Remember Ed Breen? No? He took over a well known company after it was rocked by scandal, pilloried by Congressmen and editorial writers and later had its senior executives sent to jail. He adopted a radical strategy and engineered a brilliant turnaround. It’s a lesson for banks today.
Ed Breen was named CEO of Tyco International in 2002, taking over for Dennis Koslowski, the controversial chief executive who later was convicted of fraud, along with the company’s ex-CFO, Mark Swartz. Breen took over a sprawling, heavily indebte
d company with a stock price that had fallen to the single digits.
After cutting costs and improving cash flow, Breen and the Tyco board decided to break up the company, and by 2006 Tyco had completed a separation that created three new publicly traded entities. All three have flourished, much to the delight of shareholders.
Could Breen’s strategy work for American banks? Many observers think so. A number of investors and analysts are calling for a break up. according to Reuters:
“My gut says all these megabanks are worth more separately than combined,” said Bill Black, managing partner of Consector Capital, a hedge fund that focuses on bank trading. Smaller, more focused banks could attract investors, satisfy regulators and increase depressed stock prices, he said.
And later in the same piece:
Toughing out a cyclical economic downturn with more job cuts is not a long-term answer, some banking experts say. Today’s problems derive from structural changes in the financial sector, including increased regulation, and demand a radical restructuring.
“The bottom line is that they have to get smaller so they can manage better,” said Roy Smith, a finance professor at New York University’s Stern School of Business. “They have to give up the idea of being a universal bank holding company that jams together businesses that have nothing to do with each other.”
Even former Citigroup Chairman Sandy Weill joined the chorus, appearing on CNBC yesterday to say commercial and investment banking should be separated:
Weill’s comments might signal a tipping point in the debate about breaking up the biggest banks. It’s an issue that has been dormant since the depths of the crisis but lately has been revived after J.P. Morgan’s multi-billion-dollar trading loss, the compliance failures at HSBC and banks’ collusion over Libor.
I’ll leave it to the M&A whizzes to determine if splitting up the banks makes economic sense. My hunch is that it would in many cases, particularly for those banks with weak trading businesses that are tying up capital. As valuations for these banks slide, breakups will look even more attractive.
But besides the immediate economic gains, there could be strategic benefits to splitting yourself up if you’re a big bank.
For one, you get an opportunity to take control of the narrative. Right now, the dialogue around banking is a dead end, a tired rotation of unresolved issues (derivatives, “too big to fail,” proprietary trading and executive bonuses to name a few).
A breakup would also be hailed by investors and would increase pressure on rivals to adopt a similar strategy or defend the status quo, which few except Jamie Dimon seem willing to do right now.
Separate banking units would have a much simpler regulatory framework, a clearer capital and risk structure and probably a big vote of support among supervisors.
So who might be bold enough to propose a split? My bet is Vikram Pandit, who inherited Sandy Weill’s bloated supermarket at Citigroup, just might take the plunge. And now he might even have Sandy’s support.