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Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
Kpmg The Architecture Of Integration 2011 11
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Kpmg The Architecture Of Integration 2011 11

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An essential guide to successful mergers and …

An essential guide to successful mergers and
acquisitions in Financial Services

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  • 1. FINANCIAL SERVICESThe Architecture of IntegrationAn essential guide to successful mergers and acquisitions in Financial Services kpmg.com KPMG INTERNATIONAL
  • 2. KPMG specialists and contributorsAmericas Sam Evans PartnerRicardo Anhesini Souza Transactions and Restructuring,Head of Financial Services Latin Financial ServicesAmerica and Brazil KPMG in ChinaKPMG in Brazil T: +85221402879 E: sam.evans@kpmg.comT: +55 11 2183 3141E: rsouza@kpmg.com.br EMATim Prince Nicholas GriffinDirector PartnerCanadian Head of Integration Head of Financial Services,and Separation Transactions RestructuringKPMG in Canada KPMG Europe LLPT: +1 416 777 8883 T: +44 20 73115924E: tprince@kpmg.ca E: icholas.griffin@kpmg.co.uk nCarl Carande Stuart M. RobertsonNational Account Leader PartnerBanking and Finance Global Banking Transactions andKPMG in the US Restructuring Sector LeadT: +1 704 335 5565 KPMG in SwitzerlandE: ccarande@kpmg.com T: +41 44 249 33 45Thomas Fekete E: srobertson@kpmg.comManager Mohammed SheikhIntegration and Separation, PartnerTransactions and Restrucutring Head of Integration and SeparationKPMG in the US Transactions RestructuringT: +1 212 954 2182 Financial ServicesE: thomasfekete@kpmg.com KPMG in the UKMiguel Sagarna T: +44 20 78964992National Sector Leader E: mohammed.sheikh@kpmg.co.ukTransactions and Restructuring, Francesca ShortFinancial Services PartnerKPMG in the US Global Insurance Transactions andT: +1 212 872 5543 Restructuring Sector LeadE: msagarna@kpmg.com KPMG in the UKTiberius Vadan T: +44 20 73115056Senior Director E: francesca.short@kpmg.co.ukIntegration and Separation, Ian SmithTransactions and Restrucutring DirectorKPMG in the US Financial Services Strategy Group,T: +1 212 954 2107 Transactions and RestructuringE: tvadan@kpmg.com KPMG in the UKASPAC T: +44 20 73111496 E: ian.r.smith@kpmg.co.ukBernie CroweDirectorFinancial ServicesKPMG in AustraliaT: +61 2 9335 7667E: bernie.crowe@kpmg.com.au Written by Jeff Wagland© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 3. Contents Introduction – It is not necessary to change: Survival is not mandatory 2 Executive summary – Key findings and five recurring issues 3 Global MA – How financial services deals compare to other industries 5 Deal drivers – The changing characteristics of financial services MA since 2007 10 Key geographical differences – A look at how regions and countries are reacting to the new environment 12 Key factors in managing MA deals across FS sectors 16 Lessons learned 18 1 Take your time on the due diligence, but integrate fast 18 2 Revenue versus cost synergies 20 3 Communicate carefully with the market 22 4 Track progress 24 5 Cultural integration 25 Is the deal going to go well? Six key questions to ask 28 A wave of deals to come – KPMG professionals give their view on what to expect 30 The value of using an advisor 32© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 4. 2 | Introdu ctio nIntroduction Above the desk of one senior financial International’s latest global survey of services executive in New York is a MA activity, published as “A New framed quotation from the 20th century Dawn: good deals in challenging times” , academic and business consultant Dr and have asked financial services William Edwards Deming. It says, “It is partners around the world to compare not necessary to change. Survival is not and contrast these with what they mandatory” . see in the FS markets they know best. The result is this report, which offers a The truth of this lesson has been view on the drivers of FS MA activity demonstrated in the clearest possible Jeremy Anderson yesterday, today and tomorrow, along fashion as financial services (FS) Global Chairman, with professional guidance on how to companies throughout the world have Financial Services help ensure that a complex deal will struggled with the consequences deliver the value it promises. of a spectacular recession. The old conventional wisdom on how to run a We want to thank all those who took successful business has disappeared part in the original global survey and under a mountain of new regulation the KPMG professionals whose insight and radically changed market dynamics. has allowed us to focus on what this Organizations wanting to continue in activity means for the financial services this sector have had to think very hard sector. At a time of huge turbulence and about how and where they want to uncertainty, their contributions provide operate in the new market environment. a framework to help make sense of the John Kelly deals being done today, and give a clear To help anyone contemplating a merger Global Head of steer on the drivers of the deals that Integration EMA Head in the FS sector, we have taken the will shape the global financial services of Transaction Services conclusions developed in KPMG market for the next decade and more.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 5. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 3Executive summary This report examines the main themes of the global FS MA market over the last three years and looks forward to what the FS sector might expect in the short to medium term. It focuses on the strategic priorities that have been driving FS companies to dispose and acquire in this period, in an attempt to pin down the key factors that can distinguish successful transactions from potential failures. The source for much of the analysis in this study is the latest in KPMG International’s long-running series of surveys of the global MA market, published under the title “ New Dawn: good deals in challenging times” plus detailed interviews with KPMG A , financial services specialists around the world. The key findings are: • The wave of deals following the recession is now at an end; there is a new wave coming, the only question is when it will break • Competition will come from Asia-Pacific buyers and from a resurgent Private Equity sector • Cost cutting has given way to revenue growth as a primary deal driver; growing through acquisition is the new normal • Markets are still skeptical of values based on revenue synergies, but they can be persuaded by a well-supported argument • Old issues with poor planning, poor communications and lack of attention to cultural differences still persist; there is real value to be gained from solving these problems. This last point will be familiar to people who have read any of the numerous KPMG reports on the MA market published in the last decade. These are endemic problems, and a great deal of thought and energy has been poured into finding ways to improve the management of major deals. We have seen a distinct improvement in the levels of professionalism as a result, but for the FS sector in particular, there remain five main lessons for a successful deal: 1. The need for speed. Successful deals are almost always those that are completed fast. Long, drawn-out merger processes tend to lose sight of the original goal of the deal, and energy dissipates, leaving integrations only partially complete. Clarity of thought and rapid action are very important.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 6. 4 | E xec utive sum m ar y2. Serious attention to revenue synergies. Markets are naturally We have distilled these lessons into skeptical of revenue synergies, but six key questions that will give a if they are an important part of the good indication of whether or not a deal, they need to be included in the deal will be successful. They are: rationale. Work on developing strong, Is there a clear plan in place for persuasive arguments on revenue the whole of the deal, including synergies is rarely wasted. integration, with agreed metrics3. Communicate carefully with the to define and measure success? market. Investors today want to hear Can the plan be carried out bottom-up explanations of all the quickly? value drivers within a deal, delivered with confidence by the CEO. Do we know in detail what we are going to do the day after the4. Track progress. One of the most deal is completed? valuable things a company can do is to develop a reputation for How long is it taking to get carefully-tracked progress in answers to our questions from delivering the promised benefits from the target company? its deals. Integration plans need to Are we thinking hard enough have tough metrics built-in. about how we will integrate5. Cultural integration. Deals can and customers and employees into do fail because not enough attention our new, enlarged company? was paid to the cultural differences If this deal goes wrong, do we between the two sets of people being have the resources and energy brought together. Losing good people to do it all over again and get it is a hidden cost of poor planning that right? markets are looking out for.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 7. