Finding footholds

in financial services M&A integration

  • Share

Why is the financial services sector working on integration strategies before the ink is dry on their deals? Why have playbooks and pre-deal planning become footholds in their climb to value realization? It’s all about capturing learning and maximizing value.

“When it comes to strategic thinking about deals in financial services, it’s a different world these days,” says Michael Wada, Partner in EY Transaction Advisory Services in London. “Acquirers want to be clear on why they are doing deals and the best way to improve control over the value they can generate. We’re working with clients on integration, design and planning pre-deal far more than we ever have done.”

This slow but steady shift follows two healthy years for the sector, as values peaked in 2015 and delivered a respectable 2016.

Dealmakers in the sector aren’t taking this growth for granted. Lessons learned post-crisis have become embedded, creating a new approach to transaction execution and integration.

According to a new report series on financial services M&A integration from EY, more than 95% of executives in the sector now start integration planning pre-signing, compared with 76% in EY’s previous survey on the topic in 2015.

“Much of this is being driven by the board,” says EY’s Wada. “In the past, the team would present deals to the board and most would sign them off without demanding much detail on post-deal plans. Now, the board is scrutinizing deals more, checking what the business is signing up to and asking what exactly is going to happen after the deal is done.”

Based on the survey findings, the effort is paying off: 60% believe product and service innovation accelerated during their post-deal integration work. And 71% of companies investing in pre-deal integration say they now generate cost synergies of more than 30% of the target’s cost base. This compares to only 52% delivering the same value in the previous survey.

Building a better basecamp

In simple terms, financial institutions are shifting their deal rationale. They are less interested in building scale; the pressure is on to build value.

For many, this means thinking about an improved operating model as early as possible. Three-quarters of respondents to the EY survey say they already have a high-level target operating plan in place by the time a deal is signed.

Lloyds Banking Group’s £1.9b (US$2.4b) acquisition of UK credit card issuer MBNA from Bank of America at the end of 2016 is a case in point.

“The driving objective of the MBNA deal is value creation,” says Paul Gordon, Integration Director with Lloyds Banking Group. “The plan is not just built around the traditional capturing of synergies in the cost space, but trying to combine the target’s capabilities with our own in Lloyds Banking Group, to create something better. This has been at the center of the integration program. That value agenda is really important.”

These efforts are being achieved, in part, by tapping into the bank’s own experience, using teams involved in earlier integration activity.

“We took their experience into pre-signing to give us a sense of the size of the integration and the amount of time and effort it would involve,” says Gordon.

He adds that integration planning begins with due diligence, when you meet the target’s management team: “You’re not able to get to the nuts and bolts at that stage,” he says, but you need to learn what you can when you can.

“We’ve had challenges around what we could or could not share between the two businesses up until the point of signing,” he says. “There are areas where you can get some clarity and start putting down markers for your integration plan, but there are many areas where you’re restricted. We knew this and took a hypothesis-led approach to the integration from the start.”

Gordon adds that, if you have people who understand the target business, it’s much easier to produce a set of hypotheses that won’t be too far off the mark—you can’t afford to leave this to a less informed or invested team, he cautions.

Video: How are financial services firms harnessing M&A integration strategies in their climb to greater value?

Rules of ascent

These limitations are a particular challenge for financial services. Banks, insurers and wealth and asset management bodies have to cope with a range of compliance considerations, from data retention and security to capital adequacy ratios of target and acquirer, as well as competition issues.

“Regulators in almost every financial services sector often influence heavy portion of the deal timeline,” says Aaron Byrne, Principal in EY Transaction Advisory Services in the US. “The responsibility for compliance lies with the acquirer, but the regulator will become involved proactively if they deem it necessary. In turn, early engagement with regulators has become essential and companies need to articulate a sound plan and approach.”

Use the best equipment

The growing impact of technology only complicates matters further. Almost two-thirds of those polled, for example, expect digitalization to have the biggest impact on integration in future deals.

Established financial institutions have used M&A to keep pace with disruptors like FinTech, but integrating such start-ups in large financial services businesses has not been easy. Doing so in tightly regulated financial services firms with significant legacy infrastructure has required a fresh approach.

“If a FinTech integration is to succeed, for example, it is crucial to protect and support the entrepreneurial spirit and culture that underpins the success of these companies.” — Henry Lacey, Partner in EY Transaction Advisory Services in China

“An understanding of what you’ve bought and why you’ve bought it can get lost in the excitement around the potential of FinTech, blockchain and artificial intelligence. It can be tempting to throw lots of money at it and buy in companies without understanding how they fit with your strategy,” says Henry Lacey, Partner in EY Transaction Advisory Services in Greater China. “In the past, banks and insurance businesses would buy each other and it would be A plus B equals C. That no longer works. If a FinTech integration is to succeed, for example, it is crucial to protect and support the entrepreneurial spirit and culture that underpins the success of these companies.”

In this dynamic space, acquirers need to understand why they are investing in any tech-driven business. Rather than doing it because they feel they must, they should recognize that the integration will differ from traditional financial services post-deal work.

Harness your talent

Understanding the different integration requirements that come with such an acquisition was a priority for Northwestern Mutual when it acquired New York FinTech start-up LearnVest, an online financial planning and client experience technology provider.

“At first, we didn’t push a formal integration; we gave LearnVest the space to continue working as they had been doing before,” says Pete Petersen, Vice President in Northwestern Mutual’s Integration Management Office. “We liked their focused innovation and the client experience that LearnVest was creating, which were two elements that we wanted to keep. There were specific elements that we wanted to achieve, like advancing certain digital products, but we saw huge value in blending our two cultures that drove our early assessments. One of our guiding principles was to leverage what was best from each organization.”

From the ground up

Building up a more detailed M&A integration plan early on, greater regulatory scrutiny and the unique challenges that come with Fintech acquisitions have seen financial services groups build up their internal integration teams and methodologies. According to 82% of survey respondents, they now have dedicated in-house resources to work on integrations and 64% have integration playbooks or methodologies.

EY’s Wada suggests that, while “the notion of having a corporate way of thinking about integration is increasing,” it is likely that frequent acquirers are more likely than their less acquisitive colleagues to have genuine in-house integration playbooks.

Northwestern Mutual’s Petersen adds that every deal is unique and it is important to go into each integration with an open mind: “You can’t pull a plan off the shelf and implement it. Every deal is different. There is a core set of questions that you will always need to ask and, after you have done a few deals, you will spot patterns. You are not following a playbook line by line; you are learning from each experience. That is the crucial thing.”