The banking industry has undergone massive restructuring as a result of the financial crisis. Along with bank failures and government nationalization, mergers and acquisitions have dramatically transformed the banking landscape as we know it.
Now the hard work of post-merger integration begins. Banking is an IT-driven industry. While there are many important post-merger activities, the ability of banks to execute IT integration is a key success factor to achieving merger objectives.
Even under normal circumstances, history shows that post-merger integration frequently fails. The Economist did a study in 1999 that showed that two of every three deals did not work (source: Economist, 1999). Other studies have shown that 50% of financial services mergers from 1990-2000 eroded shareholder returns (Capgemini 2001), and that large bank deals have tended to perform worse than smaller ones (Merrill Lynch 2003).
Yet, these are not normal circumstances. At least 50% of post-merger integration activity in the banking industry will fail due to IT complexity for three main reasons:
- The size and scale of IT complexity of recent acquisitions is especially enormous – For example, Bank of America must integrate Countrywide, Merrill Lynch and LaSalle. JP Morgan Chase must integrate Bear Stearns and Washington Mutual. Barclays must integrate Lehman Brothers. Other large integration projects will include Lloyds TSB and HBOS, Banco Itau, and Unibanco, and many others. These were all extremely large organizations prior to recent acquisitions – now the word “enormous” takes on a new meaning. Large banking organizations have significant challenges with IT complexity and redundancy of applications, processes and data – much of this resulting from acquisitions in previous years. New mergers and acquisitions multiply this IT complexity to what will be an unsustainable integration pace for many of the acquisitions that have taken place.
- Little or no due diligence and planning occurred prior to these acquisitions – Strategic choices regarding post-merger integration, such as how to deal with the IT complexity of the merged firms, usually begin to take place prior to the close of the deal. One of the many challenges facing this wave of M&A is that these acquisitions were executed under severe stress with little or no due diligence and planning. Therefore, post-merger IT integration becomes a process that is force fitted after the merger occurs.
- The market is still in crisis – The financial crisis continues to plague even the strongest of banks, none of whom are immune to continuing struggles with liquidity. Banks are already struggling with cost/income ratios, and post-merger integration challenges will likely make them worse (see Banking Efficiency Needs More Than Cost Containment). In the midst of this, IT spending levels will be reduced. Gartner believes that internal IT spending will not recover until 2018. The daily fight for survival therefore makes it difficult to even begin post-merger IT integration planning, let alone execute it.
Despite the high failure rate of acquisitions, there are ways banks can improve their probability of success. Gartner has identified 10 ways banks can effectively address IT complexity in order to improve the success of post-merger integration in Predicts 2009: Banks Won’t Realize the Benefits of Technology Replacement and Integration.
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