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The Looming Failure of Post-Merger Integration

by Kristin Moyer  |  January 23, 2009  |  6 Comments

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:

  1. 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.
  2. 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.
  3. 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.

Category: operations  

Tags: banking-and-investment-services  financial-crisis  ma  mergers-acquisitions  post-merger-integration  

Kristin R. Moyer
Research Vice President
14 years at Gartner
more than 20 years IT industry

Kristin Moyer is a Research Vice President in Industry Advisory Services/Banking and Investment Services. She has more than 20 years of experience across the global high-technology industry in a variety of roles. Ms. Moyer's research coverage includes… Read Full Bio

Thoughts on The Looming Failure of Post-Merger Integration

  1. Alex Bishops says:

    Excellent M&A article on IT…. simple, elegant, and thorough…well done! However, I would like to point out that most deals are done behind closed doors. Regardless of the premise driving the deal, IT is almost always a secondary consideration to the balance sheet in the banking industry. And, even with the major deals in play today, the time from the announcement to the close date has not varied from historical norms. This is when the IT teams usually begin their planning.

  2. Kristin Moyer says:

    Hi Alex, thanks for reading and thanks for the comment. Ideally, IT would not be a secondary consideration. Though I agree, it usually is.

  3. BrootSoft says:

    Have a look at BrootSoft as PMI for IT specialists with over 20 years in the industry. They have recently partnered with Capco to form a PMI powerhouse.

    They have case studies showing that they can complete an integration assignment in half the industry standard timeframe resulting in significant ROI.

    IT should be one of the major considerations as so much of the synergy between the two entities is derived from IT.

    Great post.

  4. Juan Tosoni says:

    Any business performing a significant M&A integration should have a framework that allows them to execute and track the PMI project end-to-end. There are many consulting firms with specialized services in this regard and leveraging PMI “dashboard technology” is an excellent method of keeping the full integration team on the same page at all times no matter what stage or business function. Companies can’t expect to keep a mammoth integration on track unless they leverage the appropriate tools from consulting firms or technology providers that specialize in PMI.

    Juan Tosoni
    Founder & CEO
    TX2 Systems, Inc.

  5. Thanks for a good post. Always good when attention is brought on post merger integration.

    I agree on all three mentioned points about complexity, due diligence and market. However, I believe that the most important risk is the fact that you are buying distressed or bankrupt companies and in the long run the value might deteriorate.

    A recent study by Cass Business School actually says acquisitions of distressed targets may create value for bidders in the short term, but struggle to improve returns in the long-term. This is to my mind particually relevant for the bank-deals we saw in the fall and winter.

    You can read more here:

    Best regards

    Author, Post Merger Integration Blog

  6. Kristin Moyer says:

    Great point, and thanks for the link. BoA was the first thing that came to my mind as I read through your comment, and I see it is noted in this link as well.

    The post-merger integration activity I’ve personally been involved with lately has been interesting. It’s not been with the distressed acquisitions that occurred over the past 18 months or so, but rather with banking organizations of all types, sizes and geographies that are trying to rationalize and consolidate redundant applications – ideally moving to a more modern architecture at the same time. This activity will result in cost efficiencies for sure, but lots of other benefits as well (agility, transparency…).

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