Integration Leads to Successful Deals

Bank Director spoke to Ernst & Webb co-founders Robert L. Ernst and Charles R. Webb about the importance of business integration and the critical role it plays in ensuring the successful outcome of a merger or acquisition.

The concept of managing consultants devoted to the integration of businesses appears to be new. How did this focus come about?

Chuck Webb: Management consultants,especially the big consulting firms, have been doing integration work for some time. And while integration may be a new concept to the financial services industry, it’s not new to American business.The focus on integration has come about for a couple of reasons. Companies need performance that matches the significant cost of transactions and they need a professional approach to these integrations. The second reason is that in today’s increasingly competitive environment,management must be able to run the day-to-day business without being diverted by the time-consuming process of business integration.

Bob Ernst: There’s a significant amount of broad-based shareholder pressure facing financial institutions. Because of this highly competitive environment,the financial services industry must create value through improved earnings and profitability. Bringing it to the bottom line for shareholder return is what is expected in business integration.

How is the integration approach different from that of other advisers, such as securities attorneys, investment bankers, and independent accountants?

Webb: The integration approach complements the work of other advisers.We call it the missing piece. The securities attorneys do the liability document. The investment bankers conduct the evaluation and put the transaction together. The accountants do the registration statement. The attorneys,investment bankers,and accountants typically deal with just the CEO and CFO or perhaps senior management. The type of integration work we do,however,drills down through all management levels. One of the major differences between a good and a bad execution is how well the people are brought into the process and how effective they are. No one likes change,but business integration is very significant change.Working with the people and improving communication is a never-ending process. It’s really a consensus-building and team-building approach.

Ernst: Managing every task that must be addressed is typically a 120-to 155-day engagement from start to finish,because as the business comes together it must evolve into a very well-oiled machine in order to hit the expectations and financial rewards the dealmakers anticipated.

In 2004, the Harvard Business Reviewexamined deals that had closed in the past five years. More than two-thirds of those deals failed to meet financial objectives,and that’s a major contributing factor to today’s shareholder pressure that acquisitions must be done well.

You mentioned that other industries have taken this approach?

Webb: In the technology and consumer product fields it’s almost a given.In fact,they often have separate integration consulting divisions that focus solely on this.We saw that there was a market need for assistance with the integration process,particularly in the financial services space.

Ernst: Business integration has received tremendous support from the attorneys, the accountants,and the dealmakers. At our firm we believe in doing the necessary blocking and tackling in order to achieve business integration. No item is too small to touch.

Could you describe the approach in more detail?

Ernst: The cornerstone of business integration is to optimally combine two enterprises in order to reach a common denominator. That common denominator in the business arena is people–the shareholders,the customers,and the employees. By first managing the people side,momentum is created providing the opportunity to approach the product, policies,procedures,guidelines,and certainly the platform and distribution. Those that have failed in business integration in the financial industry have treated integration as a financial exercise or have limited its focus to just operations and IT. They didn’t address the people. They didn’t address the menu. They didn’t address the things that we touch each and every day during a business integration engagement.

Typically the CEO and CFO bring us in because they’re looking for a systematic/profitable approach.We like to come in on the due diligence side once the opportunity is presented by the investment banker.This is not only when revenue enhancement opportunities are identified,but when areas that may be of concern are identified. Most importantly,we become familiar with the platform used by the target institution.We can then assist the investment bankers and lawyers in proper preparation of a definitive agreement that touches all points of concern.It’s important at the outset of the integration to meet with employees and establish that first line of open communication. Communication throughout the process is critical.

Webb: Once the deal’s signed and announced we orchestrate a program for the CEO to meet with the employees and share his or her vision,announce the timeline,and let everyone know the process is endorsed from the top down. Using a team approach to combine the two companies sets the tone.

You both mentioned the importance of execution.What’s the process to ensure that happens?

Ernst: Over the years we have engineered a system that identifies,for each division,probably 85% to 90% of the tasks that would be relevant to the people, the product,the policies,the procedures,the guidelines,the platform, and the distribution.

It’s important to create camaraderie right off the bat between the target and acquirer. Doing so allows us to share that vision with the entire integration team which is comprised of representatives from both the target and acquirer. We show them the importance of assigning responsibility, accountability,and execution. It’s also critical to celebrate milestones and achievements as the integration progresses. Everyone wants to be part of a winning team and be recognized.

How do you apply engineering concepts and processes to your business integration consulting approach?

Ernst: We start with the framework, which has a central functionality or vision. Sometimes the vision is created by the investment bankers and assimilated by the management of the acquiring entity. Other times it’s extremely well defined by management.

