Beating the Post-Merger Odds

It’s sad but true: Most business mergers are financial flops, with most failing to even return the cost of capital invested in the transactions. And mergers in financial services are no exception.

“The optimists will tell you that you have a 50% chance of getting it right,” explains Denis Picard, practice leader for post-deal services at PricewaterhouseCoopers, New York. “The pessimists will say your chances of failure are about 80%.”

One thing everyone seems to agree on is this: A merger plan that fails to address adequately technology integration issues is almost certainly doomed. This likelihood of failure increases as integration issues mount, the experts say.

Banks and other companies that successfully integrate acquired units, sometimes known as “serial acquirers,” often employ dedicated staffs of merger and acquisition experts. Or they bring in hired gunsu00e2u20ac”management consultants who make the hard decisions that can be otherwise clouded by ego and sentimentality. Decisions like which branch automation platform and which loan systems make the cut? Perhaps the acquired bank has a better check processing systemu00e2u20ac”an image-based system that allows it to truncate customer checks and issue monthly statements with miniaturized images of their checks.

“It can be challenging” getting an acquirer to understand that the bank it’s buying has a better system for processing checks, or for that matter, any superior process or technology, says Bill McFarland, a senior consultant with Alex Sheshunoff Management Services, Austin, Texas, who works on bank merger integrations. “But everyone needs to be creating value.”

A successful merger tackles upfront the most contentious issues. Some of the stickier ones: Which technologies stay? Which get scrapped? How long will the changeover take? What’s a reasonable expectation of costs?

“Banks have got to get their arms around the costs of integration, especially technology integration,” says Dick Poje of R.J. Poje & Associates, a Barrington Hills, Illinois consultancy. “The easiest thing to do in a bank merger is to slap two balance sheets together,” insists Poje.

The recent annals of banking are chock full of examples of mergers and acquisitions that fell short of management and shareholder expectations because of technology integration problems. Take he 1998 combination of First Union Corp. and CoreStates Financial Corp., for example. A year into the merger, First Union’s earnings and share price tumbled following an exodus of customers over an ill-planned switchover by the bank to a new branch banking system. The damage to First Union’s reputation was severe enough that when the bank acquired Wachovia Corp. last year, it dropped the First Union moniker altogether and became the “new” Wachovia.

“It’s really difficult to get these things right,” explains McFarland. “And my experience has been that it is no easier with smaller banks than it is with big bank mergers.”

As a board member then, what questions can you ask, what insights should you possess, to help your institution avoid the pitfalls of a failed merger integration? Bank Director posed this question to several experts. Here’s a distillation of what they said.

First, and foremost, you should understand the bank’s merger and acquisition strategy.

“If the strategy is to leave the acquired unit as a standalone entity, the bank will likely never realize the value of what it has acquired,” suggests John Auldridge, a partner in the post-transaction integration practice at Ernst & Young, San Francisco.

A strategy focused on size is dangerous too. “Bigger is by no means always better,” notes Picard. “People tend to forget that size begets complexity and complexity increases costs.” Picard says banks are better served when acquiring other financial institutions that will help make them leaders in their markets.

The best acquisition strategies are aggressive strategies. “Clearly, those organizations that are aggressive [in integrating acquired companies] tend to be more successful at the end of the day than those that are passive,” says Auldridge.

Good strategies articulate a clear sense of purpose, such as the desire to grow market share or to enhance product and service offerings. And they tend to build on the company’s strengths rather than blaze new trails. A wholesale bank with a small account base, for example, will likely have more IT problems merging with a retail bank (and integrating its large account base) than if it were merging with another wholesale bank.

Once an acquisition has been identified, ask management for clear definitions of what it considers to be the elements of success, and hold them accountable.

Is it a geographic expansion or a grab for greater share of customer wallet? How long will the integration take? How will success be determined? Progress reports that address these questions should be a priority of every board meeting until the merger and integration process are completed.

“You don’t want to micromanage the business,” explains Picard. “But you need to know whether the governance structure within the management team can lead the process to a successful outcome.”

“Board members should be holding management’s feet to the fire and getting a real clear indication of how the merger and integration are going,” adds Poje.

“The good deals are the ones that focus on the customer,” says Picard. They are undertaken with goals like filling holes in product lineups and increasing share of wallet.

Acquisition deals that should raise eyebrows in the boardroom are those management tries to introduce before the completion of a major integration. “A [merger] deal is good for at least two years of chaos,” Picard notes. A new deal can be a welcome distraction to an integration process that is headed south.

After the merger-integration is completed, there should be some executive or some department within the bank responsible for declaring success. Not just anyone, however. The assigned person or department should be in the front lines of customer service such as branch management.

Encourage management to act quickly and decisively.

The tough decisionsu00e2u20ac”like who is in charge and which systems and technologies to scrap u00e2u20ac”take immediate precedence. “The faster and more fully integrated an acquisition, the sooner the bank will realize the value of its investment,” Auldridge says.

An integration committee, with representation from all major areas of the two banks, should start planning as soon as the acquisition is announced.

Success in any merger is contingent on the work of the integration committee, says McFarland. “It’s about choosing the right team, the right representation, and a leader who understands the dynamics of bringing together people who may not want to work together,” he says. And it’s about detailing a conversion plan and monitoring adherence to it.

The plan, McFarland adds, should “look hardest at those things that will have a customer impact,” and those that carry the highest penalties when things go wrong, like ATM and funds transfer operations.

Additionally, the plan should identify the products, services, technologies and other things that will have to be relinquished by one organization or division, and steps that can be taken to compensate for those losses, McFarland says. For example, if the acquired bank offers electronic bill pay, and the acquiring bank decides that is not a line of service it intends to support, it’s important that that decision be articulated early and often, and that management and staff assist customers with the transition to a new service.

The plan also should include training for front-line staff early in the integration process. That way, when things go awry during the cutover to a new system, for example, tellers have the skills they need to process transactions manually. “Training can be the killer in any merger,” McFarland says.

What can go wrong?

Many combinations these days are billed as “mergers of equals.” But Picard and others insist these deals are doomed. “There are no mergers of equals. Someone has to lead,” Picard says. “A true merger of equals will create a deadly embrace.”

It’s also foolish to expect apparent synergies will hold together a merger and integration. “Cultural issues are always huge and underestimated,” Picard says. “Different organizations in the same industries often have very different ways of doing things.”

Banks that understand and incorporate this into the integration planning process have a shot at being among the 20% or so that execute successful mergers. The ones that don’t are apparently doomed.

“If you do a really good job, than you’ll get something for the money you paid,” says Picard.