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 5Global MA – how financialservices comparesThis study of the financial services MA market is based, in part, on a wider study of the global MAmarket between 2007 and 20091. So before looking in detail at MA in the FS sector, we shouldlook briefly at the dominant trends at a global level across all sectors, and at how FS deals as a wholecompared with what was happening elsewhere.Perhaps the most surprising finding Many of the deals done in the FS sectorfrom the main report was that despite during this period were completed bythe impact of the recession on global privately owned acquirers, so for theseeconomic activity during these years, deals there is no publicly availablethe proportion of deals that actually information on subsequent share pricecreated value (as measured by the movements. But where this informationmovements in the acquirer’s shareprice relative to their sector) rose from was available, just under 70 percent of deals were followed by share price 73%   of companies in the   FS sector agreed that by the time the deal was27 percent in 2005–2006 to 31 percent changes that suggested an increase in complete, it will have createdin 2007–2009. corporate value, or at least a decline in value for the organization. value that was less than that experienced by the rest of the sector.By the time your plan for target company is complete, this deal will have createdvalue for your organization 5% 6% 4% 6% 12% Strongly agree 15% Tend to agree Global Financial Tend to disagree average (162) 56% services (34) 52% Strongly disagree 23% Not sure 21%Source: KPMG International, A new dawn: good deals in challenging times, July 2011.“A New Dawn: good deals in challenging times” KPMG International, 2011. This is the sixth in a series of KPMG reports on the global1MA market. The series began in 2000 with a review of MA in 1997 – 1998.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 8. 6 | G lobal MA – how FS c om pa nies c om pa r eThe general improvement in performance • A clear switch in focus from deals that synergies were chosen as a rationaleis explained by three main factors: were designed to cut costs, to deals by only 15 percent of FS companies, that generated growth in revenues. compared with 19 percent of all the• A reduction in target prices, companies surveyed. predominantly in the Atlantic markets, This last point seems to have particular caused by the gradual withdrawal significance for the FS sector. Asked of private equity houses from the about the initial rationale for the deal, Top 3 reasons behind a FS deal market as the recession took hold FS companies were much more likely than others to cite increasing market › Increase market share ›• The greater scrutiny that companies share, geographic growth, or expanding found themselves under from › Geographic growth › into a growing sector as major factors. recession-hit shareholders wanting All of these are measures associated › Expand into a growing sector › to be sure that a proposed deal really with increasing revenues rather than would create value consolidation or reducing costs. Cost© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 9. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 7What was the initial rationale behind the acquisition of the target company? Increase market share/presence 62% 48% Geographic growth 44% 35% Expanding into a growing sector 29% 27% Cost synergies 15% 19% Investment opportunity 9% 18% Enter a new market 15% 17% Acquire brand/additional services 15% 13% Diversify 15% 10% Acquire intellectual property or 6% new technology 8% Transformation strategy 6% 8% Expansion/increasing assets 4% Strengthing of Capital Base 3% 1% Other 6% 6% Refused 1% 0% 10% 20% 30% 40% 50% 60% 70% Financial services (34) Global average (162)Source: KPMG International, A new dawn: good deals in challenging times, July 2011© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 10. 8 | G lobal MA – how FS c om pa nies c om pa r ePricing factors revenue rather than cost synergiesThis need for revenues appears again in (65 percent versus 45 percent). What was the largest single factorthe reasoning behind the pricing of the in determining price? These responses show that the effecttarget company. Here, 68 percent of FS of recession on the revenues of FScompanies chose revenue enhancement companies has been relatively greateras their largest single factor indetermining price. Cost savings werechosen as a factor by only 41 percent. than for other companies, and that the need to rebuild revenue flows played a greater part in FS decisions to acquire 68% 41%There are clues to this focus on than it did elsewhere.revenues in two questions touching Turning to the management and Revenue Cost savingson the market conditions surrounding enhancement planning that went into integration ofthe deals. FS companies were more the target company, FS companieslikely than other companies to agree were reasonably quick to get fullystrongly that their acquisition had working management teams in toallowed them to deal better with market their acquisitions, with 44 percentor competitive conditions (55 percent saying their management team wasversus 46 percent). They were much in place and working within a monthmore likely to agree that the economic of completion compared with a globalclimate has led acquirers to focus on average of 48 percent.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 11. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 9Planning ahead Due diligenceBut FS companies were ahead in Given the longer planning period, it is Financial service companiesthe amount of planning that they curious that FS companies generally did less due diligence thancarried out prior to completion. appeared to do less due diligence than the global average. The mostA third of respondents in the sector other types of companies. FS companies common types they did weresaid that they began their planning focused on financial, commercial, legal financial, commercial andfor post-deal management more and operational due diligence, but in operational.than five months before completion, each of these areas, the proportion ofcompared with only 25 percent of the acquirers carrying out due diligence waswider sample. A large proportion of less than the global average.the companies polled in all sectors FS companies were more active than(27 percent) did not begin planning the average in carrying out due diligencefor post-deal integration until around on IT systems and strategic matters, but8 weeks to completion. they shared the general trend of putting HR due diligence at the bottom of the list.What types of due diligence did you do? 71% Financial (including tax and pensions) 81% 62% Commercial 62% 47% Legal 56% 50% Operational 56% 47% Strategic 45% 44% IT 42% 35% Human resources 38% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Financial services (34) Global average (162)Source: KPMG International, A new dawn: good deals in challenging times, July 2011© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 12. 10 | D eal d rive rs – the cha nging cha r a c t er is t ic s of FS M ADeal drivers – the changingcharacteristics of financialservices MAIn this section we will look more closely at the main drivers for FSdeals since 2007 and especially how they have changed from year ,to year. The four years since 2007 have clearly been a transitionfrom the end of an MA boom, through deep recession and into atentative recovery. 2007 2008-09 2009-10At the beginning of 2007 there was still businesses, and on the buy side by thoseenough momentum in the market for relatively few organizations able to takethe last big deals to go through at pre- advantage of the opportunity to pick uprecession prices. good quality assets at low prices.That gave way in the later part of the In many cases, these were not assetsyear and into 2008 to a slack period, as that would, in more normal times, havecompanies came to terms with the idea found their way onto the market. FSthat a recession was upon them and companies, particularly in the US andwaited to see how bad it would be. parts of Europe, were being forced to ‘cash in their chips’ selling highly valuedLater in 2008 and into 2009, deal activity assets that they would have preferred topicked up, driven on the sell side by keep, simply in order to raise the capitalbanks and insurers needing to raise necessary to stay in business.capital to shore up poorly performing In the US, legislative changes and the financial crisis drove a multitude of deals that may or may not have added up to muchof an increase in value. It can take two or three years to work outwhether a deal has been successful.Tiberius Vadan, Senior Director, KPMG in the US, Integration and Separation, Transactions and Restructuring© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 13. