a variety of industries. This is what was facing Oman International Bank which is a likely contributor to the declines in net profit and deposit valuation with declining consumer incomes. Though HSBC is unable to influence an effort to curb inflation, the business can utilise effective promotions (advertising) that provide short-term incentives that give consumers the motivation to utilise HSBC to continue wealth management strategies even though these buyer segments are experiencing very high cost of living increases created by government involvement and economic growth in the national economy. OIB was not equipped with the internal capacity to identify how to utilise service promotions (such as offering short-term higher-than-international-average interest rates so consumers find value in using HSBC for their wealth management needs. HSBC maintains the capital resources to take small losses by providing higher interest rates on such services as CDs and savings accounts in order to gain long-term expenditures and loyalty by important and profitable customer segments. Therefore, OIB can now exploit incentives opportunities by enhancing the attractiveness of existing products and services with a much greater capacity than could ever have been achieved on its standardised and inflexible business model once driving Oman International Bank. 4.0 Conclusion It should be noted that the only limitation to this research study was that the merger between HSBC and OIB is so recent that the full breadth of all synergies achieved cannot yet be completely determined. However, this report highlighted the culturally-driven, economic, governance, and marketing-oriented problems within the OIB business model that were greatly enhanced by the competitive presence and financial resources of the HSBC international banking model. 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