Bancolombia Mergers: Talent, Culture & Value Creation

Executive Summary

Bancolombia Group was successfully led by outgoing CEO Jorge Londorio until his retirement in January 2011. Required by corporate governance terms to retire upon reaching superannuation age, Londorio — along with the rest of the organization — was anxious about the direction the company would take under incoming CEO Carlos Raul Yepes, who had a background in the cement industry. Although Londorio guided the group through Colombia's two largest mergers — combining Banco de Colombia, Corfinsura, and Conavi — and achieved unprecedented market share and reach, the company's financial statements at the time of his retirement did not show healthy signs. With some of the weakest efficiency and profitability ratios in the industry, Yepes faced the dual responsibility of maintaining the cultural and administrative cohesion so masterfully built by his predecessor while also improving profitability and operational efficiency.

Three alternatives have been outlined as a strategic road map for the incoming CEO. The first requires Yepes to focus on profitability and reduce the cost of operations. The second requires the company to recreate its source of competitive advantage by shifting from quantity to quality of operations. The third alternative is to franchise the rural branches of the bank — particularly those that fall below a minimum profitability threshold. The third alternative has been identified as the optimal option, as it would allow the company to maintain brand perception, employee morale, and strategic direction while attaining greater profitability and operational efficiency, along with upfront cash securities from potential franchisees. An elaborated, phased implementation plan is provided at the end of the report.

Bancolombia Group is a group of companies comprising Banco de Colombia, Corfinsura, and Conavi. The group has undergone significant changes over the past decade, consistently pursuing a growth strategy. With a multi-banking structure that offers corporate, commercial, and mortgage banking services, the group operates 741 offices across 186 municipalities with a workforce of approximately 6,300 people. The group also acquired Banco Agrícola in 2007, a leading financial conglomerate in El Salvador. With an operational network spanning Colombia, Spain, Brazil, Miami, Peru, Puerto Rico, the Cayman Islands, and Panama, Bancolombia Group faced a pressing leadership transition following a directive from the Antioquian Entrepreneurial Group (AEG) — the leading shareholder — requiring top executives to retire upon reaching superannuation age. Accordingly, CEO Jorge Londorio, who had transformed the group into the 10th-largest financial institution in the world, was required to retire in January 2011.

Problem Statement and Justification

Against this backdrop, the company faces the challenge of transitioning its top leadership and the accompanying uncertainty of change management, together with the compulsion to increase efficiency and profitability. The company must anticipate how the transition process can keep it on the trajectory that Londorio so successfully maintained. There remain pressing issues regarding expansion and operational efficiency that incoming CEO Carlos Raul Yepes is expected to address while keeping the change management process as smooth as ever.

During the merger process — which Bancolombia called the "integration" process — the Golden Rules of Integration, laid down by an executive team comprising top managers from all three companies, placed "Employees" at the top of all priorities for change management. It is the employees of an organization, from top executives to line managers, who execute the mission plan. Employee talents, knowledge, aptitude, and attitude were regarded as the most crucial part of integration. Since the group continuously pursues a growth policy to compete effectively in the financial services market, mergers, acquisitions, and post-merger consolidation are expected to remain frequent. Therefore, the CEO must lead the operational and strategic growth process from the front. The outgoing CEO performed this role effectively and empoweringly; any incoming CEO will similarly be expected to demonstrate the high-level leadership skills needed to manage growth and change effectively. For this reason, the leadership transition carries exceptional importance for Bancolombia Group.

The significance of the leadership transition can be appreciated through the role the outgoing CEO played in elevating the group to its current standing. Jorge Londorio's career spanned 15 years in the same post, and during the last ten years in particular the group achieved unprecedented growth across all its banking service sectors — corporate banking, commercial banking, and mortgage banking.

Leadership was vital in transforming the company, previously known as Banco Industrial Colombiano (BIC), into the merged entity known as Bancolombia Group. When Londorio assumed the role of CEO at BIC, the share price stood at $6.85; at the time of his retirement in 2010, Bancolombia's preferred share price had reached $59.20. This appreciation reflects the change management competency and strategic vision that Londorio brought to the company through a series of carefully managed mergers and acquisitions (M&A).

Historical Perspective and Merger Background

Founded in 1945, the original Bancolombia — operating as BIC — focused solely on investment banking and high-income individuals, with a distribution network limited to the Antioquia region and a few cities on Colombia's west coast. The company held less than six percent of the Colombian financial services market share, operating only 110 offices and employing 3,416 people.

Banco de Colombia was better positioned than BIC, operating 286 offices with a workforce of 4,850 people. Through Londorio's leadership, BIC pursued a growth strategy by listing on the New York Stock Market just before merging with Banco de Colombia in 1998. The resulting entity, Bancolombia, secured 11.5 percent of the financial services market share. Because the organizational cultures of the two merging firms differed substantially, the leadership skills and strategic direction provided by Londorio were essential in enabling both companies to grow together under a single group.