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 11 2007 2008-09 2009-10In 2009 and 2010, capital was still king, Tiberius Vadan, from KPMG’s USbut rather than driving the market member firm says that the upheavalforward it acted as a brake. Deals that in the FS market has had a liberatingmight normally make perfect sense from effect on thinking about how businessesa business perspective were not being should be organized. “Right now, peoplecompleted because they would absorb are listening to creativity. he said. “A lot ”too much of this precious resource. of strategic new thinking and value is Growth throughThis was not just a reaction to the being created by unlocking assets that acquisition isemerging problems of business done were stuck in environments where they were not allowed to flourish. ” the new normal. Thosein the past. It was nervousness of the that can’t or won’tnew and significantly tougher capital But this is not an entirely comfortablerequirements that banks and insurers experience, especially for the old guard accept this will beexpected to be imposed on them by of FS managers, many of whom have snapped upnew regulations. found their fundamental beliefs about their business either challenged or Miguel Sagarna, National Sector Leader,For some of the bolder and better completely shattered. Miguel Sagarna, KPMG in the US, Transactions andcapitalized companies, however, this Restructuring, Financial Services also from KPMG in the US, says that FSphase of retrenchment has presented organizations have gone through a painfulopportunities to do deals that might not period of self-examination. The market ishave seemed feasible during the boom. demanding growth, and those that haveThe Bank of America/Merrill Lynch realized that the prospects for organicmerger, for example, was a surprise to growth in their existing businesses arethose who felt that the cultures of the poor, have had to take the stark decisiontwo organizations were so different of whether to be an acquirer or a target.as to be entirely incompatible. ButBank of America was able to pick up a “The sector is still trying to sort itselfdistribution channel for its investment out, says Miguel Sagarna, “but it’s ”banking division which gave them a clear that the new normal is that growthclear benefit which might not have been through acquisition is going to be partavailable at any other time. Similarly, of any organization’s strategy goingthe wave of acquisitions in Europe and forward. Those that can’t or won’tthe US made by the big Spanish banks, accept this will be snapped up. ”Banco Santander and Banco de Bilbao,were felt by many to be an opportunisticreaction to a unique and possiblyunrepeatable set of circumstances. In Asia, the challenge for many organizations is how to overcome regulatory and valuation issues to accessmarkets that are growing at 25–30 percent a year. If you get inat the right time, you are growing the market by entering. Thetrick in the current environment is to find the right partner oropportunity in an increasingly competitive arena.Sam Evans, Partner, KPMG in China, Transactions and Restructuring, Financial Services© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 14. 12 | Key ge og rap hical d iffer enc esKey geographical differencesAsia-Pacific region The last 12 to 18 months have seen a “Ownership restrictions typically preventIn the Asia-Pacific region (ASPAC), the significant amount of transaction related foreign companies gaining control, says ”very active MA markets of 2007 and activity in the bancassurance sector, as Sam Evans from KPMG’s member firm in2008 have cooled as the delayed impact banks and insurance companies look to Hong Kong, “so there tend to be a lot ofof global recession has had its effect. secure potentially lucrative distribution joint ventures and strategic investments, opportunities. Many regional players combined with capability transferBy contrast with some of the Atlantic have used bancassurance opportunities programs where big banks and insurersmarkets, ASPAC FS companies have to gain access to high growth focus on helping their local partnernot had significant capital pressure developing markets. develop their businesses. ”or a need to implement a very heavyround of cost-cutting. Increasingly FS But governments in the region also Australiacompanies are focused on controlling recognize the value that their economies In Australia the FS sector has remainedcosts and improving cost/income ratios, have to offer foreign acquirers, so it is relatively untouched by recession, leavingbut there has also been, and continues common to find legal restrictions on the the large banks well capitalized andto be, an emphasis on delivering growth percentage of a domestic FS company looking for opportunities to consolidateand expansion into new markets. that can be owned by a foreign partner. their position.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 15. Th e a r ch i t e c tu r e o f i n t eg r at i o n | 13China leverage the significant opportunities across the different markets. Deal rationale andIn China, banks and insurers havebeen focusing on opportunities in their motivation in Asiadomestic market. But there is evidence “In the initial phase, everyone jumped in, thinking that they really need to have is quite different, andof a gradual shift in focus towards a business in China. says Sam Evans ” this has implicationsoverseas markets, with some Chinesebanks pursuing opportunities in the of KPMG’s member firm in Hong Kong. for the way youUS and South America. Going forward “But now, in the second phase, people are asking themselves whether they approach the post-dealwe expect to see a significant increase are really making money here. There is environment. Often,in activity, as the major banks andinsurers turn their attention to overseas a much greater awareness of what is you are not looking at aacquisitions. strategically important, who is the right partner, and what parts of the market formal integration.There is also evidence among foreign should be focused on. Some companies Sam Evans, Partner, KPMG in China,investors of a more fundamental review have pulled out entirely, while others Transactions and Restructuring,of ASPAC strategies and how best to have sold non-core assets to focus on Financial Services their main business. ”© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 16. 14 | Key ge og rap hical d iffer enc esThe Atlantic markets or not remains to be seen; a lot of of 2010. Activity is expected to remainThere is a view emerging from the deals were done at high prices, and the high, for the rest of this year at least.global MA survey that deals done market is watching to see how well the integration plans and synergies work Canadarecently in the US markets havegenerally been more successful at before coming to a judgment. Canadian financial services companiescreating value than those done in have a rare opportunity to make some There is a clear appetite now for dealsEurope. It is not clear that this can be major acquisitions in other countries that will generate growth. Potentialsaid of deals done in the FS sector. on favorable terms. Canadian banks acquirers feel they have come through have come through the global financialIt has been argued that the sheer size of the worst of the cost cutting and want to crisis relatively unscathed, and theythe US market for financial services will move into an expansionary phase. What are now very well capitalized with fewtend to make deals more successful, is holding this back is uncertainty over opportunities for acquisitions or organicwith relatively fewer regulations and imminent regulatory changes combined growth at home.restrictions than the more complex with a determination not to overpay.European markets, combined with labor Their primary area of interest is, Brazil naturally, the huge US market southlegislation which makes downsizingeasier to accomplish. Economic problems in the developed of the border. There is already a economies have highlighted strong lot of interest in selecting suitableBut successful deals in the Atlantic growth in other parts of the world, acquisitions, especially banks that aremarkets have generally been those that particularly in Brazil. Reuters puts strong at the state level which can servehave been done quickly and with a clear, Brazil’s average annual economic as a base for further expansion. Butachievable rationale in mind. Speed of growth rate since 2004 at 4.4 percent, some institutions are venturing furtherintegration is a major factor in the success peaking last year at 7 percent, its .5 afield, assessing possible acquisitions inor failure of a deal, and deals where fastest pace in 24 years. South America, particularly Brazil, and incultural or organizational issues have not the Asia Pacific states.been thought through and resolved in This prosperity has stimulated demandadvance, tend to run a high risk of being for financial services, so it is little Canadian financial services people areseen by the markets as unsuccessful. surprise that the past four years has generally cautious and conservative, seen a vigorous round of consolidation and there is a history of failed foreignUS among the large retail institutions, acquisitions whose lessons they areThere has been a brisk market in failed with Santander and Banco do Brasil keen to learn. There will be activityor troubled US banks and insurers, but especially acquisitive. In the first six in this market, but it will be careful,most of the big deals have now been months of 2011 there were 22 major deliberate, and done on the right terms.done. Whether they were successful deals, compared with 28 for the whole© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 17. Th e a r ch i t e c tu r e o f i n t eg r at i o n | 15European Union UKFor those countries hit hardest by debt The aftermath of the financial crisis is still European bankscrises, particularly Ireland, Greece, working its way through the UK financial generally thinkSpain and Portugal, financial servicessectors problems have swiftly become services sector, with several major banks still effectively under State control they can easily integratesovereign debt problems as banks and being required to divest non-core the US arm into thehave turned to governments for businesses. At the same time, and in bank’s Europeansupport. Widespread exposure to theweaker economies has damped down addition to the anticipated impact of new European legislation, the UK Finance operating model. ButMA activity across the continent, Minister has announced plans for a major they soon realize thatbut well capitalized FS companies, overhaul of financial sector regulation, significant differencesparticularly those based in Switzerlandand, paradoxically, the large Spanish which will include proposals to require banks to separate their retail operations in products, servicesbanks, have taken the opportunity to from their investment banking arms. and customer/employeestrengthen their market positions. This is fertile ground for a lively MA culture exist. AddressingThere is some pent-up demand in the market, and a substantial number of UK those differencessector, which is being held back (as inthe US) by uncertainty over the detail of FS companies are undertaking internal reviews which will almost certainly can lead to extendedforthcoming legislation and changes in result in new assets coming on to the integration timelines,capital adequacy requirements. There are market in the next two to three years. incomplete integrationalso signs of interest in the sector fromacquisitive Russian interests, who may Shrewd acquirers will be active, and commentators are expecting a and synergy leakageplay a significant role in the next few years. re-emergence of the PE houses in which could ultimately this market, as well as trade buyers undermine the success from the UK and elsewhere. of the deal. Thomas Fekete, Manager, KPMG in the US, Integration and Separation, Transactions and Restructuring© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 18. 