4 integration strategies to help ensure the success of your deal
How financial institutions can realize the full benefits of M&A
Consolidation continues among financial institutions, with many banks pursuing acquisition as a growth strategy. But acquisition is a high-risk option. According to a Bloomberg Businessweek analysis of major acquisitions since 1990, only 17 percent have contributed significant value, 33 percent have contributed marginal value and 50 percent have eroded shareholder returns. Fortune found that 77 percent of acquisitions do not earn or exceed their cost of capital. Furthermore, in the four to eight months following an acquisition, half of the newly combined entities see a drop-off in productivity.
Picking a target that fits your strategic growth plan and performing sound due diligence are obvious needs. But effective integration is what transforms the potential of two separate entities into a strategic powerhouse that makes the whole greater than the sum of its parts.
Following are four key integration strategies that can help you make the most of your acquisition:
1.Understand and integrate cultures
Cultural integration often is considered one of the less important concerns. Treat it as one, however, and your deal may well fail. Here are some specific steps to help provide more concrete guidance:
- Plan for retention of key leadership. You can’t assume the players you need are going to stay. Nearly 50 percent of senior executives at acquired companies leave in the first year, and nearly 75 percent leave within the first three. Retaining key players is especially important in banking, where there is a shortage of experienced executive talent. Leaders at the acquired institution can provide more than solid banking skills. For community banks, their ties to the community are vital to keeping and expanding business, especially if you are moving into a new geography. Also, keeping leaders in place, who the managers and employees of the acquired institution already know and trust, will help improve communication concerning and acceptance of the many changes that any integration will involve.
- Communicate your strategy. You acquired the target for a reason that you and the leadership at the target institution not only understand, but are excited about. Share that excitement with employees across both organizations. Integration is an uncertain time for employees. Making sure they understand the reasons for the combination and the opportunities that your strategy will provide, not only for the newly combined entity, but for the employees, will help gain the commitment of your people.
- Address lending culture. Lending culture can be a touchy integration issue, as every organization strikes its own balance between lending and acceptable levels of risk. You need to clearly delineate the combined entity’s position and document all loan policies and procedures to support that philosophy. With that established, you can work through issues, like lending forms, credit files and the timetable you want to set for originating, underwriting, approving and closing loans.
- Tone at the top. Given the unprecedented level of regulatory pressure facing financial institutions, you will have to do substantial work to integrate the compliance efforts of both institutions into an effective, cohesive approach that effectively addresses the full range of compliance issues your new, combined organization faces. But effective compliance tools and processes are not enough. You also need to imbed a culture of compliance into the DNA of your new organization. A consistent, strong emphasis on ethical behavior by all personnel, and leadership that walk that talk every day, will go a long way to controlling your risks.
2.Review, rationalize and renegotiate vendor contracts
Financial institutions are increasingly reliant on third-party vendors for a wide range of functions, so both sides will have a number of vendor contracts. Deciding which to keep and how any remaining contracts should be modified to appropriately serve your strategy going forward are key integration steps. First, identify those applications or services that you will need going forward. Then identify the vendors that each of your organizations is currently using to meet those needs. That will position you to address the overlap. Following are six key contract questions to consider:
- What is the pricing over the term of the contract and how will that change as a result of the combination?
- Are existing performance requirements and acceptance criteria appropriate or should they be updated?
- Will current penalty clauses for late or nonperformance fit your combined organizations’ demands?
- Should you update business termination provisions?
- Will your deal affect how state and federal regulatory changes impact your contracts?
- Should business continuity requirements be updated as a result of the acquisition?
3. Product selection and data cleansing
Both your institution and the target utilize core systems and a variety of other applications. You will need to evaluate all of these against the strategy and needs of the combined entity and decide which tools will best meet your needs going forward—or possibly decide on new tools entirely. Whatever solutions you decide on, you will then need to cleanse your data to work effectively with your selected products.
Even if you are both using the same core system and decide to continue with it, it is best for all data from both organizations to reside in a single database to complete integration processes, support future operations and generate combined financial statements. This will entail working with vendors and systems at both organizations to map data requirements among a variety of functions, including general ledger accounts, products, collateral codes and product codes. Be sure to extend the process beyond your core system to include all ancillary platforms.
4. Identify and implement best practices
Because integration will require combining the operations of both banks, change is inevitable. Focus on making the right changes. Integration provides a unique opportunity to review processes and procedures throughout both organizations, identify best practices and weaknesses and then make improvements that will help maximize the value of your acquisition.
Select a team comprised of leaders from both organizations, who have the experience to make the right evaluations and the clout to push for the right solutions. Then, across both organizations:
- Interview managers and staff to build a clear picture of performance metrics, processes, procedures and related processes at both organizations.
- Observe staff to understand daily activities, technology use and average workload.
- Analyze key workflows to identify unnecessary steps and non-value-added tasks, potential failure points and bottlenecks, regulatory risks and automation opportunities.
- Review results of the above activities to identify key gaps and opportunities; then, develop best-practice recommendations and a road map for their implementation.
Don’t miss this chance
A merger or acquisition marks a turning point for your institution, one laden with both risk and opportunity. The workload necessary to execute a combination is substantial and, especially for institutions that have not previously been through a transaction, can involve skill sets you simply don’t possess. The right advisors can be vital to making your deal work. Be sure those you choose combine substantial mergers and acquisitions experience in the banking sector, with a deep working knowledge of the full range of operational and technical issues that drive a successful integration.
Executing the right deal the right way can provide exponential benefits. Getting it wrong could cripple your institution. Effective integration can make the difference between success and failure.