1. The merger and acquisition between Grupo Santander and Abbey National from 2004-2009 saw Santander transfer its IT platform to Abbey in an unprecedented move, exceeding forecast synergies by 35%. 2. Analysis of efficiency metrics shows Abbey's efficiency ratio improved from 86.1% in 2004 to 43.1% in 2009, far exceeding projections without the IT platform transfer. 3. Interviews and documents revealed Santander implemented modular architectures that enabled planned synergies through cost reductions, while emergent synergies arose from problem-solving integration of IT and business domains, generating new organizational forms and capabilities.

1. DISCOVERY PATHS: EXPLORING
EMERGENCEAND IT EVOLUTIONARY
DESIGN IN M&A
Analysing the Grupo Santander’s
acquisition of Abbey (2004-2009)
Javier Busquets, PhD
ESADE Business School
California, USA, September the 30th 2015
1

2. Agenda
•Introduction
•The evidences
•The gap between theory and reality
•Method
•Findings
•Insights
2

3. Introduction
• The merger and acquisition (M&A) between Grupo Santander
(GS) and Abbey National from 2004 to 2009 was the first cross-
border operation to take place in the history of European
banking.
• During the M&A, GS transferred its Information and
Communication Technology (ICT) platform, Partenón, in an
unprecedented strategy in global banking
• By the end of the process, the results exceeded the forecast
synergies by 35% Santander became the most efficient bank in
the world in 2012
• We argue that the synergies obtained represent a sign of how
organizations are more and different than the simple ‘addition’
of the parts (two banks)
• Therefore this research is an investigation of how this evidence
(efficiency) is a sign of emergence (a radical novelty) of a new
banking system
3

4. The Evidence
4

5. 0
1
2
3
4
5
6
7
8
9
10
0 20 40 60 80 100
Wells Fargo
Santander
BBVA
BNP Paribas
HSBC
Standard
Chartered
ING Group
Nordea
JP Morgan Chase
Itaú
Intesa
Sanpaolo
Royal Bank of
Canada
Credit
Suisse
Mitsubishi
UBS
Unicredito
Number of countries where
banks have some presence
Number of countries
where banks reach a
leadership position
(ranked between 1 and 5)
Global banks with some
presence in other countries
Banks focused on one
market
Banks with strong
orientation towards
private and
corporate banking
(between 40 and
60% of revenue)
Citi

6. 3.331
1.435
2.838
2.977
2.620
2.456
2.3352.319
1.997
1.4381.492
1.5001.648 1.615
2004* 2005 2006 2007 2008 2009
-15%
-6%
Income
Costs
25% during two first years
Income Without model
Costs without model
Income
Costs
Efficiency
Ratio
Real
No Model
86,1 70,6 61,1 56,9 48,3 43,1
59,7 58,3 56,9
Aprox 14 ppt.
Efficiency to the
model

7. The Gap
7

8. Evolution (1)
• In the long run more than 70% of M&A fail due to
technology integration; culture gaps and differences in
regulation
• Main problems
• Synergies are a metaphor of short term efficiencies
• Normally scholars consider technology as a “single artifact” that
enables organizational processes ignoring the nature of different
components of digital technologies
• In fact M&A do not scale-up since we assume organizations fail to
manage complexity
8

9. Evolution (2) in M&A literature –
replication and “dynamic” transfers
9

10. Evolution and Modularity (3)
• In contrast, evolutionary theories see firms as systems
formed by a set of subsystems (or modules) with a
specific function and a set of relationships between them
(Simon, 1996; Aldrich & Mueller, 1982; Miller & Page,
2007).
• In fact modules are the result of problem-solving to frame
complexity (Simon, 1996)
• For the purposes of our research, we can view these
modules as
• organisational task systems (Zhou, 2013) and
• technological components (Arthur, 2011)
10

11. Evolution and Modularity (4)
• design principles (Baldwin &
Clarke, 2000) (Modularity)
• system governance and
coordination (Arrow, 1972; Aldrich
& Mueller, 1982)
• Setting the conditions (Holland,
1972; Stacey, 1992; 2011)
11
• Emergent properties using the
following generic processes
• Variation arises as different strategic
initiatives.
• Selection works through market-
based, “programmes”, “processes”,
“culture” and “algorithms” that
regulate the allocation of resources
to these different strategic initiatives.
• Retention determines the initiatives
that survive in the external
environment and ultimately become
important.
• Competition (at internal level
between different strategic initiatives)
and (at external level to set selection
principles in the industry or
organizational ecology)