16 | Key factors in m ana ging M A dea ls a c r os s FS s e c t o r sKey factors in managingMA deals across FS sectorsIn this section we have summarized the main characteristics of the MA deals carried out recently ineach of the main FS sectors. This is not intended to be an exhaustive list of deal features. Rather, it ishere to highlight the key differences in approach between the sectors, and to give some insight intothose factors most likely to shape deal negotiations now and in the immediate future. Banking Deal team Common deal Common deal Post-deal structure and Pre-deal planning Cultural fit drivers priorities integration management Distribution Technology Deal teams often Tendency to focus Not a strength Internal cultures separate from on cost savings for this sector, are often strong, Geographical/ Cash implementation – assumptions especially but relatively market growth management teams. of 25–40 percent for big retail little attention Capital Operations savings not banks. Teams is paid to how Small groups requirements uncommon. responsible for they might affect Continuity focusing on implementing the success of a Regulation particular Establishing core the deal are often deal. A common aspects of the and non-core different from view is that if deal with limited businesses. those who do pre- a deal makes understanding of Cultural issues deal planning, commercial the whole. generally low so key targets are sense, then the Patchy on the list of often lost or not cultural aspects communication. priorities. tracked. are not relevant. Day 1 continuity Integration takes Different very important 18–24 months, customer for customer which is too long, cultures, e.g., confidence – energy fades and US customer means much IT/cultural issues expectations attention paid are often left versus those to IT. unresolved. common in Europe, can also prove difficult to assimilate.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 19. Th e a r ch i t e c tu r e o f i n t eg r at i o n | 17 Insurance Deal team Common deal Common deal Post-deal structure and Pre-deal planning Cultural fit drivers priorities integration management Distribution Risk Large teams with Attention to Shares many of Becoming more many specialists. due diligence the problems important in Scale benefits Continuity generally of the banking deal planning, Team Cross-selling/ Talent retention improving, sector. especially if management at a bancassurance especially in sales forces are premium. Rare to see ASPAC following involved. But still Capital convincing In-house MA past due diligence not an area of requirements stretch targets teams becoming failures. strength. being developed more common, Focus on risk and and introduced but matched actuarial analysis, centrally. by increased distribution Integration plans willingness to matters often devolved seek outside help. especially where too far down the bancassurance organization, and is a deal rationale left to the wrong and where people. different sales Merging different forces are sales forces with involved. well-developed Merging big cultures is a insurers is still a particularly developing field. difficult problem. Investment Management Deal team Common deal Common deal Post-deal structure and Pre-deal planning Cultural fit drivers priorities integration management Core business Retaining key Often MA Where merger Tends to be done A key driver of deal model relies on personnel specialists with specialists quickly and well planning, and a growth through wide experience. are involved, by the merger focus of attention Speed acquisition can be a very specialists, helped where individuals Well organized, well organized by strong expertise and teams are Product range focused, clear plan process. May be and a clear plan. seen as having enhancement of action. seen as inflexible, commercially Generally a less Distribution but generally very important client complex task effective. relationships and Better asset than merging a fund performance growth through Clear idea of what big retail bank or track records. improved parts of the target insurer, but close management are valuable, attention to the what to do with real value drivers them, and how in the business to dispose of the and to those with rest. the customer relationships means a greater chance of measurable success.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 20. 18 | Les so ns learne d 1. Take your time on due diligence, but integrate fastLessons learned 2. Revenue versus cost synergies 3. Communicate carefully with the marketKPMG’s long-term analysis of the factors behind successful MA 4. Track progressdeals, combined with the comments on recent activity from our 5. Cultural integrationspecialists, has highlighted some common issues relating to theFS sector. We have summarized them here.1. Take your time on the due diligence, Deals done fast but integrate fast. may look goodSome of the very biggest recent deals goes into creating a framework that they financially, but if you arein the FS sector have been completed can drop organizations into. When they planning to leave yourafter astonishingly short due diligenceperiods. There are undoubtedly some have a deal, they don’t prevaricate, they integrate very quickly, putting pressure underlying systems andvery talented analysts working in the into the system to get it finished fast. ” operational integrationsector who may indeed be able to This focus on speed of implementation until later, you are storingassess a business in a matter of hours,but it stretches credibility if two large is relatively rare in financial services. up trouble. The longerbanks, for example, claim that they are It can be found in the insurance sector you leave it to complete where the past two years have seenideal candidates for merger after only a some very well executed deals. But your integration, thefew days’ work. among those deals that fail to live up harder and moreCarl Carande, who leads the FS integration to their promise in terms of revenue or expensive it gets.practice of KPMG’s US member firm, says cost synergies, it is common to find thatthere is no way that proper due diligence the pace of integration has been slow. Carl Carande,can be completed over a weekend. “The National Account Leader, In investment banking, a European bankpre- and post-completion work really need KPMG in the US, faced the task of integrating a newlyto be seen as one process, he says, “and ” Banking and Finance acquired trading team, chose to integrateif the early work is not done well, the fast. Age Lindenbergh, a Partner inintegration will be difficult. With one recent KPMG’s Transactions and Restructuringclient, they thought they had finished the Dutch practice recalls, “They haddue diligence, but we then handed them derivative traders that had been head-ona further set of around 90 questions competitors for most of their lives andcovering important details about operating we were concerned about their ability toplatforms, tenure of key people, product work together. Bringing them together,lines and operational capabilities that were to work on one floor immediately aftervital for integration planning. They had to closure of the transaction turned outhave this information if the integration was to be a decisive factor in building agoing to go smoothly. ” strong, new, joint culture and to reap theBut with the due diligence complete, expected synergies.successful deals are generally completed Depending on the size of thefast. The FS sector leaders in this area are organization, proper integration can’tthe asset managers, possibly because really be completed in less thanso much of the value in the deals they do nine months. But KPMG specialistsis tied up in the individuals in the target across the world cite deals where thecompany who may leave unless they feel integration process is still not finishedsecure and valued. Ian Smith, of KPMG’s two years later, often because theUK member firm is very clear on what planning necessary to decide whichmakes the asset managers successful. parts of the business should be kept and“They create a very focused and clear which should be sold, or how differentmodel for growth through acquisition, ” parts of the combined business willhe says. “What makes it work is the work together, does not even start untilclarity, the thinking and planning that after the deal has been completed.