3 minute read 2 Aug 2019
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Why banks should focus on people, customers and risk in M&A integration

Authors

Charlie Alexander

EY Global Transaction Advisory Services Leader – Banking Capital Markets Sector

Experienced transaction leader across the Banking and Asset Management sectors. Strong believer in building long-term relationships by doing the right thing. Travel and sports fan. Father of three.

Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.

3 minute read 2 Aug 2019

As new deals are realized, banking CEOs must demonstrate sound M&A integration strategies to maximize deal value.

Amoderating regulatory environment is favorably impacting the appetite for banking acquisitions. According to the EY Global Capital Confidence Barometer released in April 2019, 58% of banking and capital market executives are expecting to actively pursue acquisitions over the next 12 months, but traditional financial services providers in the sector are reevaluating their M&A objectives as they face an increasingly nimble competitive landscape and technological disruption.

In this rush to stay current, banks are turning to acquisitions for specialized capabilities, including robotic process automation, artificial intelligence and blockchain offerings. But striking a balance between core business and new technological opportunities — in a way that does not alienate existing customers — raises new questions for the sector. For example, how will banks identify capabilities that are true strategic differentiators?

This changing industry landscape will require increased nimbleness from more traditional financial services providers. When speed to value is key, they will be more willing to buy rather than build. What leading practices should banks follow to achieve their long-term synergy objectives through acquisitions?

Focus on speed to value — synergies realized earlier are more valuable

Synergies realized early are worth more than those that take years to come to fruition, both because of the time value of money and because the longer one waits to achieve them, the more difficult they are to identify and achieve. Those acquirers that can show an ability to execute and earn back value more quickly will be able to pay higher prices because both their board and their shareholder base has confidence that they can achieve synergies faster through their proven capabilities and more quickly be ready for the next acquisition. Here are some steps that can help a banking institution achieve the greatest value as efficiently as possible:

  • Separate growth and synergy plans. Banks may not want to give up personnel, facilities and other capacity only to have to re-acquire them as they grow. But branch consolidations and divesting of assets and businesses are essential parts of a robust cost takeout program. Skilled teams should deal with these and be held accountable for the results.
  • Renegotiate to achieve economies of scale. Scrutinize contracts to determine whether they should be re-negotiated. For example, banks may use the same vendor for comparable services. Post-acquisition, one of those contracts may be shut down but additional negotiation can ensue when volumes are expanded.
  • Set an aggressive timeframe and invest to meet the schedule. Introduce a centralized control hub of program management to drive everything forward, using people with proven skills. This can break down barriers, help decisions get made, control risk, address problems quickly and drive the schedule, with transparent reporting.
  • Keep the customer at the heart of the deal and identify potential complications. Establish a customer experience team across integration work streams to engage with key stakeholders and personalize customer experience, minimize customer attrition and offset that with new growth.

Preserve value by mitigating risk

  • Identify opportunities and vulnerabilities in your target operating model. Consolidate risk governance frameworks, recalibrate compliance and risk management functions, and align the finance function and oversight in the combined organization. Evaluate the business value chain, target operating model, and the markets where the combined business wants to operate. Invest appropriate resources in the design of the target operating model to realize synergies without risking the strategy of the combined firm.
  • Establish a dedicated synergies team that can cope with the scale. Identify the team responsible for synergy definition and tracking, and have them engage early with key departments. Create a formal communications program for cross-team collaboration as well as processes for documenting and distributing outcomes from key work sessions and decisions.
  • Provide adequate coverage of foundational integration risks. Successful acquirers maintain an objective view of program issues and risks; and set a culture of transparency and openness so that program execution teams are empowered and encouraged to present factual information in a timely manner.
  • Mind the integration culture gap. Value is lost when staff in a newly acquired company loses morale. Sit down with major players on both sides, appoint culture champions and recognize the role played by informal leaders.

An accelerated integration time frame will almost always enhance deal value. But without robust planning, centralized governance and dedicated resources (both financial and talent), speed is often achieved by cutting corners rather than enhancing capabilities.

Quality and risk mitigation may cause delay, but such decisions should be transparent and vetted in go and no-go discussions. There will always be mistakes, even in the best programs, so contingency plans should include triage and response teams as well as adequate staffing of customer-facing and internal employee functions (such as IT and training help desks). By mitigating preventable risk, banks can focus on creating value without leaving anything on the table.

Summary

Deal appetite remains strong in the banking sector. Speed to value for banks and their shareholders is essential, but to achieve that goal, the sector will need to keep value creation, customers and culture at the heart of any deal, and start the integration process as early as possible.

About this article

Authors

Charlie Alexander

EY Global Transaction Advisory Services Leader – Banking Capital Markets Sector

Experienced transaction leader across the Banking and Asset Management sectors. Strong believer in building long-term relationships by doing the right thing. Travel and sports fan. Father of three.

Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.