The banking industry’s M&A machine has been in overdrive during 1998, right in the middle of exhausting Y2K projects to update systems. Directors, caught in the wheels of the machinery, are witnessing their banks experiencing resource shortages, shrinking integration timeframes, and rising customer fallout. As a result, they have heightened their scrutiny of the steamroller approach to merger integration.
More and more bank directors are developing a keener appreciation for the real bottleneck in banking today. It may take only a few weeks and a handshake to hammer out a merger deal, but it takes years to truly integrate two organizations with different structures, systems, and cultures. The past two years have proven that banks often overestimate merger synergies and underestimate the technology and organizational pitfalls that accompany these transactions.
Over the next few years, the banking industry will create demand for system conversions and merger integration efforts faster than available resources can address them.
The biggest downside? Poor integration performance could suck the entrepreneurial spirit and competitiveness out of many a great banking organization. Could our massive industry consolidation become just another tale of synergies never found?
To ensure that today’s mergers do not turn into tomorrow’s spinoffs, bank directors need to focus on several key strategies in the merger integration process:
Screen deals strategically, not just financiallyu00e2u20ac”While most acquiring banks have established disciplined financial modeling into their deals, the strategic analysis is often sorely lacking. If a bank is changing its franchise, its directors should be asking questions, such as
- “How does this product mix fit with the bank’s strategy?”
- “Are new skills and management talent being acquired?”
- “What structural, organizational, or systems issues might threaten or slow down our own strategic evolution?”
Set a conversion timeframe that is quick yet reasonableu00e2u20ac”With merger timeframes becoming more demanding, bank CIOs must manage a new balancing act: the faster the conversion, the more resources will be drained fixing problems that crop up after the conversion. We recommend that clear conversion timeframes be agreed upon by CIOs and senior management prior to the acquisition. This will ensure that an unreasonably fast close is not thrown in to sweeten a deal or that cost-reduction assumptions are not overly accelerated.
Communicate the “non-negotiables” immediatelyu00e2u20ac”Merger and acquisition announcements typically set off a new series of political positioning internally. It may be executives from both banks vying for the same job. Or it could be emerging disagreement about where corporate functions will be located. A great deal of this anxiety and posturing can be eliminated quickly if senior management immediately communicates its overall objectives and strategy for the deal.
Develop both a short- and long-term technology directionu00e2u20ac”The M&A frenzy has made technology planning a nightmare. Consider the plight of a bank making an acquisition while it is just beginning to pilot new branch automation. Should the acquired bank convert to the old system and be obsolete within a year or risk installing new, unproven technology? It is critical to understand that mergers and acquisitions force CIOs to implement imperfect technology strategies in the name of speed and integration.
Quickly standardize the infrastructureu00e2u20ac”Banks that quickly move acquired companies to a standard infrastructure have clearly outperformed the rest of the pack in terms of merger payoff. Sometimes standardization requires continued usage of less-than-optimal systems. This tactic is justified because speed and simplicity are much more valuable than trying to manage a more complex, disparate infrastructure.
Determine where flexibility and adaptation are strategicu00e2u20ac” There’s a fundamental caveat to the beauty of standardization: Do not throw the baby out with the bath water. Too many banks have squandered acquisitions because they have steamrolled right over the unique products, processes, and skills that justified paying a premium for the company. Every acquisition, even the very smallest, presents an opportunity for adapting best practices.
Release Version 1.0 of the new organization immediatelyu00e2u20ac”Large acquisitions or mergers of equals often result in major organizational restructurings. Unfortunately, these are often viewed as an opportune time to implement other strategies or organizational changes that the bank has been contemplating.
This expansion of scope should be avoided at all costs. Like a piece of software, Version 1.0 of the newly formed company must be released within six to nine months after the announced deal. Enhancements and revisions to lines of business and support areas should be done as separate, focused initiatives after the merger when the company is able to absorb additional change.
Communicate the new “scorecard” to management and your boardu00e2u20ac”CEOs can make or break M&A success depending on how they establish accountabilities. Management and board scorecards should be developed along two major fronts: Certain executives must be held accountable for the fast, effective integration of the companies, and others must be charged with the continued growth of sales and new business. It is not wise to mix these accountabilities with a single executive. One objective is usually met at the expense of the other.
Let the entrepreneurs ruleu00e2u20ac”As merger integration activities are completed, board members can ask themselves and their CEOs a very simple question to evaluate the initiative’s success: “Did our company become more or less entrepreneurial as a result of this acquisition?”
If an acquisition brings new products, new markets, and new ideas without undermining the existing culture and accountabilities, share price appreciation is on the horizon.
If an acquisition adds a slow, confusing and increasingly bureaucratic tone to your company, warning signs must flash. Fast, successful acquirors such as GE and Cisco have proven that size does not have to kill entrepreneurship. Banks that bulk up to move through the next phase of consolidation must also prove this fact.
Over the past few years many banks have developed disciplined, well-tested M&A operations. However, with larger acquisitions, mergers of equals, and purchases of nonbank entities, directors should be prepared for the new merger integration issues ahead.