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 21. Th e a r ch i t e c tu r e o f i n t eg r at i o n | 19 When you are integrating a business, you focus on three things, protecting the value in the deal, managing and mitigating any risks, and creating momentum. Ian Smith, Director, KPMG in the UK, Financial Services Strategy Group, Transactions and Restructuring“Too often people do not have a clear underlying performance of the business The most difficult problem causedidea of what to do once the deal has declining as a result. A measure of by slow integrations is the onebeen done, says Nicholas Griffin, Head ” distraction is almost inevitable, but the mentioned by Ian Smith – dissipationof Financial Services, Transactions problem is amplified if managers are of energy leading to the acceptanceRestructuring, KPMG Europe LLP . co-opted onto workgroups to implement of integration issues that should be“On day one they start the conversations the integration of their parts of the solved. An integration that is only partand so begins 6–12 months of business, without adequate external completed can create an organizationdiscussions over the merits of the support and with no clear idea of their that is a jigsaw of different IT systems,respective models and systems, trying to own future with the organization. management systems and cultures.find common ground. Eventually, energy KPMG’s past investigations into MA Bernie Crowe, of KPMG’s Australiandissipates, everyone forgets what was management and value creation have member firm, points to one recentdriving the deal in the first place. They shown that it is very challenging for example where “ the work streams ...move on to other matters, often leaving partly-integrated organizations to deliver that had support from advisers workedlegacy problems unresolved. ” the value that their shareholders expect. well. But those that didn’t suffered from It is even more difficult for them to doThe most immediate problem of a lack of focus and were less able to the next merger or acquisition, becauseslow integration is managers getting define a target future state and execute they are often still struggling with thedistracted from their day-jobs, and the a plan to implement it.” legacy problems of the last. Case study Integration management One example of successful management tools, templates and development of a highly effective integration management planning collaboration processes that would target operating model for post-deal involved a large US bank which was improve the running of the project. conversion. acquiring a smaller but strategically The assessment phase of the A KPMG adviser who worked on important rival. project was completed with the the deal comments, “I think we The acquirer had not done a major assistance of the KPMG team, identified two main issues from deal for 10 years, so it brought in leading to an integration program this project. First, the need for a a team from KPMG’s US member involving 21 different work streams, strong, well resourced IMO team firm to support the in-house with separate integration teams very early in the deal, able to begin Integration Management Office covering areas including retail and the integration planning well before (IMO) in its planning for deal closure sales management, operations, completion. ” and post-deal integration. finance, HR, training, and consumer “Second, the importance and corporate credit. The KPMG team’s first task was to of keeping close track of evaluate the IMO team itself and Coordinating these streams was dependencies and interconnected suggest any necessary changes to a major task, but it was very risks in the management of the the structure of the team and the important that there was effective integration teams. This was vital program of work it had planned. cross-functional monitoring and to allow the IMO to maintain an With no recent experience of regular reviews to ensure that the accurate picture of the critical a merger, the IMO team was integration plan would deliver the program path, while allowing the not familiar with the progress in promised business benefits, cost integration teams to understand management techniques that had and revenue synergies. KPMG how their work affected the been made in the past decade, advisers worked closely with the realization of the deal goals.” so KPMG advisers were able IMO team on this task, resulting to suggest a range of project in a seamless deal closure and the© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 22. 20 | Les so ns learne d 1. Take your time on due diligence, but integrate fast 2. Revenue versus cost synergies 3. Communicate carefully with the market 4. Track progress 5. Cultural integration2. Revenue versus cost synergiesFor most of the FS companies distribution, developing new product problems for acquirers; deals have covered in the study, and also for the lines, or entering new markets. But, collapsed because of it.clients of the KPMG teams that have compelling though these opportunitiescontributed to this report, the phase of might seem when the deal is beingfocusing heavily on cost cutting is over negotiated, revenue synergies are Financial service companiesand the emphasis now is on finding rarely given much weight by the generally target more revenueopportunities for growth. equity markets when they are valuing synergies than the average a deal. This undervaluing of growth especially in cross sellingThat means looking for opportunities to products and services. opportunities has caused substantialbuild revenues, often through expandingWhich of the following revenue synergies were targeted in the deal? Growth of market share in existing markets 62% 56% Expansion into new geography 53% 46% Cross selling products and services 53% 37% 32% Expansion into a new sector 30% 9%Leverage of intellectual property and technologies 20% Other 3% 2% 3% None/refused 7% 0% 10% 20% 30% 40% 50% 60% 70% Financial services (34) Global average (162)Source: KPMG International, A new dawn: good deals in challenging times, July 2011© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 23. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 21The underlying logic for this skepticism of KPMG’s UK member firm says thatis clear. Cost reductions are directly acquirers need to be able to answer I have a databaseunder the control of the acquirer, whocan, for example close redundant some pretty fundamental questions. of 3–400 dealsdepartments or reduce a labor force “If businesses can absolutely prove that they wouldn’t get the growth without which shows that whilevirtually at will. Revenue synergies, acquiring a particular business, then the cost synergies are oftenhowever, are often in the hands ofclients and customers, who may or revenue argument might have some announced, revenuemay not choose to do business in the value, she says. “But there is always ” the question, ‘Why can’t you do that synergies are talkedway that the architects of the deal anyway? Why do you have to do the deal about, but that’s all.are predicting. It is the extra level ofuncertainty that leads markets to to get this growth?’ This is especially More robust analysis ofbe skeptical of deal values based on true in bancassurance, for example, where businesses may well have done revenue synergies willanticipated revenue growth. several similar deals in the past and definitely help.Despite this, it is possible to persuade may be challenged on whether they aremarkets of the value of revenue making good use of the distribution they Tim Prince, Director,predictions, provided the arguments already have. ” Canadian Head of Integration and Separationare strong enough. Francesca Short© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 24. 22 | Les so ns learne d 1. Take your time on due diligence, but integrate fast 2. Revenue versus cost synergies 3. Communicate carefully with the market 4. Track progress 5. Cultural integration3. Communicate carefully with the marketMarkets are generally easier to This may seem to be a prudent and carefulpersuade of the value of revenuesynergies if the CEO is able to speak line to take with skeptical markets, but if revenue growth assumptions are built into The story needsconfidently and convincingly about the price (and vendors will do their best to to be complete,them. It’s common to hear business make sure that they are) then the markets clear, compelling andleaders telling their audiences thatthere is a strategic rationale for the deal, will need to hear a good explanation of how these assumptions will be realized. convincing for all thethey are going to pay a certain amount audiences that willfor the acquisition, there will be these In some countries, like the UK for example, there are requirements built need to hear it.cost savings and, if all goes well, the into the rules governing takeovers todeal team thinks that this combination Tiberius Vadan, Senior Director, KPMG ensure that the acquirer does reportof businesses will produce revenue in the US, Integration and Separation, on all the synergies cited duringsynergies of X. Transactions and Restructuring price negotiations. This might make a Case study Separation and  transitional service agreements In the complex group structures clear that if both businesses were time. When it emerged early on that that are common in today’s FS to remain operational during the TSAs would be needed, the KPMG companies, it can be very difficult to transition period, some form of team worked with the client and the separate out businesses earmarked TSA would be needed. acquirer to identify precisely where for sale if a significant part of their support was necessary, and to iron As Mohammed Sheikh from operational support, in the form of out the