Technology assets can be the drivers behind a merger or acquisition, and integrating systems post-merger often presents the biggest challenge to realizing the value of a deal. To navigate M&As successfully, banks must establish a plan and communicate it across the enterprise.
CTO, First Horizon National Corp. (Memphis)
VP, Financial Services Industry Strategy, Oracle (Redwood Shores, Calif.)
VP, Client Services, Callidus Software (San Jose, Calif.)
VP & Director, Boston Consulting Group (Boston)
Sr. Manager, Boston Consulting Group (Boston)
Q: What is IT's role premerger, and how does technology integration impact a bank's M&A strategy?
Andrea Klein, Oracle: When evaluating a potential merger, IT plays an essential role. The acquiring bank must try to assess the cost and profitability of various systems in the context of features and functions. Performance management and business intelligence tools enable the acquiring bank to make decisions about which systems survive post-merger based on data rather than emotion. Armed with cost and profitability data, institutions can then model budgeting, staffing, payroll and capital costs more accurately. This information also enables a fact-based assessment of operational approaches, including the ability to compare in-house and outsourcing or offshoring options.
Richard Furino, Callidus Software: IT has a critical role in assessing the feasibility of a merger. In particular, system capabilities, scalability and flexibility must be assessed in light of the combined enterprise with an eye toward generating the best long-term ROI. IT also can help determine which projects will have the greatest cultural integration impact on the combined organization. One critical element is a performance management system that will encourage behaviors, within the newly merged company, that support corporate goals. Ultimately, taking care of the people that face customers is crucial to the success of a merger.
Patrick Ruckh, First Horizon: Post-merger conversion costs can be pretty high, and if you don't convert to a single system, you won't get any benefits. Most often, the acquired bank converts to the acquiring bank's systems. That's one way to get the savings very quickly. The other strategy is to take some time and look at who has the best system and decide which one to convert to. If you have the time and you don't need the cost savings immediately, in the long run, that's the best way to do it. But these things are expensive to do, so the former is the best way to get savings in a hurry.
Simon Kennedy and Michael Spellacy, Boston Consulting Group: In smaller transactions, the issues often can largely be addressed during due diligence. Sometimes the acquired institution has valuable IT assets. Due diligence extends to the feasibility, desirability and likely costs of integrating these assets and developing an integration strategy. In major acquisitions, IT will play a critical role in every aspect of integration. Specifically, the IT decision-making and selection process is critical to mitigate the risk of both generating significant complexity and time-consuming integration, or of ending up with separate operations and little synergies.
Q: What is the CIO's role in a merger or acquisition?
Kennedy and Spellacy, Boston Consulting Group: Since IT is both an enabler of every acquisition and a significant source of savings, the CIO is critical. In typical integrations, 20 percent to 25 percent of the synergies are IT synergies and another 25 percent to 30 percent are IT-enabled (e.g., back-office operations, customer service, finance, risk management, etc.). Thus, one half or more of all synergies are related to IT. The CIO should be involved in all aspects of due diligence and with specific accountabilities for integration. Unfortunately, the CIO often enters the process too late, and IT synergy targets are set too high, misaligned or unrealistic, while integration budgets and time lines are set too low.
Klein, Oracle: The CIO and executive team are critical in building the value proposition behind the proposed merger or acquisition. A key part of the due diligence process is a thorough evaluation of the IT systems of both organizations involved in the deal. The IT team must accurately assess the ongoing costs for maintenance and enhancements versus the costs of migrating systems to a new solution. Often, however, IT teams fail to fully consider the true costs of less-flexible solutions that cannot rapidly meet changing market and regulatory requirements. As a result, legacy applications are frequently those that survive post-merger.
Q: Are the efficiencies that are expected to result from a merger or acquisition realistic?
Ruckh, First Horizon: As long as IT makes the commitments, they're realistic - particularly as you get rid of systems and redundancies. You get significant savings by consolidating data centers, consolidating systems and consolidating support staff. If you're doing a small M&A or acquiring a company that has its systems outsourced, however, there isn't much savings.
Kennedy and Spellacy, Boston Consulting Group: The stakes in IT integration are relatively high, with 20 percent to 25 percent synergies in similar businesses. But savings often are elusive. Managers underestimate the level of difficulty in migrating accounts or merging systems and the time required for integration. They overestimate the flexibility, extensibility or scalability of internal applications. Managers often misunderstand the complexity and discipline required to manage and implement a merger integration. Normal project management disciplines are insufficient to drive successful integrations. Mergers with sustainable results adhere to disciplined, rigorous post-merger integration management methods.
Klein, Oracle: Organizations that merge quickly and enforce the acquiring company's culture and structure realize expected efficiencies more often than organizations that transition the integration over longer periods of time. Business processes need to reflect a single integrated approach by the new company rather than allowing business units to continue to operate as they did premerger.
Furino, Callidus Software: The success of a merger often is judged by how well the new bank meets goals, such as improving customer satisfaction, increasing cross-selling and optimizing efficiency ratios. Sometimes, a single, high-leverage solution can quickly deliver the target metrics by driving top-line revenue growth.
Q: What are the best practices for merging IT organizations?
Ruckh, First Horizon: The best practice is to pick the best people for the job and not just have the acquiring institution automatically get all the jobs - but that's difficult to do. I'm not sure if it's even politically doable, unless there's a situation in which the acquiring institution's key personnel are getting ready to retire or planning to leave. The acquired institution never seems to win - and that's not a best practice. Whoever is the acquirer always wins. You don't see many CEOs stepping down because the other CEO is better.
Klein, Oracle: Prior to the announcement of a merger or acquisition, the acquirer or lead organization should develop a strategy, determine product and structural changes to the organization(s), and outline a communication and implementation plan that can be activated as soon as the deal is announced. The new organization must understand the changes taking place and how those changes will specifically impact operations across the enterprise. Determining which employees will remain with the merged company should be decided and communicated as quickly as possible after the merger or acquisition. This approach minimizes business disruption and allows the organization to begin the process of building the new team's identity and morale. Effectively communicating changes in strategy, products and organizational structure to customers must also be a top priority.
Furino, Callidus Software: In most cases, a post-merger bank will be larger, with new lines of business and more-diverse channels than either of the premerger organizations. Supporting rapid changes in size and diversity of the business requires flexibility and adaptation capabilities within the IT organization. Successful CIOs create an organization that demonstrates those core competencies. The organization must incorporate individuals and processes architected around a technical vision that supports scalable applications designed for long-term business success.