Prior to acquiring Conavi, Bancolombia had already achieved depth in two financial service sectors: corporate banking and commercial banking. Each company leveraged the potential of the other and helped diversify service offerings. The merger gave the combined firm 377 offices in 127 cities, as well as expanded ATM and internet banking operations. Bancolombia adopted the Added Value System (AVS) to strengthen its internal capabilities. By 2003, Bancolombia had attained a 14.6 percent market share in Colombia's financial services industry. The successful integration of two distinct organizational cultures into a single, growing brand was one of Londorio's most important milestones.

Conavi was a premier mortgage institution in Colombia, originally established as a government-aided institution to develop financial support for home building. Operating within what was effectively a monopolistic mortgage market, Conavi ran 257 offices and employed 3,977 people. The company held 19.3 percent of the mortgage market share, providing 55 percent of funds in the mortgage credit market and 35 percent in commercial loans. Conavi was notably "people-oriented," placing significant importance on both customers and staff.

Established in 1993, Corfinsura dealt exclusively in financial services for large corporate clients, offering credit lines, treasury management, investment services, and stock market operations. With a small individual share of the assets market prior to integration, the combined entity following the three-way merger achieved 47 percent of the assets market share in Colombia.

Analysis of Efficiency and Profitability

Despite the financial pressures created by the Asian financial crisis of 1999, the CEO did not cut training and development funds for the integration program. Cultural Transformation Workshops were offered to all employees across the three merging firms without exception. This demonstrated the top leadership's commitment to managing cultural change effectively and preparing the workforce to deliver high-quality service based on a newly formed, collaborative culture. Exhibit I displays the Golden Rules of Integration laid down at the Santa Marta Meeting, in which employees and customers — the two key human resources on which an organization's growth depends — were emphasized in the integration manifesto.

Culture, compensation plans, and the preservation of employees' previous seniority were identified as the key issues to which most employees were sensitive. By addressing these issues directly and through candid communication, the CEO and his team fostered a culture that was not resistant to the significant changes underway in the integration of three culturally diverse companies.

Given Londorio's documented leadership achievements, both the company and its employees understandably felt anxious about the capabilities of the new CEO, with many viewing the change as untimely and potentially disruptive to the ongoing growth trajectory. Recognizing this concern, the company sought ways to support its people through the transition.

The non-consolidated financial data of Bancolombia Group indicates that despite significant growth and unprecedented expansion through mergers and acquisitions, the company does not operate as efficiently as comparable banks such as Banco Santander Chile. The efficiency and profitability ratios show that the group has grown substantially in size and service network but not in operational efficiency or profitability.

The group's efficiency ratio remained between 4.9 percent and 5.1 percent during the years 2004–2010. This marginal increment of only 0.2 percent over six years indicates that despite expanding its reach throughout Colombia and other countries, the company has made negligible improvements in operational efficiency. By contrast, Banco Santander Chile managed assets of $47 billion as of 2011 — more than 50 percent greater than Bancolombia's — yet maintained an efficiency ratio of 38.4 percent while operating from roughly half the number of branches. Banco Santander Chile operated 499 branches and 1,920 ATMs (Clouse, Gregson, Guerrero & Platt, 2012), compared to Bancolombia Group's 952 branches and 3,333 ATMs. This large gap in capacity utilization relative to profitability signals a lack of post-merger consolidation and an overemphasis on acquiring market share at the expense of operational efficiency.

Return on equity (ROE) reported by Bancolombia Group in 2010 was 16.4 percent, down from 22.2 percent in 2004 (see Exhibit II). This figure also lagged behind Banco de Crédito de Bolivia (15.5% in 2010 and 15.6% in 2011) and Banco Santander Chile (22% in 2011) (Clouse et al., 2012). While there is a one-year gap between the reporting periods for these comparisons, the overall inference is clear: Bancolombia Group disproportionately expanded its branch network — from 325 branches in 2004 to 725 in 2010 — without reaping the benefits of economies of scale. The intrinsic value of Bancolombia stock was approximately 150 percent below the actual share price in 2010 (share price: $15.50; intrinsic value: $5.20).

It is worth noting that all commercial banks in the region increased their branch networks over this period to serve SMEs, so expansion alone does not explain the underperformance. Rather, Bancolombia's expansion was disproportionate and was not matched by the operational consolidation needed to generate efficient returns. Competing banks that expanded over the same period, such as Banco de Crédito de Bolivia and Banco Santander Chile, operate fewer branches and earn higher profits and better asset utilization relative to their network size.