With M&A the devil is in the details

When doing deals banks can make the same mistakes as any other company, such as failing to align systems, processes and management.

The bedding down period for mergers or acquisitions represents a crucial time for companies. The allure that triggers the deal is almost irresistible: growth, market share, economies of scale, economies of scope, and cross-selling all figure. In such circumstances the decision to merge or acquire is almost a no-brainer.

But the object of corporate desire also poses threats to the CEOs driving the agenda who will be judged by shareholders, market and media alike on the effectiveness of integration, realisation of synergies and creation of value. Many of the risks stem from the failure to force the pace in alignment of systems, processes and management.

The challenges can appear insuperable – living through the necessary transformation and re-alignment can be nightmarish. But if the end result is not to be a reduction in shareholder value, these challenges must be conquered. One-half of recent bank mergers around the world have (apparently) destroyed shareholder value, according to Philippe De Backer, a partner in Bain & Co, a consulting firm.

Supermarket chains have determinedly thrust their way into the world of retail banking and perhaps financial services can learn a salutary lesson from some of their experience. Soon after retail giant Morrisons acquired Safeway in 2004 it announced it was going to switch off the supply chain management systems inherited from Safeway. Morrisons struggled with the integration of Safeway’s IT systems for a short period before making the decision to switch off Safeway’s supply chain systems in all its warehouses and replace them with bespoke technology, meaning employees had to revert to manual processes in some instances.

This was a surprising move given that Safeway had invested heavily in systems that were generally considered to be far superior to those of Morrisons, according to Martin White, independent consultant and ex-Sainsbury’s supply chain director, speaking to Computing in 2005.

Trying to align systems in-house after a merger or acquisition can be problematic, particularly when parties fail to agree on the best system to go with and arrive at the sort of political stalemate that leads to good elements from both systems being thrown away. In the Safeway example, it was clear that Morrisons should not have disposed of those systems that had received heavy investment. Safeway had sophisticated technology, with systems performing real-time store stock management and fingerprint scanning technology for monitoring performance management and it was simply Morrisons’ inability to integrate these systems properly that stopped their continued successful usage.

In financial services, similar problems can arise. When banks grow by successive acquisition, the pace of change frequently leaves a legacy of systems that do much the same thing but don’t interconnect and of people who perform essentially the same business processes but in incompatibly different ways. As a result, management teams often find it harder to consolidate and summarise everything that is going on in the bank, leading to duplication of costs, which makes it harder to flush out risks and increases the chance that there will be a failure of internal controls. The result may be a reduction in profit, share price and brand value, the complete opposite of what was intended.

Outsourcing M&A business processes

The time of a merger or acquisition can be perfect to introduce an outsourcing model – establishing a relationship with an ITO outsourcing partner can help at such a juncture. They will be in a position to provide an independent perspective, i.e. they will not favour the system of one company over the other and will be able to select the best features from both. As part of a standard outsourcing contract, the supplier will also be prepared to sign up to cost reduction targets and business case benefits. Often with a merger or acquisition the infrastructures are so different that it will require a fresh start.

And it is not just IT. In mergers and acquisitions, business processes tend to get overlooked as the board moves on to consider its next target. In businesses where acquisitions have taken place, a political wrangle can often ensue, as the two sides are unlikely to accept change in their processes willingly – attempts to standardise can cause more trouble.

Alignment of business processes like finance and accountancy; HR administration; and industry specific processes (e.g. cheque handling) has to be approached diplomatically and, again, an outside perspective can help. A strategic business process outsourcing (BPO) partner can take the strain in the wake of such mergers or acquisitions, arranging for the standardisation of the business processes, handling the change management and delivering the desired service to the agreed KPIs. Buying into the strategic business case and savings would, of course, be second nature to such a partner.

When an outsource service provider steps in to help a merger or acquisition, the independent assessment that is provided should ensure that a best practice solution is found. This might be taking the best elements of both companies operations and processes, or simply starting afresh, but either way an outsourced provider should ensure that best practice is followed.

However, what if outsourcing is already involved before the merger or acquisition? In the past there have been high-profile examples of mergers and acquisitions causing previously agreed outsourcing relationships to fail. One such example of a merger that led to the early demise of an outsourcing arrangement was Halifax’s acquisition of the Bank of Scotland. Two years before the merger, the Bank of Scotland had put in place a 10-year £700m IT outsourcing contract with IBM. Shortly after the merger the contract was terminated. According to an article on Silicon.com, the explanation given was “the original contract was not suitable for the combined organisation and the decision was taken to retain control of important infrastructure.”

It is vital that if a company is in the period leading up to a merger or acquisition, outsourced providers are used carefully. Outsourced providers are best used to bring the two companies together and if one has recently hired a provider this could potentially lead to problems.

The full costs associated with the exit by HBOS from this contract have been confined to history. However, given a typical outsourcing cost/price profile, it is likely that termination so early in the 10-year term carried a fairly hefty price tag for HBOS.

The triumvirate of technology, processes and outsourcing play a significant and increasingly pervasive role in business life. Understanding the constraints and opportunities they present in a merger or acquisition situation are crucial when assessing the potential shareholder value that a target company may add and the level of post-merger integration required to deliver that value successfully.

Article by: Nigel Roxburgh – research director of the NOA.

Marc Barber

Raven Connelly

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.