In our previous blog, we talked about the future of mid-size banks and evaluated strategic options including partnerships, the creation of bank utilities (or outsourcing to existing utilities) or leveraging the Banking-as-a-Service model.
The traditional merger and acquisition (M&A) route is still a strategy for growth and there are new approaches to M&A that merit examination.
There is some skepticism about M&A as a strategy, and when in-country mergers (and, even more so, cross-border mergers) are announced, there are typically three major challenges raised:
- Identifying meaningful synergies while avoiding value destruction
- Securing and realizing value from identified synergies
- Realizing the synergies on an announced timetable
It’s possible, however, that we have been looking at this through the wrong lens. Instead of realizing synergies once the deal is announced, perhaps more value can be realized before the announcement or in synchrony with the deal announcement.
Banks can act to make sure realization of value takes place more quickly and with more certainty.
A great deal can be done before a deal is announced. Banks can enter into partnerships at the business level, as corporate banking activities can realize efficiencies within the same country or across multiple countries. We have noted, for example, Kepler Cheuvreux teaming with Unicredit Group on research and stock brokerage activities. Banks can also collaborate to create utilities, pooling resources in areas such as risk modeling, Know Your Customer (KYC), and purchasing to gain scale, create centers of expertise and realize value through the growth of the utility.
Banks can also act to make sure realization of value takes place more quickly and with more certainty. For example, they can use outsourcing (application outsourcing or business process outsourcing) to secure a commitment from the outsourcing partner as to the value to be created. The outsourcing partner can receive part of the value up front; in some applications outsourcing cases, savings of 10 percent were agreed to and executed in the first year of the deal.
Data is another area of potential synergy. Banks can use analytics during the due diligence phase to assess the value of institutions’ combined data—and can start realizing this value during the pre-announcement phase. Depending on the types of products each of the banking entities carry, there could be upsell and/or cross-sell opportunities. There is also value in being able to bring together the customer data in a harmonized data set, looking at assets managed, revenue and products and conducting analytics on upsell and/or cross-sell opportunities, which can drive targeted marketing or bundling campaigns.
Finally, banks’ digital transformation will lead them to make their IT systems more agile and more modular: The greater the modularity, the easier the appropriation of those systems in the case of a merger and/or acquisition. Shifting from custom systems to packages, or even to Solution as a Service is a key accelerator of value realization.
Analysts have not yet factored this dimension into their evaluation of M&A, but it could increasingly change the market view of potential transactions, whether local or transnational.