Global capital markets are undergoing an unprecedented change marked by a consolidation spree. Though the economic impact of covid-19 pandemic caused an M&A lull during 1H20, our recent report  found that the year 2020 on a whole recorded $105 billion of aggregate deal activity, highest in the last five years.

Interestingly, the average ticket size of a deal increased by 4x from $105 million in 2015 to $420 million in 2020 – indicating an increased confidence of capital market leaders to go for larger and strategic deals. In fact, capital markets sector witnessed the largest corporate merger of 2020, where S&P Global agreed to acquire IHS Markit for $44 billion to gain scale and efficiency from its complementary businesses.

Figure 1: M&A in Global Capital Markets*: Value-Volume Analysis

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:

1. 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.
2. 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.
3. 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.
4. 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

1. Keep your eyes on the “core purpose” of the deal: Planning the PMI during due-diligence stage with a strong focus on the “core purpose” of the deal ensures a holistic and accurate estimation of synergies, preventing you from the “tip of the iceberg” illusion. Otherwise, most of the deal makers estimate synergies using generic thumb rules, leaving significant value on the table. Subsequently, PMI becomes just a reverse engineering exercise to achieve these limited, under-estimated synergies.
2. Quantify the deal value drivers: Remember that you can chase only those goals or targets which are quantified and have a firm timeline. Hence, based on the “core purpose” of the deal, identify and quantify key value drivers, be it operational, functional or technology related. A best practice is to create a dashboard to regularly check on the status and take an agile approach to take corrective measures to stay on track.
3. Ensure operational stability and quality of service: It is imperative for deal makers to have a robust Transitional Service Agreements (TSA) in place. This ensures that customers do not suffer when an acquirer takes charge of some of the target’s products and services. Moreover, assess how the deal will impact different customer segments. Connect with key accounts to assure them that the new entity will serve them without any disruption in service or degradation of quality.
4. Ensure appropriate budgeting and resourcing: Leaders need to ensure that the PMI program is adequately budgeted and an Integration Management Office (IMO) is in place. It is critical that the resources have proficiency in the desired skills to ensure a seamless integration of all the functions. Hence, if you do not have in-house capabilities, do not hesitate to connect with a vendor who can take-off all your PMI headache.
5. Communicate transparently right unto the grass root level: It is imperative for leaders to communicate transparently the key takeaways of the integration plan right unto the grass root level. Engage functional leaders to become your exponents and make sure your people know well in time how the organizational structure will change, how their roles or responsibilities will change, which support functions might get dissolved, and if they need to look for an alternative.

How can you drive results by following a comprehensive approach to PMI?

To drive desired synergies, a systematic and comprehensive approach to PMI is a must. It starts with a high level program management, followed by detailed operational and IT integration plans, closing with change management to ensure that your PMI journey is a sustainable one:

1. Program Management: PMI is a process where a number of strategic decisions related to sourcing and organizational structure are taken. Moreover, it has a very wide scope of activities under its purview – consolidation of overlapping business units and functions, re-alignment of the roles of key leaders, change in the performance evaluation criteria, and so on. Hence, it calls for a robust program management to develop business case for PMI, ensure rigor and enable collaboration between different functions.
2. Operational Integration: It is rightly said that operations is the heart of every business. Hence, dedicated attention is required to ensure seamless integration of operations. This entails designing a targeted operating model which serves as a blue print of the overall PMI program. Once the operating model is defined, focus on each function and analyze how it can be integrated to maximize synergies. Finally, get ready for the day 1 after the deal is closed. Ensure zero disruption in services by keeping in place robust Transition Service Agreements between the seller and the acquirer.
3. IT Integration: As IT enables over half of the overall synergies, allocate a dedicated working group to identify cost optimization opportunities across IT infrastructure, applications, as well as data. Consolidate and modernize the underlying IT infrastructure to meet the next generation needs of the business. Scan the combined pool of applications and decommission redundant ones. For rest of them, identify applications which can be simply re-hosted to cloud, and those which will need significant effort at the configuration or architecture level. Finally, streamline data reporting and processing workflows to maximize timely utilization of data and look for data monetization use cases to generate additional revenue streams.
4. Change Management: To ensure a sustainable PMI, a dedicated team is required to effectively manage the bunch of changes planned during the integration. This entails, clear and transparent communication to manage internal and external stakeholders at different stages of the M&A deal. Another critical aspect is to identify capability gaps in the combined organization at various levels across the business functions. Leverage industry best practices to develop a training program with detailed learning map for people to fill those gaps.

Lastly, it is rightly said that “well begun means half done”. Hence, don’t wait until the deal is announced and start integration planning right at the stage of due diligence. This provides you enough room to capture opportunities and manage potential contingencies.

Hope this was helpful, wishing good luck for your PMI journey!

Footnotes

*Capital markets include – wealth managers, asset managers, investment banks, brokers, financial exchanges and financial information providers

“Most Mergers Fail Because People Aren't Boxes” – Forbes, June 2019