1 + 1 = ? (Aozora + Shinsei = ??)

Rumors are flying about a proposed Shinsei-Aozora tie-up (these are nothing new, but recently the background noise on the subject has increased). The Nikkei has reported the possible formation of a joint holding company and integration of operations by the middle of next year, and this would create a large financial institution - reportedly it would be the sixth largest in Japan (all dependent on stockholding values, of course!).

Of course, these two banks have a lot in common. Both are phoenixes arising from the ashes of semi-governmental commercial banks, which turned into such hot potatoes as the result of mismanagement that the only buyers to be found were foreign investors. Both have undergone a change of top management in the past six months (as has Tokyo Star, the other foreign-owned bank). Both inherited out-of-date IT systems, and worked hard to modernize them and bring them in line with best practices outside Japan.

However, there are points of dissimilarity. Shinsei operates a retail chain of about 40 branches, as well as owning and operating a number of consumer finance businesses, whereas Aozora's business line is almost entirely on the commercial front.

Viewed from a purely business viewpoint, the merger would not seem to make immediate sense. On the one hand there is duplication of effort and overlap of services (Shinsei's non-retail side duplicates Aozora's role to a large extent), and on the other, the deal includes businesses that have nothing to do with the other partner's business, and are actually superfluous to the main thrust of a merged enterprise (the consumer finance industry is in very poor shape right now, and the addition of Aplus, Shinki, etc. to a conglomerate would hardly be a selling point). There is very little there that is complementary or, to use MBA-speak, "synergistic", and the IT systems are going to need overhaul on both sides to make them work smoothly together.

However, there is another factor involved - the Japanese government - a major shareholder in both enterprises. Improving the health of these banks is a major concern for the Japanese government, and the FSA has already commented publicly on the desirability of a merger. Such an event would help with the repayment of the bailout money provided by the government in the past to both banks, as well as promoting an increase in confidence in the Japanese banking system as a whole.

Is pressure being placed by the Japanese authorities on the management of both banks to merge the businesses? Given the previous often heavy-handed style of the financial regulators, this is by no means an impossible theory - after all, we have seen bank mergers dictated by governmental fiat in the past.

Watch this space for details - it could be an interesting story...

UPDATE - since writing the above, I've talked with someone in one of the banks above, who informed me that he/she believes that the government is indeed putting on pressure to go ahead with the merger.

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