After cost-cutting came restructuring. Next comes consolidation

It may seem a touch early to be talking about another wave of consolidation in the investment banking industry. After all, six to nine months ago most firms were still in cost-cutting mode. Even today, many are concentrating on exploiting the fruits of recent restructuring – such as the integration of corporate and investment banking (at HSBC) or the consolidation of debt and equity activities (at Lehman and others).

But, if history is any guide to the future, the return of “Big M&A” – not least in the commercial banking industry with the US$47 billion Bank of America/Fleet Boston deal – will sooner or later spill over into investment banking and broking. When it does, bankers must not repeat the mistakes of past acquisition binges.

As the Wall Street Journal put it in January: “As firms exhaust cost-cutting opportunities for increasing share valuation, they will return to M&A as a core corporate strategy. When they do so, it is crucial that they incorporate the lessons learned from the recent spate of M&A failures.”

Across all banking sectors, Prudential Securities reckons the rate of consolidation is currently running at about 3% per annum. In the investment banking industry, there has been an increasing level of smaller scale takeovers of specialist outfits. Bank of New York has reinforced its services business with the acquisition of Pershing and increased the scale of its East Coast fund management operations through the purchase of a number of small firms, including Boston firms Beacon Fiduciary Advisors and Gannet Welsh & Kotler. Meanwhile, Deutsche Bank is poised to buy the commercial mortgage business of General Motors for about US$1bn. The number of niche deals is picking up – witness Barclays’ takeover of UK broker Gerrard and the auction of Panmure, put on the block by WestLB.

But the market can be unforgiving of badly conceived or executed mergers. Today, shareholders have power as never before. Failure to deliver the benefits of a merger will be transparent. There are two key problems facing firms undertaking a merger:

• The tactical implementation of M&A integration often lags or fails to deliver the goals required. A key factor here is the inability to integrate technology infrastructures quickly and efficiently. (see TRANSITIONS: IT due diligence – more time to get it right)
  
  
• Due diligence does not uncover all the problems of the firm being acquired. There may be a failure to uncover hidden financial liabilities or understand the incompatibility of different technologies.

In the retail-banking world, one of the factors underpinning Bank One’s success in the 1980s and 1990s was a data model that allowed the rapid incorporation of customer data into its CRM environment. This enabled it to buy a succession of smaller banks and start cross-selling products through them – and integrating their back offices – almost overnight.

Nations Bank, which became Bank of America when it bought BoA, is another proponent of having a process for merger in place that delivers integration quickly. Even so, the integration of the old BoA was complicated by the diversity of different systems within the bank which had itself a number of acquisitions within its empire that were not fully integrated. It will now be looking to apply its old approach to Fleet Boston.

This kind of approach is now influencing a lot of thinking on pre- and post-merger processes. CalTech in the US actually runs a course in this process. The course highlights four key areas:

• Successful integration planning during initial conception, negotiation, and due diligence
  
  
• Developing the acquisition integration framework
  
  
• Dealing with “below the radar screen” issues after the acquisition transaction is completed
  
  
• Building an effective communication program: getting the right messages to the right people

Building an acquisition machine is a combination of elements – some technological, some financial, some related to human resources. In this issue of TRANSITIONS we look in more detail at the technology issues involved in consolidation moves and ways of maximising corporate agility through restructuring.