Diagnosis merger

The current financial turmoil is seeing a wave of fast-track mergers and acquisitions. Capgemini’s Sean Drewett looks at the risks and opportunities of an accelerating market.

“Nobody's going to end up on the news because they acquired a bank and then found it had a bad IT, because the most important thing in any merger is always going to be the assets ”
-Sean Drewett, Capgemini

There are a number of factors as to why so many banks are looking at mergers. The first is the most obvious one, which is that some of them are being forced to into it because if they didn't merge, they would fail. The other one is that there is just there's a lot of value out there. Bank stocks are low. So if you are a bank that survives or a hedge fund or a private equity company that's in a strong financial position and you're looking at what your growth strategy's going to be for the next five years, now is the time to go out and acquire.

I read a great quote recently from a banking COO that said, “Banks are not bought; they're sold.”  We have seen exceptions where a government agency or other third party is forcing the issue, but generally a bank that's being bought has to want to be bought by the acquirer. What we’re seeing now is certain organizations getting in quickly to acquire those assets while they're available We’re going through a period where some banks are weak, their balance sheets are weak and they need to find partners. A lot of European banks may not be looking at the regional bank setup in the US, but there is a lot of value there that they can go after if they're looking to become bigger global players. But there is the counter to that. While I've seen some banks going into acquisition with the aim of becoming the HSBC of the future, they could be hampered because so of them are now nationally owned and will be for several years. If they are a nationally owned bank or a majority shareholder is a government, there are legal constraints as business constraints around what they can do. So for example, in some countries, there's a limit to how much of a bank can be owned by a foreign nation.

So you've got a lot of legislative constraints that will maybe inhibit those banks that have large national owners, which will drive them to try and pay back that debt as quickly as possible so they can get back to business as usual. But on the other side of the coin, you can take the Spanish banks as an example. They came through this not completely unscathed, but without having to take a lot of, or any, government money. So their banks are now looking both to increase their acquisitions, but they've also been acquiring over the last few years anyway, and they're looking to consolidate their position.

The nature of the fast moving environment that is promoting this wave of M&A does present certain challenges. The difference between the fast track and what might have happened 18 months ago is that in the past, I and acquirer would have looked at the assets to establish that they are sound, but there would also have been time to do proper due diligence on IT, the people, everything else. There is a risk that certain things may be ignored that will come back to haunt some of these banks later on.

Nobody's going to end up on CNN or the BBC because they acquired a bank and then found it had a bad IT, because the most important thing in any merger are always going to be the assets. However, there are potential impacts involved in not knowing exactly what you are buying. They won't get the returns that they may normally have expected from a merger. They may not get some savings on consolidating banks or consolidating their IT because they may be acquiring a bank purely on the basis of its assets rather than on the synergies between its HR, its finance department or their strategies around how they've done outsourcing on their IT. The difference is that if you do a traditional acquisition, you would have looked said, “Okay, this is a bank that has a similar strategy around its technology which will be able to give me savings quicker than one where I've got to merge two banks with completely different technology strategies.” Those are the risks around generating the savings and also taking longer to truly integrate the banks.

There are ways that organisations can limit the risks of fast track mergers. They will have a limited time for due diligence so they have make sure they build teams and plans to enable them to do at least as much as they can. It’s far better to do that than to just accept that they’re going to have to deal with it later on.

Of course, sometime and acquisition will be pushed through before they have a chance to get that due diligence done. If that is the case, then it is vitally important to get moving on it from day one. It may not affect the decision anymore around the acquisition, but it at least allows the CIO to know about all of the problems he's got ahead of him. Hopefully he will then have a great chance to develop a strategic plan for his own IT going forward.

For example, if two banks merged and one of the had a strategy that was around outsourcing as much of its processing as possible and the other one's around keeping inside, the CIO that's going to have to own that should very quickly develop what should the future strategy and the future setup for the IT that the bank needs. It may be a long time before he gets there because he's got two different organisations, but if he starts the first thing is to make sure he has a plan and that he knows where he's going rather than just spending all of his energy on trying to keep both banks running as they were before.

And it isn’t just IT. As with any merger or acquisition, looking at cultural fit is important. It is rarely a factor in the final decision around an acquisition but it can prove to be an issue. There are a couple of possible approaches depending on the kinds of organisations involved and it’s really a question of going with the one that fits. If there is a major difference between the type of banks that are merging, you may consider actually that you don't want to have a single culture. An example might be a bank that's primarily focused around retail banking and just bought a large wealth management or asset management firm. The two operations are different there and the histories are different, but also the type of people that you need to run them successfully may not be the same.  So the executive who's grown up through running regional banks and traditional retail banking products will have no understanding of even the products in the asset bank, but also the culture's going be different. In those cases the decision to keep the two cultures separate might well be the best thing.

The big risk around culture from the perspective of the acquiring bank is around customer relationships. That's not so much a problem on the retail banking side because your customer’s personal relationship with their bank is not as strong. But on the private banking side, it's all about the relationship between the customer and the advisor. If an advisor goes to another bank, they may well take the customer with them and you effectively become a drain on your assets. So the first thing that needs to be done is to make the decision on whether a single bank model and a single culture is really what you want?  If you decide that the banks are relatively similar and you do want a single culture and a single organization, make sure that you establish that up front.

What’s different in an accelerated merger situation versus a traditional one once again the time you have available to get things working. What you would normally look at is what the future combined company should look like, taking the best of both and then creating a new company culture for that bank. In this environment, that may not actually be the right answer, because actually what I want to do is I want to get to business as normal as quickly as possible, so it may actually be the acquiring bank, that's going become the dominant culture. Then it's just a matter of managing the retention of key people who may feel uncomfortable about the change.

The big question is will the global banking model still survive? HSBC is a classic example of a big global bank that actually really worked. So will we see more global banks emerging from around the world? My instinct tells me that in the long run, yes, because the efficiencies will drive new emerging global banks, whether they're from some of the banks in the Far East, or some of the more successful US banks. But when the big UK banks, emerge from being nationally owned and go back to being privately run, they will again become players alongside HSBC and try to drive that market.

Regulation is continuing to be a hot topic. There was a lot of discussion around it at the recent G20 summit. I don't believe that there's a rush to regulation because I think there is a general view that it is more important to get the credit flowing and fix the banking systems later on. I don't know that any one country is going to benefit by rushing to over regulate the banking sectors too soon. I think there'll be more forced separation between the types of banks and the assets.  But that's something I think we'll see a bit later. As for how government holdings are going to affect acquisitions, no one can really predict this marketplace. But those banks that are 70-100 percent government run, they're not going to be allowed to do acquisitions while there's still a large amount of public debt. I think the drive is going to be to fix those banks and then get them back into the private sector.

Sean Drewett is the leader of the Strategy and Transformation Consulting Practice of Capgemini Financial Services Global Business Unit. Drewett has over 16 years in Business and Consulting and joined Capgemini on 1996. Before joining and then leading the Strategy and Transformation team within the Financial Services Global Business Unit Sean has worked as a transformation consultant, corporate development manager, Project manager and financial Controller.