The mergers and acquisitions (M&A) market for financial services organizations is showing signs of picking up, which means it’s time for organizations to prepare. In our last article, we highlighted key areas of focus that can help lead to a successful close. In this article, our team offers insight on considerations for postacquisition integration that can help further value creation.
In our last article, we discussed the importance of an integration plan. Specifically, we described the vital role an integration management office (IMO) plays in helping manage this process and making sure the organization understands which responsibilities transition on transaction close date. After close, the combined organization should put this plan into action with a detailed road map that encompasses each area of integration. This plan can help steer the combined organization’s future state and guide it through successful integration execution.
Designating a steering committee can be a helpful way to guide overall integration strategy, communication, and training. This committee should consist of executive or higher management levels from each area of the larger cross-functional team, with one executive-level leader designated as the steering committee leader. This leader should also direct the IMO regarding executive-level decisions. The committee’s responsibilities during integration should be documented in an official charter and include monitoring integration activity status and readiness. The committee can serve as an escalation point for issues and a final decision point on expense spending. The committee can also help facilitate alignment on key decisions based on recommendations from the integration teams and review potential integration risks to determine potential mitigants. The steering committee should have meetings to address key strategic points during the integration activities when critical decisions are necessary, as this committee is ultimately responsible for making those critical decisions when discrepancies exist between integrating organization philosophies.
The specific details of the integration should be led by the IMO, with each integration partnership treated as its own project. The most ideal IMO team consists of two to three dedicated individuals with a leader, a second in command, and administrative support. The IMO should use specific tools to manage the project, including:
The IMO should update the entire group involved with integration activities with a weekly email outlining accomplishments and next steps. This team should report to the executive-level leader who also heads up the steering committee.
To help work through integrations successfully, organizations should create cross-functional integration teams with members from both the acquiring and acquired organizations. Each team should assign a team leader with a backup from both the buyer and seller. While the integration road map guides the overall integration process and includes considerations for each of these functional areas, the integration teams typically are responsible for creating a list of integration activities related to their areas and the key decisions made throughout the integration process while tracking risks and issues as they arise. Typical integration teams include representatives for every area of the business, including:
Once established, these teams should document their plans for integration to address customer needs as well as team readiness and align those plans with the overall integration road map. The readiness status should be presented to the steering committee along with a go/no-go vote.
After the deal closes, it’s critical to properly conduct Day 1 and Day 2 accounting. This process involves recording the fair value adjustments and purchase accounting entries from the deal, recording updates to allowance for credit losses, setting up accurate amortization schedules, and consolidating the financials of the combined organization. Organizations should also make sure their processes and numbers are in full alignment with the closing documentation, the purchase accounting policies and workbook established during integration planning and closing, and any auditor expectations regarding controls and supporting documentation.
The Day 1 accounting process brings the opening balance sheet adjustments from the purchase accounting workbook to life operationally. Acquired assets such as loans and assumed liabilities like time deposits or debt need to be booked at fair values with entries for any premium or discount accounted for correctly. Likewise, any identified intangible assets, goodwill, and deferred tax impacts of the fair value adjustments need to be recorded. Moving to Day 2 accounting, the amortization of these fair value marks and intangible assets must be calculated precisely and recorded according to the appropriate methodologies, and current expected credit loss estimates related to the acquired financial assets need to be properly recorded. This process lays the foundation for the combined organization’s go-forward financial reporting, which is why accuracy is vital.
Successful operational integration hinges on aligning people, processes, and technology across the merging organizations. This undertaking is extensive and usually lasts several months, but it is essential for the combined entity to work and act as one organization. Cutting corners at this critical stage can lead to headaches and costs down the road that arise from disjointed teams, processes, and technology. The strategies that follow can help unite the new combined organization in three specific areas: people, processes, and technology. Each of the integration teams, in addition to the organization at an enterprise level, should consider these areas when executing the integration road map.
It might sound cliché, but it bears repeating: People are the most important asset in any M&A. They house critical insights into processes, policies, and historical contexts that should be explored and retained if possible. Identifying the people from the acquired organization with institutional knowledge and taking steps to help retain them through the conversion period (and potentially long-term) is critical. Developing retention plans, whether through bonuses or confirmed future roles, can help the combined organization hold on to this knowledge.
Customer relationships are also a key piece of any deal. Identifying and making efforts to retain the employees who are instrumental to those relationships can help preserve the acquired organization’s important accounts. If prominent figures depart, clients might follow – and jeopardize the deal’s projected value.
Above all, acquirers should exercise compassion when people’s livelihoods are at stake. The people dimension is a delicate aspect that requires empathetic change management. Transparently communicating their prospects as soon as feasible provides peace of mind and prevents disruptive turnover. Integration teams should quickly determine organizational needs and structure, openly share updates on position prospects, and present opportunities to apply for roles in the combined entity. Organizations should respectfully manage staff impacts through timely decisions and opt for retention over loss of intellectual capital wherever possible.
Managing the complexity of a process integration can be a challenge, especially considering that only so much preparation can take place before the deal closes. Each of the cross-functional integration teams should assess the processes in their functional areas that have been in place for both the buyer and seller. Typically, the IMO provides tools and tracking for these teams to perform a gap analysis that compares processes, identifies differences, and develops recommendations to bridge gaps while retaining best practices.
