As acquisitions continue to play a major role in financial institutions’ strategic growth plans, management teams and boards are under increasing pressure to deliver results—with minimal surprises. Though due diligence often is seen as a necessary evil to completing a transaction, it can help identify opportunities to drive profitability and assess integration hurdles so an acquirer effectively can plan for and mitigate the risk of an unsuccessful integration.
Cost savings often are touted as a primary driver of acquisitions in banking. Many public filings show that estimated cost savings of a target’s expense structure run north of 25 percent. Preliminary cost estimates that are provided by management or investment advisers often are based on high level analysis prior to a letter of intent (LOI) being signed. Once an LOI is signed, due diligence should be performed to verify the extent, timing, and operational effects of the proposed cost savings as these are critical to recognizing the value in many acquisitions. Cost saving estimates should be continually adjusted throughout the due diligence process as new facts come to light.
Following are three areas of significant cost saving estimates and examples of how thinking through integration objectives throughout the due diligence process will help eliminate surprises.
Back Office Consolidation
Significant cost savings can be realized through back office consolidation. Consolidating back office operations can get delayed, however, due to vendor backlogs for conversion or de-conversion of data. Product mapping issues also might delay moving from one core processor to another. Such delays can have significant impact on the returns analysis as the savings are delayed and two operating structures remain for extended periods of time. While it might not be possible to fully address all factors that can potentially affect the integration, reviewing product mapping and starting the system conversion timeline discussions during due diligence will provide insights into timing and possible roadblocks.
Eliminating branch overlap or consolidating unprofitable locations can be a source of cost savings. A branch profitability analysis can identify the product usage, transaction activity, and relationship value and should be performed during due diligence. However, the costs associated with exiting facilities as well as operational drag must be considered. Acquisition accounting requires recognizing the assets and liabilities at fair value upon the change in control, and operational costs to exit or restructure a bank generally are represented through the acquirer’s income statement post-combination.
While combining core processing systems are a given for cost savings, comprehensive vendor management cost savings often are overlooked in the initial transaction value proposition. Again, considering integration while performing due diligence can help executive teams concentrate vendors across the combined organization. Thinking in terms of pricing power, service level expectations, integration support, and breadth of service, acquisitions often set the stage for new conversations with vendors. Taking the time during due diligence to analyze the future stable of vendors to eliminate overlap or consolidate platforms can be a significant value driver. Analyzing vendors early on allows acquirers to execute formal vendor selection processes shortly after the transaction announcement and realize cost savings soon after legal closing.
Best Practices to Follow
Here are best practice recommendations for achieving targeted cost savings:
- Each cost savings assumption should be championed or assigned to a cost savings owner.
- The cost savings owner should help establish the initial savings estimate and timeline to recognize cost savings during due diligence.
- The cost savings owner should be able to affect the integration plan to achieve the cost savings objective.
- The integration vision should be defined during due diligence to accomplish the cost savings.
- Cost savings estimates should be revisited throughout the due diligence process to adjust for one time costs identified and for revisions to the plan.
This article originally appeared in Bank Director digital magazine’s Growth issue. Download the digital magazine app here.