This article was meant to be about managing a merger. It turns out that this is hard to explain without first understanding the goal of the merger. There has been little information made public in terms of the thinking behind the FGB-NBAD merger, with some commentary from analysts. Here I will discuss various ideas on the merger.

1 So why might FGB and NBAD have decided to merge? One oft-quoted reason is that it was a political decision. But to what end? I’m pretty sure that politics do not drive commercial decisions.

2 Next is the idea of cost savings. Merging the two companies does not only offer the possibility of eliminating overlapping functions, there is also the possibility that FGB’s cost effectiveness, as measured by a cost/income ratio of about 20 per cent, can bring down NBAD’s same ratio of about 38 per cent. That would be a big saving indeed. But in the end it is no different to FGB growing assets organically. A merger doesn’t necessarily make it faster, after accounting for merger costs, it might be the same.

3 Another idea is that NBAD’s lower cost of funds could give FGB an advantage. But that might just be offset by NBAD’s lower return on equity. Worse, if the merger is not handled well, the new entity could end up with FGB’s higher cost of funds and NBAD’s lower return on equity.

There are a few more such arguments that I could bring up, but in the end it boils down to either increasing the assets and liabilities via acquisition rather than organically, or acquiring human resources rather than hiring them. It is more of the same, just a different path.

4 There is another, far more exciting, reason for the FGB-NBAD merger, and that is to transform two local banks into a true regional, if not international, bank. That is the one thing a bigger balance sheet gives a bank that is not simply more of the same: at some point a quantum jump is made to the ability to be a full-service bank in multiple countries. Not just one or two branches, or a small subsidiary, but a bank that competes with the local banks. Think HSBC or Standard Chartered. Why not? If we’re going to think big, let’s actually think big.

Maybe, just maybe, the idea is to create a supra-regional bank that can enter the wider Middle East and Africa region, South East Asia, some of the “Stans”, China and Russia. Why not follow where our business people are going?

In such a case, this merger would be the first step. Use it to create a permanent acquisition and integration team, acquire ADCB next and then UNB. At the same time, but separately, merge Al Hilal Bank and ADIB. Maybe Noor would be open to an approach.

This is how these banks, too big for the UAE but too small for the region, could reach the size that they need to get a substantial geographic footprint.

Of course, once FGB-NBAD created a critical mass by adding ADCB and UNB, that does not mean that they have to stop. As they expand in their target markets there will be tempting targets in the new geographies, all the easier to approach given the critical mass FGB-NBAD would have achieved and with their experienced acquisition and integration team.

The No 1 lesson from the banking industry that we have learnt is that the bigger you are, the greater your strategic advantage. Your credit ratings go up. Your brand value goes up. Your perceived counterparty risk drops. Your regulators are more open to discussions, although approvals will of course remain strictly compliant.

There are other issues than size that are relevant to the success of a commercial bank: service levels, product selection and interest rate levels, both on deposits and loans. But clearly asset size is a key determinant to dominance of a market.

The FGB-NBAD merger might mean just more of the same, only bigger. I am, however, excited to think that it is a quantum leap forward and the first of many more.

In my next article I will talk about how to make the FGB-NBAD integration work based on the assumption, my hope, that they are going for the quantum leap.

FGB/NBAD, let’s go big.

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This article was originally published in The National.