For example, deciding which products will remain from the acquired organization and which will be rolled into products already offered by the acquiring organization is important. Team leads should collaborate and discuss interdependencies, consider phased approaches, and align on an integrated operating model. When performing process and product gap analyses, the following considerations can be helpful.
Regulatory compliance is a specific piece of process integration that should be managed closely. As part of the due diligence process, organizations evaluate their acquisition targets’ or merger partners’ overall compliance management systems to make sure the general approaches and risk appetites of the two organizations are aligned or complementary. During integration, it’s important to make sure the combined organizations’ enterprise risk management process is effective and competently staffed and includes comprehensive risk appetite, tolerance, measurement, and monitoring capabilities.
Successful technology integration is pivotal during an M&A. Organizations should start by determining which systems to retain and identifying any potential duplication, such as overlapping account numbers, across the combined organization. Establishing a strong technology team and a robust process for system mapping is also essential to a smooth transition, both for the combined organization and its customers. Using advanced technologies, such as AI, can help identify potential outliers or anomalies during the data migration process. Combining those technologies with strategies like systematically analyzing data in bulk rather than relying on periodic sampling can enhance the efficiency and accuracy of the integration. It’s important to test and validate the data using mock conversions throughout the process, not just at the end, to catch any errors or issues along the way.
Technology that enables and enhances customer support is another vital consideration. Organizations can and should expect a surge in customer inquiries and requests during the initial weeks following the conversion. Taking proactive measures, such as using historical data to forecast call volumes, increasing staffing, and updating interactive voice response systems with relevant information, can help mitigate potential bottlenecks and issues. Debit card reissuance is often a necessity during mergers and requires meticulous planning for timing and execution as well as clear communication to customers.
This comprehensive list of integration milestones and considerations can help organizations plan system integrations and conversions.
After the deal is closed and integration execution begins, it’s critical to track progress toward a successful integration, including realization of the planned cost savings and synergy targets established during due diligence. Early on, organizations should identify key performance indicators to measure success in capturing anticipated synergies from combined operations, systems consolidation, duplicate function elimination, and other efficiency gains. Similarly, they should track and compare merger costs with anticipated costs.
Establishing a target operating model, confirming initial cost savings estimates, finalizing contract negotiations, making technology decisions, setting organizational structure and roles, and incorporating defined milestones into the integration road map can help manage this process. Key actions for organizations to take to best realize benefits from integration include benchmarking vendor contracts to market pricing based on the size and length of contracts; performing detailed vendor selection analysis to make informed investment decisions in areas such as core, digital banking, lending, and analytics solutions; and relying on an objective, data-based view aligned to industry best practices for go-forward staffing and organizational structure.
“Effective IMOs provide oversight and tools in support of developing the target operating model, including mechanisms to track progress against cost savings targets. IMOs and the steering committee should have industry benchmarks available as a point of reference and must understand what progress can be made against savings targets at the key operational integration date (usually core conversion) and what might need to wait for further process optimization.”
– Quintin Sykes, Partner, Cornerstone Advisors. Cornerstone Advisors is a leading consultancy that collaborates with Crowe to deliver comprehensive M&A services to financial services organizations across the entire deal life cycle
The integration road map should outline specific actions and timelines to achieve projected cost savings as well as metrics to monitor performance against those goals. Rigorous tracking of one-time implementation costs is also vital to validate initial estimates and identify any overruns that could affect expected performance of the combined organization.
The IMO typically oversees the execution of the integration road map by helping the combined organization steer and maintain focus, gauge progress, manage risks, maintain clarity, establish effective governance, drive accountability, and keep score. A strong IMO and steering committee can help keep core foundational objectives of the deal in focus: full value optimization, functional integration and risk management, and people and culture transition. In addition to the integration road map and IMO tools, other considerations for the IMO include:
As synergy initiatives and overall integration move into execution mode, it’s important to track these synergies throughout the process. Integration teams should continually evaluate the combined organization’s actual results against the deal model. For example, were vendor contract renegotiations as fruitful as expected? Were costs for changing signage on branches higher than anticipated? The IMO can also offer hands-on execution support for accelerated realization of key synergies, including employing robust data collection mechanisms that enable continual progress monitoring versus targets, providing centralized tracking tools, and increasing transparency with reporting dashboards. This data-driven approach allows management to course-correct if anticipated benefits fall short of projections. Having the detailed estimation for synergies and merger expenses coupled with assigned responsibility, timelines, and effective monitoring can help the organization hold integration teams accountable, adapt to changing expectations, and realize the value from the deal that the organization saw when setting its M&A strategy and identifying the right target.
While following an integration road map is critical in the short term to realize deal value, it’s also important to use that road map and tracking to learn from the deal and inform future M&A. Looking back at the deal after integration, the organization should objectively assess two primary aspects. First, was the operational integration executed smoothly, and did it create a cohesive combined organization? And second, separate from integration quality, were the underlying deal rationale and financial thesis validated? That is, did the deal deliver on the deal promise, including the expected returns, revenue synergies, cost savings, and other quantitative benefits? Tracking against the original M&A strategy, deal model, and success metrics confirms if the strategic objectives were realized and highlights where process improvements or strategy modifications can be made for the next M&A deal.
Even when the deal is closed, a wide variety of integration needs remain. Integration is often one of the most significant challenges in successful M&A, and executing it effectively is critical for delivering on the deal promise. Involving a third-party with extensive expertise in M&A for financial services organizations can be a helpful way to effectively navigate the integration with targeted support and a specialized IMO in a way that maximizes the deal value.
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