A match made in heaven – The case for a JPM-Standard Chartered merger

Sitting in my room reading news reports regarding the performance of JP Morgan and Citigroup, part of the triumvate (alongside Bank of America) that dominate banking in the United States (at least the commercial and retail variant of it). I started to think about which of the banks (i.e. Citi or JPM) is the dominant or better one. I don’t know why this is what I spend my free time thinking about, I guess you can blame the fact that I am a nerd, I spent ungodly hours playing monopoly as a kid or that I currently go to business school and we are encouraged to bask in delusions of grandeur. You are free to pick your favorite rationale!!

Anyways I was thinking about both banks’ and I couldn’t help but conclude that despite JPM’s great performance and Citigroup’s recent lackluster to mediocre performance, Citigroup is still better placed to thrive in the new global reality. My vote for Citi rests on its unparalleled global footprint and strength in major emerging markets (from Africa to Asia to Latin America etc). JP Morgan’s storied investment bank has a global presence but its private, retail and commercial banking franchises remain basically US operations and are also-rans in most emerging markets. Therefore, my opinion is that for JPM to match Citi it needs to bulk up its international operations to become a “network bank” for global corporates and boost its presence in fast-growing emerging markets. Building this footprint organically will be very difficult if not impossible (Citigroup already had a branch in China has far back as the turn of the 20th century). Therefore the best option may be an acquisition and I think the right “bride” will be Standard Chartered Bank Plc. So why buy Standard Chartered?

Firstly, it can be done and the bank seems like a decent sized target that JPM can swallow! (before you turn your noses up, a lot of “transformational deals” have been done in the past simple because it could be done!). JP Morgan currently has a market capitalization of US$175 Billion while Standard Chartered has a market cap of about US$60 Billion (i.e. Standard Chartered is only about a third of JPM’s size). JPM should therefore be in a position to finance and pull off some sort of hybrid cash & stock offer for the bank without necessarily “breaking the bank” or overly diluting shareholders!. In addition, Standard Chartered has a core investor: Temasek (the Government of Singapore’s direct investment company) that could be convinced to back a deal if it requires some liquidity.

Secondly, while bankers often tout the “synergies” of every deal , this tie-up will come with almost unparalleled geographic synergies. Standard Chartered – though nominally a British bank – derives almost all its revenues from Asia, Middle East & Africa (Regions of the world where JP Morgan still needs to do a GREAT JOB in advancing its on-the-ground presence). Buying Standard Chartered will instantly give JPM an on-the-ground network in these fast growing regions of the world. On the other hand, Standard Chartered has an almost non-existent America’s franchise and would thus be a nice geographic plug for JPM. A Standard Chartered acquisition will enable JPM benefit from trends such as increasing Indo-China, Sino-African and Indo-African trade and as an added bonus: the combined bank may purchase South Africa’s Nedbank to achieve a more complete African footprint!

Lastly, there would be room for JPM to build on Standard Chartered’s product offerings and this may be a source of “alpha” or upside for the bank’s shareholders. Despite a push towards more sophisticated product offerings, Standard Chartered bank still resmains a largely retail and commercial bank with strong transactional banking products aimed at corporates operating in emerging markets. JPM may deploy its strengths in trading and investment banking to boost Standard Chartered’s offerings in its core markets and increase the full earnings potential of the British bank’s franchise and footprint.

Obviously, life is a lot more complicated than the mental wanderings of a bored student and there are many reasons why such a deal will not materialize. However, I think this is a deal with a lot of merit and will be happy to see both banks “walk down the aisle”!

In pursuit of a non-zero sum world

Currently reading my favorite TV historian: Niall Ferguson’s seminal book on the rise of the West and a recurring theme through the pages was the role exploration (or exploitation in my book!) played in ensuring the dominance of European or European-inspired societies (such as the US). A key reason for the ascendance of Europe was the continent’s role as a colonialist that ensured cheap products to advance its own resource-constrained societies. For example at the middle of the last millennium, the average height of the Asian and European populations were about even but this situation changed in the later centuries as the Europeans typically had a much larger calorie-rich diet, which was in turn made possible by their colonial activities. Throughout human history - from the Persian civilization, to the Roman and the modern-day American & British empires – it seems that the rise of a people has almost always involved the subjugation or exploitation of another set of people or the environment. The rise of mining brought us useful metals but destroyed pristine lands, the rise of textile technology raised western standards of living but depended on slave-picked cotton from the antebellum southern United States and the list of zero-sum scenarios goes on.

It is therefore refreshing to see that many business executives and policy makers have begun to view business and development through a non-zero sum lens and have begun to put in place policies that ensure that all stakeholders can all benefit from growth. This movement has taken on two parts: 1) Shared Value and 2.) Social Impact Investing, which I believe are equally important concepts that should be embraced or at least considered by all.

The Shared Value concept is been popularized by no less an eminent figure than Harvard University Professor Michael Porter (of the 5-forces fame) and it is at its core a new framework for evaluating business decisions that gives due consideration to social and environmental issues. This is not some feel-good CSR department that sprinkles a few dollars on “noble causes” to obtain pictures that look nice and endearing enough to be published on corporate websites and annual reports. Michael Porter is advocating nothing short of a fundamental rethinking of the corporate business model and has highlighted various success stories such as GE’s launch of affordable, hand-held scanners that have proven effective in boosting healthcare delivery in India while delivering robust profits to GE. Closely related to the concept of Shared Value are concepts such as “greening of the Supply Chain” (i.e. reducing environmental impact of corporate supply chains while reducing costs and serving customers at the “Bottom of the Pyramid”. Central to all these concepts is the emerging thinking that doing good by society and also making money need not be diametrically opposed. Michael Porter’s insightful article about shared value can be found here.

The second related concept is that of Social Impact Investing and it involves a not-so- new concept that investors can strive to achieve a double bottom line of social prosperity and market-rate financial return. This concept isn’t new as organizations such as the IFC (the private sector lending and investing arm of the World Bank Group) have been incorporating social and environmental considerations in its activities for decades and it is yet to record an annual loss since its founding. In an attempt to make this more mainstream and adopted by many more investors, institutions such as the Rockefeller Foundation, Clinton Global Initiative, JP Morgan etc have come together to form the Global Impact Investment Network (GIIN) to agree on a set of common standards for the sector. This evolving field has great potential for growth as the funds in the global investment community is exponentially larger than the global philanthropy community can muster.

Although I fully support the growth of both of the above-mentioned sectors, I still have major doubts about their usefulness. These involve where the line will be drawn between “good works” and “filthy lucre”: at what point will investors sacrifice extra profit to achieve higher societal impact? Secondly, how much of the Shared Value initiatives will companies make anyways because they are financially compelling and are we just giving a fancy name to business as usual?. Anyways while there are legitimate doubts regarding the impact of these initiatives, one thing most people can agree with is that they are directionally correct in gradually moving the world into a non-zero sum state. And that I am happy about!