How can acquiring firms increase the chance of success in an M&A deal in terms of adding long-term value? With so many deals going through, it is time to take stock.
There has been a great deal of merger and acquisition activity in the world's wealth management and private banking sectors in recent years. Recently, for example, Barclays sold its Hong Kong and Singapore private bank to OCBC; Societe Generale has sold its private bank in Asia to Singapore-listed DBS, while in Europe, Royal Bank of Canada sold its Swiss private bank to Banque SYZ. Luxembourg-headquartered Banque Havilland has bought Switzerland's Banque Pasch; last year, Union Banque Privee, the Geneva-headquartered bank, bought private banking businesses in Asia and Zurich from Coutts. Some of these marriages and divorces are driven by a desire for economies of scale in an increasingly costly, rule-bound industry and some are caused by a desire to consolidate booking centres, reduce regulatory risk and complexity.
M&A deals can go wrong and there is a risk of unhappy marriages or regret in a break-up; some clients can be left unhappy at a deal and change banks; talented RMs who find their new masters not so congenial can get up and leave. The corporate takeover world is mindful of the statement that many deals destroy, rather than add, to shareholder value in the medium term.
So what makes for a successful, credible deal? In this article, Jacqueline Teoh and Amar Bisht, of Orbium, a technology and business consultancy, examine the terrain and provide some answers. The authors have worked across the world, so their views should resonate with readers in Europe, North America, Asia and elsewhere. The editors of this publication are pleased to share these insights and invite readers to respond.
Consolidation in private banking has recently led several players to vastly scale back operations and, in some cases, completely exit the industry. This consolidation has in turn offered opportunities for remaining players to strengthen their positions and increase their assets under management through mergers and acquisitions deals. Growing AuM organically is becoming increasingly challenging as the traditional practice of hiring seasoned private bankers from competitors slows down significantly. This is mainly due to the reluctance of private bankers to move firms given the increasing regulatory and compliance barriers in place to take their clients with them. In this "new normal", acquisitions are increasingly becoming the preferred option to grow AuM. The ultimate prize in these deals is the ability for banks to increase margins and economies of scale, enter new markets, reduce cost-to-income ratios, and enhance their range of products and services.
We have identified three main factors that successful acquirers have in common when executing M&A deals in private banking. We have also identified areas of attention for future acquirers to ensure that full value is being extracted from increasingly complex deals which often span multiple jurisdictions. Several industry studies have shown that not everyone is getting the intended benefits of M&A deals.
Based on our experience in Asia and Europe, we have observed that the following three factors are common in successful M&A deals:
(1) Customer focus
In executing an integration project, even while grappling with IT systems, processes and people, banks must put customers first. Mergers are known to increase the risk that clients will either exit the banking relationship or reduce their share of wallet. Through our engagements, we have seen the best integrators adopt a focused customer centric mindset from the outset. The bar is set very high for customer retention and deal models often include significant incentives to ensure high client retention rates.
Among the steps taken to increase customer retention are early meetings with top-tier clients by senior management to show commitment, proactive communication and the strengths of the acquiring firm. At every stage of the integration process, banks have to ensure that the customer experience is carefully nurtured. Examples of this nurturing include seamless transfer of accounts and even abandoning legacy support processes to enhance the overall customer experience. Recent examples include the set-up of a dedicated call center to help clients initiate their e-banking accounts during the migration process. Another illustration of client focus is the creation of customised "day one" welcome packs for transitioning clients to ensure a positive client experience.
Building a solid integration team with a motivated leader is critical to the success of the project. Integration is often seen as a career-accelerator and can be attractive for talented individuals looking to move up within the organisation. Although finding the right person to lead such mission critical projects can be challenging, if done successfully, it can be a game changer. The ideal candidate must be able to lead teams across multiple functions within both organisations to manage a highly visible, complex and time critical integration project.
