The dark side of financial services mergers
The financial services industry has largely welcomed the proposed merger of Momentum and Metropolitan, to form a new insurance and wealth management company called MMI Holdings. Late last week – on 14 October 2010 – the Competition Tribunal added its stamp of approval for the deal, with conditions. The Metropolitan / Momentum merger will give rise to South Africa’s third largest life assurance company. But there’s a dark side to merger and acquisition activity. The combined MMI Holdings will result in operational savings in the region of R500 and R700 million in operating costs each year. And it’s likely much of this “saving” will be thanks to a reduced staff complement.
MMI Holdings is on record there will be job cuts as a result of the merger. During the recent Competition Tribunal debate lawyers for the merged entity said cost savings brought about by the merger were necessary for the company to compete in today’s competitive insurance market. They said job cuts – as part of this cost saving – were unavoidable, but stressed the 1 000 job cuts being bandied about were a theoretical maximum. Actual job losses were likely to be significantly lower.
Saving jobs could prove difficult
We were surprised to learn the conditions imposed by the Competition Tribunal dealt with employment issues rather than competition. A recent Momentum press release summarises the tribunal’s position as follows: “The tribunal has stipulated that no retrenchments resulting from the merger are to be allowed in South Africa within a period of two years from the effective date of the proposed transaction, except at senior management level.” It’s a tough requirement given these cost savings are aimed at making the new entity cost competitive.
Although the decision to protect jobs isn’t surprising given the delicate balance of employment in post-recession South Africa, the company felt the tribunal’s requirements were “more rigid” than expected. Nicolaas Kruger, group CEO designate of MMI Holdings, said: “While we wait for the Competition Tribunal to give the reasons for their decision, which will provide us with a clearer indication of the way forward, we are considering the alternatives open to us, amongst which are accepting the decision or lodging an appeal.” The tribunal also proposed a range of measures to minimise the impact on retrenched staff. They want MMI to re-skill the approximately 1 000 workers that could be affected and make sure the training is of a sufficient level to assist retrenched staff to find new employment.
Unions getting a bit edgy
It seems the tribunal were swayed (in part) by lawyers from the National Health and Allied Workers' Union (Nehawu). Their lawyers had attended the tribunal to argue for those employees likely to be impacted by the merger. They said MMI hadn’t done enough to mitigate job losses post merger and appealed to the tribunal to put the brakes on the transaction unless all jobs were guaranteed.
Kruger took the stand at the hearings too. He told the tribunal that while the two entities party to the merger were complementary businesses, not all mergers led to job creation. He said the long-term benefit of the merger would be felt by consumers as a result of more competitive pricing. He also advised that MMI holdings would not retrench more than 1 000 people in the first two years following the merger, and that R5 million had been set aside for training.
Still waiting for regulatory approval
Insurance industry analysts say there’s no question the deal will go ahead. Now that conditional approval has been obtained from the Competitions Tribunal the parties only require approval from the Financial Services Board (FSB). Once the regulator approves the deal the final obstacle will be removed and the merger will proceed, probably at breakneck speed!
Editor’s thoughts: News of the Momentum and Metropolitan holdings merger was well-received by stakeholders in the financial services space. But as details of the transaction become clearer it looks certain “heads will roll” as the merged entity streamlines operations. Do you think the two financial services giants can merge without making job cuts? Add your comment below, or send it to [email protected]
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