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Chief Investment Officer
Commercial Loan Automation
Most of our banks are on an acquisition track. While not all view acquisitions as a line of business, many feel it’s an important element of their growth strategy, and most feel that bigger is better. This is especially true as technology requirements demand scale for capital investment leverage and overall effectiveness.
As banks continue to grow by acquisition, the effectiveness of this strategy has been brought to question. Many mergers didn’t fulfill their promise and analysts are inreasingly more attentive to acquisition integration risk and execution effectiveness.
What are the key elements in making acquisitions work? How far do you go in cost cuts, how fast should you change the sign on the door and how much revenue enhancement can you expect?
1. First, remember what you bought. You paid a premium for this institution, and you want to make sure that premium doesn’t dissipate among draconian cost cuts and major changes in credit culture. Also, they couldn’t be doing EVERYTHING wrong if you paid a premium for them. Therefore, be careful not to throw the baby out with the bathwater; treat the acquired institution with respect and retain the elements that made them worthy of your acquisition dollars.
2. Be upfront about your values, vision and integration approach. The more the acquired institution knows about what to expect, the better the integration process will be. There are certain aspects of your culture that are at the core of your existence; share them openly and as “non-negotiables” with the acquired institution. On the other hand, make sure upfront that you are compatible where it counts the most – your credit culture. When credit cultures are dramatically different, there is a major customer impact when the culture changes, and, with it, customer attrition. When two different credit-oriented institutions combine, the price should reflect greater customer attrition than typical.
3. Build a bridge from where they are to where you are. Create a road map, spelling out the final destination and the milestones that will take place to get both institutions there. A detailed roadmap is necessary to help the acquired institution’s leadership and staff visualize how they’re going to get where you want them to go, including all aspects of the operation, customer relationships etc.
4. Remember the two questions customers will ask the most: “Will you change my checks” and “will my fees change”? Prepare your entire front line team to accurately answer the question and support them with scripts to overcome objections to the changes you know you’re going to undertake.
5. Be very specific about expectations and the definition of success in the new, combined company. Spelling out aspects such as how many calls do you require each week from commercial loan officers, to whom (customers, prospects) and whether they are in person or not is appropriate. People want to succeed in the new company but they’re not sure what it takes to be successful. You can help them by clearly painting the target.
6. Pay attention to the individual level; spend time with people from the acquired company to both learn who they are and let them get to know you and your company. Lay down for them the path to success and promotability and provide intense communication. These are ultimately the people who will define the customer experience and help the customer make final judgments about the effectiveness of this deal and its impact on them. The front line’s buy-in can make or break this acquisition.
7. Cutting too much too soon will debilitate your revenue growth capacity, no matter how carefully you cut. Don’t over-promise the Street, and both you and your customers will benefit from it. Just observe the many mergers that over-committed and under-delivered, and the decimated franchises they left behind. There are plenty of them!
8. How much to cut, how much to expect in revenue growth etc. are highly dependent on where both you and the acquired institution are with respect to these measures and the culture that comes with them. While it is important to remain flexible, it is equally important to identify the elements that will not change, and execute those as soon as practical (many aim for closing date). These include the values and culture you are committed to embracing and maintaining; financial goals that must be achieved; operational and technology conversions; and layoffs and other human resource changes (such as the new organization chart; who’ll stay and who’ll go; etc.). Candor pays off upfront, and you can always support it with retention bonus for impacted individuals whose job will be eliminated or at risk.
Two elements that are perennial considerations in lerger conversations are culture and grographic contiguity.
Culture indeed is a critical success factor for all organizations. It’s the glue that binds people together toward a common goal. Culture is not about a document or a set of values, though. It revolves around how people conduct themselves daily as they interact with all contstituencies, so leadership and people selection are critical elements to culture preservation.
As to geographic contiguity, it has traditionally been a major consideration for selection or merger partners. Many in-market mergers were driven by the financial gains of consolidation and redundencies, and became efficiency and financial moves. Technology and new generations of employees made geographic distances less essential in contemplating mergers. Enterprise Bank’s acquisition of Los Alamos National Bank is a perfect example, where a Midwest-based company was looking for a stable, growing and less competitive deposit base. The two companies are far from contiguous, but their balance sheets are perfect complements. There are numerous examples of similar deals, where acquisition integration might be perceived as higher risk due to the distance, but, in reality, minimal cost saves affect least disruption to current operations, staffing and the customer experience.
Several principles are helpful as you design your own integration process:
• Take the best of both worlds not just by paying lip service to it but in reality, demonstrated through organizational balance (having executives from both companies in senior positions), system balance (picking the right systems regardless to which institution had them) and overall merit-based decisions
• Be clear what will NOT change (vision, values)
• Give everyone an opportunity to success and buy into the new organization
• Be deliberate, thoughtful and highly disciplined in the integration process
The key to successful M&A strategy lies, like any other strategy, in its execution. Using these guidelines will help you develop core competencies for acquisition integration without necessarily building dedicated staff to get the job done.
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