Integration leads are expected to make rapid decisions including identifying and retaining the best talent from the acquired bank in order to reduce uncertainty. Lack of clarity on how the future organisation will be staffed is often cited as the reason top talent exits a bank in the midst of integration. Retention failures can have dire consequences as one industry player learned when they failed to retain a reputed CIO who did not see a position in the future organisation.
Despite the challenges, if a team and leader have successfully delivered, they are usually well positioned to repeat the exercise and build on their integration experience. This practice has been noted as several banks have become repeat acquirers. Making periodic acquisitions is helping these leaders to develop best practices and execute repeat deals faster and with much better results. Repeat acquirers are able to leverage an internal learning system for their leaders and convert it into a huge differentiating factor when it comes to successfully executing M&A deals.
At the end of the day, M&A deals are the successful adoption and integration of two company cultures. Building a uniform culture and reinforcing the values, beliefs and behaviours that determine how people do things in an organisation can ease the integration process and help deliver long-term value. Often the culture of an organisation can be defined in two aspects. Firstly, there is the visible aspect, which is demonstrated by how employees interact with each other.
Then there is the true essence of culture that is evidenced by management practices and how banks get things done. For a successful integration, the acquirer must quickly understand the culture of the target bank, diagnose the differences that matter and start shaping it right from the integration planning phase. Diagnostics using a range of tools can help identify and measure the differences among people, units, geographical regions and functions. They can also help the acquirer determine which gaps need to be closed. For example, a bank reputed for rapid decision making and a can-do attitude showcased this approach from the integration planning stage both through interactions and communication.
The work-stream leads reinforced this behaviour in their interactions with the target bank and tackled differences head-on to accelerate the process of cultural integration.
There have also been some cases of less successful integrations due to insufficient focus on the regulatory aspects and governance of the deal, and this has in turn led to significant cost over-runs and often reputational hits. Areas of focus for future acquirers are the following:
Complex multi-jurisdiction regulatory framework
Recently there has been a flurry of multi-jurisdictional deals driven by the need to increase geographic scope to new markets and client segments. Such acquisitions place the acquiring private banks right in the middle of challenging regulatory frameworks often without in-depth knowledge of the practices in those markets. Ability to rapidly put in place a compliance framework that addresses the regulatory requirements from all local jurisdictions while adhering to cross-border guidelines is a must. There is a tendency to underestimate the effort and costs involved in rapidly developing and adopting a compliance framework that is fully integrated with the bank’s risk view and in line with local regulatory requirements.
While banking confidentiality laws and regulations may pose potential complication to due diligence, banks should endeavour to benchmark a target’s regulatory risk framework to their own and industry best practices. Post-merger or acquisition, a bank has to demonstrate its ability to maintain appropriate governance, management oversight, and internal control and risk-management systems. This has to be undertaken rapidly to monitor and limit risk exposure at the start of merged business operations.
Finally, and most importantly, banks must also look upon acquisitions as an opportunity to re-organise and optimise their operating models and processes. An integration is a daunting exercise and banks often adopt what appears to be the easier option of introducing manual workarounds to facilitate the integration process. With time, manual processes become part of standard operating procedures and expose the bank to regulatory risks.
Banks also tend to discard the processes of the acquired bank, often missing out on the opportunity to address areas of identified weaknesses within their own organisation. The integration process brings with it the natural opportunity to improve. For example, a private bank adopted the credit processes of the acquired bank and also gave the overall responsibility for the merged department to a top talent from the acquired bank.
M&A in private banking will only increase as the race for scale intensifies. A poorly executed M&A transaction destroys shareholder value and makes the bank wary of further acquisitions. In a fiercely competitive industry, there are no second prizes for poorly executed M&A deals.
About the authors
Jacqueline Teoh is the head of business consulting (APAC) with Orbium. Prior to joining Orbium, she was a director at PwC, head of core banking for Switzerland and an associate partner at IBM Global Business Services, based in Geneva for 18 years. Amar Bisht is responsible for wealth strategy and advisory at Orbium, Business Consulting Services. He has lived and worked in Singapore, Hong Kong and the US. Prior to joining Orbium, he worked in the private banking industry in Asia-Pacific.