details. KPMG’s UK member firm says, IT processing, finance or HR, the vendor is rarely a specialist A KPMG adviser who worked is provided centrally by the group. in providing services to external on the deal says, “The deal was In these cases, a solution may clients, which means that the completed seamlessly, and we be to agree Transitional Service operation of the TSA may not be were glad that we had been able to Agreements (TSAs), so that the as efficient as it could be from a start shaping the TSAs early in the support services continue to be specialist provider. A further issue process, because they were key provided by the seller for an is that the acquirer does not have to the successful operation of the agreed period post-separation. full control of the business they post-close interim and long term have bought until the full process of business model. ” This was the case with a US-based transition is complete, meaning that international financial services “But a key lesson we took from the the integration process takes longer organization which KPMG’s US deal was that there are significant and can cost more. member firm helped in the disposal benefits to be had from changing of its retail asset management In this case, the KPMG team focused finance arrangements as early business. A key rationale for the on effective communications to as possible to avoid the need for deal was to allow the KPMG all stakeholders throughout the TSAs in future. Partnering with the client to focus on developing process, and developed a governance buying entity is vital to help ensure its institutional client base, but model consisting of senior finance the smooth running of the deal, but in the course of the disposal executives to ensure that issues were once the process is completed, the to an independent investment identified and reported promptly, and cleaner the break can be, the better management company, it became executive decisions made in good for all concerned.”© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 25. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 23difference to the amount of information synergies. The premiums the market isthat an acquirer will want to make prepared to tolerate now are much lower You need toavailable to the market at the point than those they were prepared to acceptwhere they are gathering support for in the past. ” break the pricethe deal. But it does not change the Tiberius Vadan agrees on the down into componentsprinciple that the better the explanation need to define and justify synergy and be able to explainfor the price being paid, the more likelyit is that the markets will accept it. assumptions very clearly, but he goes your thinking to theMiguel Sagarna cites cases where the on to recommend an equally clear set of priorities which need to be communicated market. If you are notsynergies predicted for a deal have both externally and internally. convincing, the marketrelied partly on media announcements “It needs to be clear to your internal team, may conclude that youof synergies for similar deals in therecent past. “This might have been an and to the market, that your first priority are overpaying. And,acceptable method of benchmarking is not to lose any customers. he says. “If ” in fact, they may be CEOs shy away from talking about theirin the past, but it isn’t any longer. Even plans in detail, or it’s not clear what they right.though it may be difficult to arrive at plan to do, then that in itself runs the riskdetailed numbers, people are getting Miguel Sagarna, National Sector Leader, of leading customers to go elsewhere. ”more and more interested in seeing KPMG in the US, Transactions andthe results of a bottom-up approach to Restructuring, Financial ServicesDid pre-completion synergy assessment involve a top down high levelapproach or a detailed bottom up process Detailed bottom up process 24% Top down high level approach 76%Source: KPMG International, A new dawn: good deals in challenging times, July 2011© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 26. 24 | Les so ns learne d 1. Take your time on due diligence, but integrate fast 2. Revenue versus cost synergies 3. Communicate carefully with the market 4. Track progress 5. Cultural integration4. Track progressIn a sector where doing deals is the life and skill of the acquiring company inblood and primary purpose of so many completing the deal.participants, we should probably not Tracking can mean tracing deal-specificbe surprised that tracking revenue and cost savings for 18 months or two yearscost synergies once the deal has been after a deal is done, when the temptationcompleted tends not to receive much may be to simplify matters by includingattention. them in a larger pool of costs to beIn the banking sector in particular, there reduced over time. This can seem ais a curious reluctance to check on the more sensible use of scarce accountingpromises and assumptions that formed resources, but it is an essentially shorta key part of the negotiations, to see term view. One of the most valuableif they were delivered. Tim Prince, of things an acquisitive company can doKPMG’s Canadian member firm, sees is to build up a reputation for carefullythis as a function of the separation tracked progress in previous deals, whichof the deal-making teams from the will add credibility to the predictionsoperational teams. “The deal maker’s made for future acquisitions.accountability stops once the deal has Tracking benefits can, however, bebeen done, so there is no motivation complicated, and in an ever-changingon them to see the process through to and growing business establishingcompletion. he says. “I have clients ” reliable metrics can really help. Bernietelling me that it is not their job to track Crowe says that in one business thesynergies, so they don’t really care projected headcount reduction benefitswhether they are delivered or not. ” were not captured, because the peopleThis is a significant problem, and were re-absorbed back into the businessone which seems increasingly to be to support an unexpectedly high levelconcerning shareholders. Mohammed of growth. This doesn’t mean that theSheikh of KPMG’s UK member firm synergies were lost. Efficiency metricsreports an increasing view that the showed that, although headcount didquality of the tracking of deal synergies not reduce, efficiency improved.should be a measure of the success You may be a serial acquirer, but unless you are tracking, how do you know whether youare successful or not? People are waking up tothis, and are looking for improvements in trackingperformance.Mohammed Sheikh, Partner, KPMG in the UK, Head of Integration and SeparationTransactions Restructuring, Financial Services© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 27. 1. Take your time on due diligence, but integrate fast 2. Revenue versus cost synergies 3. Communicate carefully with the market 4. Track progress 5. Cultural integration5. Cultural integration CulturalFS companies are not alone in relegating new employees were different and we realignment is acultural and HR issues to the bottomof the list of due diligence items; in the just took that into account. We created the best of both worlds. ” major issue, especiallygeneral survey only 38 percent said they A different, more directive approach was when it comes tohad carried out any HR due diligence, revealed in a comment from a Korean mergers of equals. Thewell behind all other matters. But withthe exception of those in the asset insurance executive who said “We used big banks have built upmanagement sector, virtually all the FS training and workshops to educate the new employees” By contrast, a retail . distinctive cultures overcompanies polled conceded that their banker from Germany said, “I think we many, many years, somanagement of people and culturalissues was not good. just ignored the issues that arose. ” when there is a mergerIllustrating one approach to this There is a business logic in spending it is a really big event.problem, an investment management relatively little time on cultural issues People freak out. in the case of, say, two large retailCEO from the UK said, “It was pretty banks where much of the benefit of Tiberius Vadan, Senior Director, KPMGstraightforward. We understood that the in the US, Integration and Separation, Transactions and RestructuringWhat were the top three people lssues? Retention 32% 22% Culture 12% 20% Redundancy processes 6% 9% Operating model 18% 7% Appointments 12% 6% Terms conditions 3% 5% Communications 3% 4% Recruitment 2% Harmonizing/integration 2% Remuneration Packages 1% Pensions 1% Restructuring 1% Other 9% 9% None/refused 6% 10% 0% 5% 10% 15% 20% 25% 30% 35% Financial services (34) Global average (162)Source: KPMG International, A new dawn: good deals in challenging times, July 2011© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 28. 