FINANCIAL SERVICESThe Architecture  of IntegrationAn essential guide to successful mergers and           acquisitions in F...
KPMG specialists and contributorsAmericas                                                             Sam Evans           ...
Contents                                                                     Introduction –                               ...
2 | Introdu ctio nIntroduction                                                                     Above the desk of one s...
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                                                  ...
4 | E xec utive sum m ar y2.	Serious attention to revenue   synergies. Markets are naturally                              ...
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 financi...
6 | G lobal MA – how FS c om pa nies c om pa r eThe general improvement in performance                               •	 A ...
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...
8 | G lobal MA – how FS c om pa nies c om pa r ePricing factors                                                      reven...
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                                                     ...
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 finan...
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  ...
12 | Key ge og rap hical d iffer enc esKey geographical differencesAsia-Pacific region                                    ...
Th e a r ch i t e c tu r e o f i n t eg r at i o n | 13China                                                              ...
14 | Key ge og rap hical d iffer enc esThe Atlantic markets                                                 or	not	remains...
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                                                     ...
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 t...
Th e a r ch i t e c tu r e o f i n t eg r at i o n | 17                                                                   ...
18 | Les so ns learne d                                                                                                   ...
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

  1. 1. FINANCIAL SERVICESThe Architecture of IntegrationAn essential guide to successful mergers and acquisitions in Financial Services kpmg.com KPMG INTERNATIONAL
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

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