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Scaling new heights

M&A integration in financial services

After two strong years for M&A activity in financial services, the pressure is now on acquirers to prove they can secure value from the transactions they have pursued.

Financial services integration teams must demonstrate that the synergies and strategies that drove the deal in the first place can be delivered in the integration phase. While M&A announcements may get the headlines, a successful integration is the only true measure of a deal’s value.

Our new series of surveys cover the banking and capital markets, wealth and asset management and insurance industries, revealing that dealmakers now recognize how crucial it is to plan integration very early on in the deal-making timetable. However, they also see plenty of room for improvement. This is particularly true in a world where artificial intelligence, cybersecurity risk and FinTech and blockchain developments are changing the way integration is achieved, requiring integration teams to shift their approach in future transactions.

Our reports provide a detailed look at integration strategies within the financial services industry from initial planning through value realization to future trends.

Contacts

Americas
Aaron Byrne
Principal, Chicago
+1 312 879 4037

EMEIA
Michael Wada
Partner, London
+44 207 951 9368

Asia-Pacific
Henry Lacey
Partner, Hong Kong
+852 2846 9928

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1 Prepare to integrate

The integration phase of a deal really determines whether an acquisition is a success or not. With increased scrutiny from boards, shareholders and regulators, integration planning ahead of deal-signing has moved from being a best practice to a minimum requirement.

When planning for day one and the first 100 days post-closing, the key priority is ensuring operational stability in the business acquired. The majority of banks and insurers involved in buying a business from another organization point to the importance of transitional service agreements (TSA) as they can help the deal move towards closing.

  • 95% of bankers say they start integration planning before signing.
  • 78% of insurers had a synergy case in place before signing.
  • 69% of asset managers say operational stability is a priority from day one

 

of financial services companies start integration planning pre-signing

2 Target operating model design

When it comes to the target’s operating model, many acquirers merge it into their own organization. However, there are those that use integration as an opportunity to broaden their vision and transform their business.

Although it may feel easier to leave systems in place, it makes sense to decommission and eradicate as much legacy technology as possible, as legacy IT systems often stand in the way of innovation and customer experience.

  • 42% of banks created new best of-breed operating models instead of absorbing the target.
  • 48% of insurers see between 25-50% of their target’s IT systems remaining in place in their end-state operating model.
  • 52% of wealth managers leave the target operating on a stand-alone basis.

As new business models and new entrants enabled by technology emerge, more financial services companies seek to make acquisitions to execute their ambitions for technology transformation.

 

of financial services companies create new best-of-breed operating models and transform their business

3 Manage the integration

Our survey reveals that integration has had a positive effect on the client and customer experience. The ability to retain customers and deliver on their growth objectives is a primary focus for most acquirers. They now include a customer experience workstream in their integration programs.

However, banks and asset managers need to watch target employee retention closely. The management team of the target business must be fully involved and represented in the integration process.

  • 29% of banks say at least a quarter of employees departed, including 5% who lost more than half the target’s staff.
  • 70% of insurers claim the client experience improved during the integration process.
  • 67% of asset managers have integration teams numbering between 11-25 employees, with a further 30% having greater numbers.

The in-house resources dedicated to integration are quite substantial, and financial services firms also hire contractors to advise them on integration. Experience, leadership, dedication and communications are the characteristics required from a high-performing integration team, according to the majority of financial services respondents.

 

of financial services companies say they now generate cost synergies of more than 30% of the target cost base

4 Realize value

Synergies are the essence of value creation, and financial services companies feel that financial synergies (capital, tax) created the most value. However, they were also the hardest to realize according to respondents in the asset management and insurance sectors. Although there may be opportunities to improve sales productivity or leverage combined distribution channels, revenue synergies are seen as tougher to deliver in the banking industry.

  • 60% of banking and insurance respondents believe product and service innovation accelerated during their post-deal integration work.
  • 63% of asset managers say that they make sure that every synergy is linked to a trigger point in the integration plan that can be tracked.

With product and service innovation often being accelerated during the integration process following a deal, integration offers a great opportunity for business transformation if that is made a priority during the process. Many acquisitions are all about acquiring new capabilities – to improve distribution, for example, so leveraging these capabilities for innovation and growth will be vital for many industry players.

5 Look ahead

The most successful acquirers learn from each transaction they manage to secure greater value from subsequent deals, and many respondents say they have a deal “playbook” that sets out the methodologies to be followed during integration work.

However, integration playbooks and similar models will need to be flexible as the trends having the biggest impact during the integration stage of transaction are changing. That will require dedicated integration teams to shift their approach in future transactions in a way that is appropriate to the prevailing themes.

Reinventing M&A and integration strategy

Watch our video to learn how big data, analytics, cybersecurity, cloud computing, and social media play a role in developing a strategic and successful M&A program and integration plan.