26 | Les so ns learne dthe deal comes from bringing together business rather than one relying on people do business. Building the requiredand reducing the size of two branch social customs, preferences and relationships can take more time thannetworks. The logic begins to break habits of thought. It may be possible acquirers are initially prepared to allocate,down when lack of attention to people to overcome these issues within an and this may be one of the reasonsissues results in the loss of important organization by removing people whose for the reassessment of the value ofIT or fund management staff. It breaks views do not fit. But it becomes more Chinese tie-ups mentioned by Samdown completely if cultural problems difficult when the cultural differences Evans earlier in this report. In China manyresult in the failure of the deal. are between a FS company and its capability transfer programs fail to deliver newly acquired customers. enhanced value because of relationshipFrancesca Short is very clear that lack issues as opposed to problems with theof attention to cultural differences can This has proved a problem for some of content of the program. We are aware ofdestroy value in a deal very quickly. “I the European banks who have moved organizations spending 12–18 monthshave seen a recent case where a global into the US markets, where the time building relationships with their partner, toinsurer bought a local player without needed to integrate US acquisitions has create mutual trust and buy-in to a tailoredtaking the time to ensure that key people been longer than they had anticipated program for local market conditions.in the local company realized they were because of the need to adjust Europeangoing to be part of a global organization products and services to US regulations There are effective diagnostic toolsand were willing to make the necessary and customer expectations. that can help to pinpoint and deal withadjustments. The deal is failing because potential cultural clashes. These are It has also proved to be an issue for FSof this, and the acquirer realizes it. ” gaining increasing acceptance in the companies moving into China, where, FS sector. If used more widely they couldAcquiring new customers despite a tendency to focus on financial have a significant impact on the levels of matters in due diligence, personalThese issues seem to arise most success in post-deal integration. relationships have a particularly strongreadily in those sectors where financial influence over how and with whomservices is seen primarily as a numbers© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 29. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 27 Case study Merging different salesforce cultures There are many different sub- This would involve finding a way for some parts of the target company cultures in the financial services the two very different approaches to unintegrated, but adapting the sector, but two very common work together. merged organization’s support and primary cultures stand out; the management systems to cope with The solution proposed by the KPMG outsourced, commission-based, the different ways of doing business. team was to segregate the market independent salesforce, versus the into distinctly different audiences, In the longer term, the KPMG in-house, employee-based version. and develop distribution channels proposal is to focus on developing Many of the large retail banking, and product offerings designed the skills, market knowledge and insurance or bancassurance deals specifically for each channel. profitability of the adviser teams, so that KPMG member firms advise on that distinctions between employed “We needed to recognize involve bringing together these two and independent advisers take where there was a sensitivity to cultures in a single organization. This second place to the quality of the independence and where there can prove to be very difficult. service that any adviser provides was not, says the partner who led ” to clients, and the profits they In one recent case, a large insurer the team. “People wanting detailed generate. with a model based on in-house investment advice generally needed fund management and an employed a much higher level of service and a “Younger advisers are hungry to do salesforce had acquired an equally wider range of funds than those who business, says the partner, “the ” large competitor which did very were simply looking for a good deal issue is how you train them, support little in-house fund management, on a mortgage or a safe home for them, and make writing the right preferring to direct clients to funds their pension money. So we needed kind of business easy for them. managed by others, and relied heavily to develop a very flexible framework This does mean letting go those on an independent, commission-only that allowed advisers to give the advisers who are not profitable, salesforce. high service that some clients and you have to have the metrics demanded, while encouraging them in place to determine who those The deal was presented to to channel suitable investments into people are. But if you can develop a shareholders primarily as a method the parent company’s own managed properly motivated and incentivized of removing a competitor, but it was funds, where security rather than salesforce with the right mix of clear from the start that the merged independence was the priority. ” skills, concerns about where they organization would also need to originated will fall away as they pursue revenue synergies if the deal This is a short to medium term compete for new business. ” was to be seen to be successful. solution. It has meant leaving© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 30. 28 | I s the de al g oin g t o go well? Six key ques t ions t o a s kIs the deal going to go well?Six key questions to askThe combined experiences of KPMG’s 4. How long is it taking to get answersspecialists around the world suggest to our questions from the target Patchworkthat there are six key questions thatneed to be asked regularly in the company? organizationsplanning of a deal. The answers to 5. Are we thinking hard enough about reveal poorly executed how we will integrate customers andthese questions will give some valuable employees into our new, enlarged previous integrations.indications of potential future problems.They are: company? Some can hit a button 6. If this deal goes wrong, do we have and tell you the1. Is there a clear plan in place for the whole of the deal, including the energy and the resources to do it information you need, integration, with agreed metrics to all over again and get it right? others need to go to define and measure success? In ASPAC where control can be difficult each different system to achieve, it is also important to ask –2. Can the plan be carried out quickly? How well do you understand the local and ask individually.3. Do we know in detail what we are market and your potential partner. Is It can take months. going to do the day after the deal is there motivation on both sides for completed? a true partnership? Where can your Miguel Sagarna, National Sector Leader, organization really add value? KPMG in the US, Transactions and Restructuring, Financial Services What will you do differently in your next deal? Answers from FS executives Perform better due diligence Conduct faster implementation/integration “I would definitely expand the due diligence in some “We would have a team that specialized in acquisitions areas. ” to speed the proceedings up. ” UK, Insurance, VP Spain, Corporate investment banking, CFO “We would carry out far more detailed due diligence. ” “We would integrate the target business quicker. US, Investment management, Managing director Korea, Insurance, Finance controller Understand the different labor laws and Understand the target company’s market cultures between countries “I would say that I would do a more thorough survey of “We must understand the culture and context of the the market to have all the tools needed to acquire the country where the acquisitions are being made. ” companies that we want to acquire. ” Spain, Investment management, CFO Brazil, Corporate investment banking, CFO More focus on cost/finances HR planning “Be less aggressive in revenue projections from the “I would handle difficult managers better. ” acquired business.” US, Investment management, Director US, Retail banking, Finance director Source: KPMG International, A new dawn: good deals in challenging times, July 2011© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 31. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 29 Case study Pre and post-deal planning Much of the discussion in this “We found that there were still This should have been produced by report has focused on the value too many unknowns surrounding the finance department, drawing on of pre-deal planning and thorough the operating models of the target the pre-completion work, but the due diligence. The problems that company, says one KPMG adviser ” finance team was scarcely involved can arise when these processes who worked on the deal, “so we in these discussions. are not carried out effectively had to put off a lot of key decisions “Each team was allowed to pick were illustrated in one recent deal until after completion when we the data it wanted to illustrate its involving two large FS companies, could see in detail what the target plans, which meant that it was on which a KPMG team advised. company looked like. ” very difficult to see whether the As is relatively common on large The post-completion phase began performance predictions being scale FS mergers, the negotiations with two weeks of intensive offered for each part of the business and regulatory approval process immersion in the businesses on each were stretching or not. It was very took the best part of a year to side. The whole process was split into noticeable that those work streams complete. Possibly as a result of a several work-streams, with detailed that brought in external advisers, desire to get the deal completed, presentations from each team to analyze the data carefully and the formal due diligence process intended to give the other side the to help devise proper metrics and was completed very quickly and, in-depth knowledge of the business KPIs, produced better and more unusually for a deal of this size, was necessary for further planning. convincing plans than those who carried out by an in-house team chose to do it by themselves. ” Next came a hypothesis generation/ without significant external support. joint design phase in which each The integration process for this Difficulties began to appear when work stream was asked to develop a deal looks set to go on for at least the acquirer tried to run a reasonably plan for the parts of the business for another 18 months. “It really extensive pre-completion planning which they were responsible. should be done faster, says the ” phase, but found that many of the KPMG adviser, “but we are finding “This was a very patchy process, ” key questions that should have ourselves doing work now that says the KPMG adviser. “Some of been answered in the due diligence should have been completed before the work streams did very well, but process had been left unresolved. the deal was signed. ” they all suffered from the lack of an overall baseline from which to work. Two organizations might say they are on the same system, but one could be using the original version, patched up, customized and no longer supported, while the other could be using the very latest release. You have to ask the right questions to find out things like this. Carl Carande, National Account Leader, KPMG in the US, Banking and Finance© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 32. 