The first critical stage of implementing the vision during integration is managing cultural change. We help our clients form two-person teams representing all major divisions of the institutions. Each team has one member from each institution. We give each team a template for identifying key business components in their area and selecting the best practice approach. This enables the two organizations to begin establishing a common ground or bond while putting together a business model to implement management’s vision. We then help the teams break those key components down into tasks. Next, identification of those critical areas with a timeline allows us to monitor them daily as well as through team meetings. We identify the major issues in the people, product, policy, and procedure areas, all the way through platform and distribution that are critical for a successful integration. Throughout this process,we continually use Pareto Analysis to identify the high, moderate, and low-risk items.

Addressing integration in a divisional format with continual interaction between divisions is essential. On a production line at an automobile production plant,key components must be placed at each stage as the car moves down the line,or the process stops. The key components here,as an example,are when a product is originated,delivered,and sales/service occurs. As each division puts together their “best-of-the-best” processes, they must be working with HR to be sure they have the personnel to execute. If HR didn’t address the people side, you can imagine how it would affect retail, commercial, or investment management’s execution.

What is the significance of focusing on divisions during a business integration that follows a completed merger or acquisition?

Ernst: Typically, retail/commercial banks segment the areas of responsibility by products, services, support systems, operations, and information technology. But it doesn’t mean they’re islands unto themselves. It means they must fit within the overall format of the operating entity. They’re all an integral part of the business model.

Webb: Another way to look at it is that a division is a way a business is segmented. Some companies have human resources as a division, but others might further break human resources down into compliance and training or recruitment and retention.

Ernst: The divisional format we refer to provides a disciplined approach to people, products, and policies. Each division has the appropriate tasks identified that touch all these areas of responsibility. It’s like the analogy I gave earlier. If the HR and personnel side of the business integration process wasn’t addressed very early in the business integration process, can you imagine how it would affect the other operating divisions? They would be dead in the water. The repetitiveness of a business integration system is vitally important as it crosses all boundaries of people, product, policies, procedures, guidelines, distribution, and platform and brings the operating entity together.

One takeaway from your particular consulting engagements you mentioned is the construction of a high-performance operating model. Could you elaborate on that?

Webb: During the integration process, there is a lot of interaction. We compile a written report and work with the CFO to qualify it–what the metrics are, return on average assets, return equity, and so on. It probably formalizes it more than most companies do. We haven’t had an assignment yet where there hasn’t been some change made to how people approach the business.

Ernst: Quality is the name of the game. The acquirer pays a fair price to create a business partnership. Therefore, on the day the transaction is completed it should not only have at least the same asset and liability base, but most appropriately, have an opportunity to hit the deck running. In other words, the acquirer should not have to go back and try to recoup in the next 12 to 18 months what it lost because the integration wasn’t done properly.

Is a follow-up an important part of the business integration process?

Ernst: Absolutely. We stay in touch not only through management of the business enterprise,but also through financial reporting. The first report card after integration is completed is the combined financial results of the operating entity. Not only do we monitor the financial results,we monitorfor four additional quarters thereafter.

Why can’t incumbent management design and lead its own integration process?

Webb: They can, but generally not as effectively or with as much experience. Integration is a daunting task, so companies bring in professionals focusing solely on integration.

Ernst: Some of the larger banks and financial institutions have dedicated staff working on business integration, but I dare say no one has systematically approached it with an engineering design and concept like we have in which we critically path and do the achievement tests throughout.

Are there any other reasons why an acquiring bank would engage an outside consultant to lead integration efforts?

Ernst: When management evaluates potential consultants, it’s looking for dedicated, experienced leadership that’s focused on producing results that would allow leadership to run the bank on a daily basis as opposedto being diverted from running its currentmodel in lieu of business integration.

Our emphasis on best practices leverages our vast experience, as well as the engineering experience of our staff. We call it bridging the gap, such that management provides the vision and we assist them with execution. Companies need that neutral bridge builder between acquirer and target to affect a systematic change while minimizing the emotional aspects of the deal. This allows the acquirer to continue its daily management of the institution while assimilating the target into the new vision.

Webb: An outside consultant brings a fresh look to the picture.In our practice we like to say we “weed the garden.” Any business will have some troublesome issues that grow over time and needto be addressed. Outside consultants are also nonpolitical. When you’re putting two businesses together, especially if they’re close in size, there’s going to be jockeying for positions. Business integration consultants such as ourselves are able to look at things objectively.

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