Seizing Opportunities in the Financial Sector
by Alan Gemes, Ivan de Souza, and Roberto Marchi
Upheaval in the capital markets is producing the most significant structural changes in the global financial-services industry in decades. Governments and regulators around the world are encouraging and leading this restructuring to a much greater extent than ever before. Besides assuming significant stakes in the industry themselves, they are offering financing alternatives to those willing to take over ailing institutions, create stronger balance sheets, and participate in market restructuring.
The most capable financial institutions are seizing this opportunity to acquire competitors, increasing their scale and seeking to benefit from the market discontinuity. This pattern was established at the beginning of the crisis, when JPMorgan Chase acquired Bear Stearns and Washington Mutual, Barclays acquired assets from Lehman Brothers, and Bank of America bought Merrill Lynch. Similar M&A activity continues in retail banking, mortgage banking, investment banking, and other sectors.
But just as in the past, when mergers and acquisitions often failed to meet the lofty expectations for value generation that were held by those who initiated them, too many financial institutions today are not prepared. They lack the proper tools and processes to fully understand the inherent worth of firms they are contemplating acquiring. And it often becomes clear, after the event, that the acquirers have not sufficiently thought out their integration game plans. They have focused on retaining talented professionals by addressing the cultural differences between the combined firms, devising large-scale internal communication programs, implementing large training programs, integrating operational and technological platforms, and eliminating overlaps and redundancies.
All of those familiar practices remain important and worthwhile. But in these troubled times, they are insufficient alone. Three additional integration success factors are particularly important.
First, executives of acquiring institutions need to quickly assess and manage the risks facing the new enterprise. Integration teams must quickly determine the status of the book of business (the accounts and commitments held by the company being acquired), looking for fragilities associated with the current environment (for example, derivatives and mortgage-backed securities). This is all the more relevant today because due diligence teams have very limited time to conduct an in-depth appraisal of a target’s financial statements. At the same time, those statements have become significantly more complex because of the use of new leveraged instruments. Management should also resist the temptation to immediately lay off staff involved with poor credit decisions, because these individuals may possess important knowledge of relevant transactions and internal procedures.
Second, in a market fraught with fear, management needs to recognize that even minor operational mishaps affecting customers could cause them to take their business elsewhere. This is not a time to place operational efficiency above customer loyalty. So acquirers need to pay special attention to reliability during the transition period, even at the expense of running platforms in parallel for a while.
Finally, remember that the staff of the institutions being acquired may feel distressed. This makes it even more important to boost the morale of the integrated staff and to win the loyalty of the employees of the acquired institution. The starting point for this is a transparent and fair performance appraisal process, which will encourage competent staff to remain in the merged organization.
As challenging as today’s climate may be, it clearly represents historic opportunities for the survivors and the consolidators. Financial institutions that can take advantage of M&A opportunities and also integrate the acquired firms in a thoughtful and value-preserving manner will emerge as strong players.
- Alan Gemes is a senior partner with Booz & Company based in London and is head of the firm’s global financial-services practice.
- Ivan de Souza is a senior partner with Booz & Company based in Sao Paulo and is managing director for South America. He specializes in strategy, marketing, and organization services for financial institutions and conglomerates.
- Roberto Marchi is a partner with Booz & Company based in Sao Paulo and is a member of the global financial-services team.
- Also contributing were Booz & Company Principal Eduardo Arnoni and Associates Alberto Silva and Rodrigo Sousa.