Tomorrow's Entrepreneur

The "dollar value of completed mergers, acquisitions, and divestitures in 2000 jumped 22.6% to more than $1.7 trillion and set a record for the sixth successive year," reported the publication Mergers and Acquisitions in February. This year the upward trend is unlikely to continue, even though the AOL-Time Warner megadeal that closed in January will be included in the 2001 totals. But nobody's looking for M&A to decline much, either. There are "uncompleted consolidations" in industries such as financial services, communications, health care, and others, writes Mergers and Acquisitions editor Martin Sikora. And the "principal forces driving M&A activity" -- technological advance, globalization, deregulation, and so on -- are still strong.

From an entrepreneur's perspective few trends are as puzzling as industry consolidations driven by mergers and acquisitions. On one hand, the companies leading the consolidations grow ever larger and seem likely to squeeze small players out of the market entirely. You wouldn't want to start a company in competition with a consolidator, runs that theory -- you'd be crushed. On the other hand those very giants frequently find themselves in trouble, either because they overpaid for acquisitions or because they can't manage the crazy quilt of companies they've assembled. Hence the counter theory: if entrepreneurs are nimble enough, they can find plenty of lucrative niches opened up by bumbling giants' missteps.

So which is it? In most businesses the debate will wax and wane, driven more by anecdote and ideology than by verifiable fact. But in one industry at least, the M&A data are reliable. If you want to know whether consolidation kills or encourages start-ups, look at the banking business.

From a researcher's point of view commercial banking is an ideal industry to study. Every new bank must get a charter, so start-up activity can be accurately tracked. Every merger or acquisition requires approval by regulatory authorities, so significant facts such as how big the buyers and sellers are, where they are based, and so on, are all a matter of public record. And, indeed, as banking consolidation heated up in the 1990s, economists began looking at whether it helped or hindered banking start-ups. Trouble was, they couldn't agree. A study for the Federal Deposit Insurance Corp. concluded that mergers discouraged the creation of new banks. A study for the Federal Reserve Board of Governors, looking at similar data, determined that the exact opposite was true.

Recently, a senior economist at the Kansas City branch of the Federal Reserve Bank, William R. Keeton, reviewed the contradictory studies and gathered new data of his own. Keeton's conclusion: without a doubt, consolidation in the banking business opens up opportunities for start-ups. The more M&A activity you see in a given market -- particularly certain kinds of M&A activity -- the more likely it is that you'll also find new banks opening up.

Keeton's contribution to the research is twofold. First, he spotted some methodological missteps in the first study -- the one that claimed consolidation discouraged start-ups. Among other things, he saw that the researchers/ economists had lumped thrift institutions (savings banks and so on) in with commercial banks, even though the two are in quite different businesses. Second, Keeton turned up the magnification on the mergers themselves, analyzing the effect of different kinds of mergers on start-up rates. On this score his findings were unequivocal: what made the real difference to start-up rates were mergers that shifted ownership from small banking companies to larger ones and from locally owned banks to more distant ones. Other mergers -- among similarly sized banks in the same region, for example -- had little or no effect on start-up rates.

Banking entrepreneurs, take heart: market consolidation by larger or far-away banks really does open up niches; the available market is all those customers who want or need small-scale personal service and locally knowledgeable loan officers and who were left in the lurch when the local banks disappeared. Maybe the statistics in other industries -- if only we knew them -- wouldn't be so different.

Seeing the M&A Upside

North State Bank opened its doors in Raleigh, N.C., on June 1, 2000. By the end of February 2001, just nine months later, the community bank had reached $91 million in assets and was within $1,000 of profitability. Maybe not surprisingly, president and CEO Larry Barbour thinks there's plenty of room for start-up banks amid industry consolidation: "I've been in banking for 29 years and, when consolidation occurs, there are always stark reminders about how much room there is for true community banking -- where there's just no bureaucracy between the customers and the officers of the bank."

Although North State competes against heavyweights such as Wachovia Securities, First Union, and Bank of America, its success, says Barbour, lies in targeting a specific niche -- small and midsize businesses, along with professionals such as lawyers, doctors, and accountants. He also cites North State's experienced workforce as a competitive advantage. "We focus more on individuals and businesses that value doing business with mature, seasoned bankers who can help them make decisions. They like being able to call up and get a sizable loan over the telephone, and we can do that for them," he says.

Please e-mail your comments to