Source: S&P Global Market Intelligence, Wipro Insights
We believe that this trend is likely to continue given the limited scope of organic growth. This is in the backdrop of a shift from active to passive investing and immense fee pressure across the capital markets value chain including asset managers, broker dealers and custodians. Moreover, sophisticated needs of tech-savvy customers and complex and ever increasing regulations are increasing the costs, resulting in depletion of margins.
Hence, to thrive in this challenging business environment, M&A is one of the most favorable strategic options enabling capital market players to quickly gain economies of scale, diversify offerings and develop next-gen technology capabilities to improve customer’s experience.
Do you know why majority of M&A deals fail to realize planned synergies?
According to a Harvard study1, 70% to 90% of M&A deals across geographies and sectors fail to generate value for the stakeholders within the planned timelines. It is not because the target acquired is not valuable, it is primarily because of sub-optimal PMI. Let’s dig a step deeper to identify key mistakes which can diminish your synergies:
- Lack of pro-active approach: Deal makers often start PMI planning after the deal has been announced. Subsequently, as the PMI execution starts late, the combining entities tend to get into the state of business-as-usual and people display more resistance to change. Typically, if you do not realize the planned synergies within 18 months from the closure of the deal, the chances of realizing desired value from the deal become minimal resulting in significant dilution of the shareholder’s value.
- Ignoring IT and operational issues: Many leaders do not pay attention to address the IT and operational issues during the PMI. Key challenges include lack of architectural stability of the IT infrastructure and disruption in operations due to poor transition of services from seller to acquirer. Hence, some of the customers switch to competitors causing direct financial impact while staining brand’s position in the market.
- Lack of cultural compatibility: We all know that organizational culture guides the behavior of the people. However, many a times deal makers fail to realize the cultural differences between the merging entities. Though some of the gaps can be filled through cultural enablers, however, in case of significant unaddressed divergence in cultures, it may be difficult to align the people of the respective organizations and realize the synergies.
- Poor change management: Last but not the least, we tend to undermine the fact that humans resist any change that is sudden or which comes as a surprise. Amidst the plethora of changes taking place around them, people feel insecure due to lack of transparency in communication. Moreover, with a sub-optimal talent retention program, some of the key talent choose to move to the safe harbors, often joining competitors.
Planning an M&A integration? Be mindful of below five imperatives
To maximize the value of your M&A deal, here are five imperatives I would highly recommend you to include in your PMI plan:
Figure 2: Key imperatives for a successful PMI