30 | A wave of d eals to c om eA wave of deals to comeKPMG’s specialists are unanimous in enjoyed, and business practices thattheir view that there is a wave of FS MA were once entirely acceptable are now People haveactivity about to break. The next threeyears or so is expected to be a process viewed with suspicion and mistrust. gone to hellof refocusing, re-shaping and transacting These changes are leading big FS companies to look very hard at their and back with thefor FS businesses all over the world. The operations, splitting out those that recession. They seemonly question is when it will begin. they think are non-core and running to think now that weThese plans are being driven bya unique combination of factors. them separately, in preparation for a possible disposal once they have shown are coming out of it.Internally, as we have already seen, themselves to be viable stand-alone Clients are saying theymany organizations have gone through businesses. want to concentrate ona severe round of cost-cutting andare now lean and mean enough to be Some of this activity is being driven by growth – that’s acrosslooking for growth opportunities as a legislation like the Dodd-Frank Act in all sectors. the US, and by recovery and resolutionmatter of priority. But there is still a plans which will require some large Tiberius Vadan, Senior Director, KPMGhuge amount of internal reorganization institutions to assess what actions they in the US, Integration and Separation,under way, as businesses struggle with could take to recover from a range of Transactions and Restructuringthe implications of a new economic stresses, and if necessary to achieve anenvironment where clients no longer orderly wind down.have the high levels of trust they once 67% of companies in the financial service sector agree that MA will bounce back in their country next year. MA will bounce back in my country next year (2011) 17% 15% 26% Strongly agree 32% Tend to agree 7% 15% Global Financial Tend to disagree average (162) services (34) 12% Strongly disagree 3% Not sure 38% 35% Source: KPMG International, A new dawn: good deals in challenging times, July 2011© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 33. Th e a r ch i t e c tu r e o f i n t e g r at i o n | 31External factors driving change include “The increased sophistication in riskthe imminent appearance of large, well- analysis required will force insurers to We are going tocapitalized Chinese acquirers on themarket, with strong government backing reassess their capital deployment. For example, the benefit of holding closed see a lot moreand an urge to take the Chinese economy life funds within large groups may come cross-border MA,to the next stage in its development. They into doubt as the capital they tie up will with interest fromwill find themselves in competition withacquisitive Russian interests, and with a increase significantly over Solvency I requirements. The tension between China and Russia.resurgent private equity sector keen to reducing complexity to reduce need for Premiums will increase.shed the assets that they have not been capital, and increasing the attractiveness We will get back to theable to sell on while markets were low,and find new targets for their skills. of products to entice customers to pay explicit sales charges is causing glory days, but not for a interesting shifts in the balance of while yet.Uncertainty over regulation power between manufacturers andWhat is holding these transactions back distributors of retail insurance products, Tim Prince, Director,is uncertainty over the detailed effect of which will spark numerous transactions Canadian Head of Integration andnew regulations plus regulatory reform as distribution channels are realigned. ” Separationand associated opening up of markets Globally, insurers will likely increasinglyin ASPAC. The full implications of the look for growth in underdevelopedrevised capital requirements contained markets where often the acquisition of ain the Basel III rules, for example, are local player is a safer option than startingstill being worked out, and banks will not up a completely new operation. The keywant to take major action on disposals to the success of these deals, as weor acquisitions until they have a good have said earlier in the paper, is to stampidea of how their overall capital profile the mark of the global player on thewill look under the new regime. new acquisition to achieve consistent“In Europe, the introduction of Solvency operational methods and governanceII, combined with wide ranging changes structures, while retaining and using theto regulation of distribution, will drive unique local knowledge acquired.the insurance industry into some major These issues will be resolved in time,realignments. says Francesca Short. ” and our best estimate is that there is 5–7 years of large-scale restructuring ahead for financial services. Whether It is key to factor this restructuring will end up adding in the impact and value to the sector or not, depends to a large extent on whether the key lessonscost of regulation in of the recent past can be learned,your bid – new capital absorbed and applied.and liquidity rules willhave a profound impacton future profit andreturn on assets.Stuart M. Robertson, Global BankingTransactions and Restructuring Sector Lead© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 34. 32 | The value of u sin g a n a dv is orThe value of using anadvisorIt might seem paradoxical, but • Specific, up-to-date knowledge ofexperience shows that the more the relevant regulations, includingpractised a business becomes at labor laws, tax matters, and localcarrying out successful acquisitions, ownership requirements.the more they tend to rely on external • Specialist knowledge and experienceadvisors to help them manage the on areas of due diligence that may beprocess. Studies suggest that deals unfamiliar to the acquirer.where there has been a good externaladvisory team will realize, on average, • Knowledge on how to shape thearound 30 percent more value than new entity, bring together a teamthose that are done entirely in-house. specifically to manage the transition from two organizations to one, andThe key contributions that KPMG drive the process from beginningadvisors can make to the success of a to end.deal are: • Resources to help get through the• Experiences of past deals – no two more difficult tasks, including present deals are the same, but the same revenue synergies in a compelling problems and issues do appear way to the market. regularly. A good advisor will have handled these matters before, and • Perspective to help ensure that will know what works and what targets are stretching, but achievable, doesn’t. that opportunities are not missed, and that the rationale that made the• A detailed program plan that will take deal attractive in the first place is a deal from initial due diligence right delivered. through to completion of integration, with all issues properly resolved.© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 35. Related Publications A new dawn: good deals Bruised but not broken: in challenging times The global banking growth agenda© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
  • 36. Contact usJeremy Anderson John Kelly Michael J. ConoverGlobal Chairman Global Head of Integration Global Sector LeaderFinancial Services EMA Head of Transaction Services Capital MarketsKPMG in the UK KPMG in the UK KPMG in the UST: +44 20 7311 5800 T: +44 20 7694 3528 T: +1 212 872 6402E: jeremy.anderson@kpmg.co.uk E: john.kelly@kpmg.co.uk E: mconover@kpmg.comFrank Ellenbürger David Sayer Wm. David SeymourGlobal Sector Leader Global Sector Leader Global Sector LeaderInsurance Retail Banking Investment ManagementKPMG in Germany KPMG in the UK KPMG in the UST: +49 89 9282 1867 T: +44 20 7311 5404 T: +1 212 872 5988E: fellenbuerger@kpmg.com E: david.sayer@kpmg.co.uk E: dseymour@kpmg.comkpmg.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor toprovide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate inthe future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMGInternational. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.Designed by Evalueserve.Publication name:  The architecture of integrationPublication number: 110735Publication date: September 2011

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