12. The Method
12

13. Deduction Induction Problem-Solving
Law
Case
Case
Results
Unforeseen
Results
Laws
Result Law Case
Research method

14. Research sources
Sources
Interviews and focus groups Documents disclosed and reviewed
 Interviews with top executives
 First interviews (April 2009 and July
2009).
 The second interview in June 2010
focused primarily on obstacles and
contingencies.
 The third interview in April 2011,
May 2012 and October 2012
(Madrid and London) were related
to scalability and understanding the
role of technology in planned and
emergent synergies.
 The fourth set of interviews in May-
June 2013 and April-July 2014,
(Madrid and London) were related
to IT factories and their functions.
 Focus groups: 1) April 2009 and
July 2009 in UK and Spain (through
Telepresence) with Spanish
Management and UK management
analysing cultural gaps; and 2)
October 2012 to analyse the impact
of Partenón on cultural gaps
 The Jack Project (2004), a document for investors explaining
the M&A strategy (*).
 Analysis of Abbey in 2004, Citigroup.
 Information for investors regarding Santander’s bid in 2004 (*).
 Consultant report (2004) validating the M&A strategy (*).
 Presentations and reports for Santander’s internal use
regarding the M&A’s progress and ICT platform transfer from
Spain to UK during the M&A (2006, 2007, 2008 and 2009) (*).
 Indirect sources: Reports from Data Monitor, Oliver Wyman,
The Banker, The Economist, press releases and other sources
regarding the bid and its progress from 2004 to 2009.
(*) Following a NDA (non-disclosure agreement) signed with the
bank during the research process, we were allowed to study and
review these documents for six months and return them after this
period. No copies were allowed or retained in our hands after the
research period. All empirical data that appears in this paper has
been approved for publication by Grupo Santander.
14

15. The Findings
15

16. 50%62%Efficiency Ratio
13%
15,5
33%
6-9%% IT / Margin
8Employees per branch
6-9%% Sales Opp’s (back office)
Gap
Abbey
2004
Santander
“Elevator pitch”

17. Britannia (2005-2006)
• Mortgages and cards were in-sourced, and outsourcing
contracts were re-negotiated.
Gain control over the
business
• Some 1000 IT staff were made redundant
• Reduction of back office staff: some 5,600 people.
• Consolidation to one call centre in UK (1,000 agents) and
one call centre in India (1,200 agents): cut of 100 staff.
IT staff and customer
operations (€286m)
• From five data centres to just two centres
• Hardware and software maintenance contract re-
negotiation
• Cancellation of new 127 IT initiatives. Re-negotiation of
IBM, BT and EDS
IT consolidation (€114m)
• Only ten people were maintaining the systemThe critical resource was
staff.
• (1) replacing the cables of the old data centre with fibre
optic cables
• (2) although Abbey’s UNISYS system was practically
obsolete,
A programme of IT
infrastructure investments:
€50 million:

18. 3.331
1.435
2.838
2.977
2.620
2.456
2.3352.319
1.997
1.4381.492
1.5001.648 1.615
2004* 2005 2006 2007 2008 2009
-15%
-6%
Income
Costs
25% during two first years
Income Without model
Costs without model
Income
Costs
Efficiency
Ratio
Real
No Model
86,1 70,6 61,1 56,9 48,3 43,1
59,7 58,3 56,9
Aprox 14 ppt.
Efficiency to the
model
Pitch to analysts
Translating into analyst
language the
transformational project
Short and Long term
A new Hybrid organization
for the strategic interaction
between IT and the
organization
Technology cycles, culture
and Regulation
The limits of “system
integration” – Isban UK
The limits of IT internal
dynamics (infrastructure;
sofware and administration)
Business model optimization,
not cost cutting plans

19. Task systems
Technology
Rules of design
- Production
- Use
Runtime
User
Experience
Data Quality
Assurance
and Global
Automation
IT infrastructures
Software and
programming
languages
Core banking
systems
IT automation Software R&D
Produban Isban HQ
“local Isbans”
System
administration
Geoban
Main Process

20. Evolution as Imitation
(Planned Synergies)
Evolution as problem solving
(Emergent Synergies)
Modular
Architectures
Scale & Scope (Dialectical Variations between
existing components and new processes)
(1) Re-Use of some core bankking components,
routines and algorythms into new taks systems
(2) Integrative capabilities : Sales portal to “connect”
new commercial policies and information
presentation with old system
 Eficiency through cost-effective re-use of
components
Morphogenesis (variations through system design)
(1) Media Management: translating business-technology
knowledge domains
(2) New IT organizational organs: Isban, Produban anb
Geoban and new IT governance
(3) Capabilities: encapsulating complexity by the use of
technology
 Eficiency through increasing returns (customer
level) and avoiding dis-economies of scale by
encapsulating complexity
Indivisible
Architectures
Economies of Scale (No variations)
(1) Automation: flat-back office procedures
(2) Consolidations and elimination of redundancies at IT
and back office personnel
(3) De-investments in resources, business lines and
assets
 Eficiency through decreasing unit costs
Learning (Dialectical variations as synthesis between IT
knowledge and “emergent” knowledge)
(1) Hybrid temporal structures : Sales Portal and IT
integrations between old and new IT architecture
(2) Capabilities: (a) Experiments, improvisations,
prototyping and learning by doing ; and (b) translation
between different paradigms
 Eficiency through cost-effectiveness and “rapid
integrations”
(a)
(b)

21. Geoban
Isban
Software
R&D
Software Project
Governance
Global
Infrastructure
Management
IT/IS
Manufacturing
Global
Telecom
Produban
Media Management
Business
Processes
Architecture
Driven
Demand
User Experience and
Productivity
Bank`s business model and
efficiency ratio
Global
Back office
Operations
Customer
Data
Management
Global
Automation
Regulation
Compliance
Local Isban
(Local Adaptations and
Innovations)
Bank’s Regulators IT Infrastructure
Vendors
Sofware Vendors
Consulting Firms
Adaptation control
for “selectiion”
variables
Constant variable

22. The Insights
22

23. Emergence as radical novelty (1)
Variations through system design
(1)Hybrid Organizations as paradigm translation: Media
Management: translating business-technology
knowledge domains (“system integration”) and business
needs
(2)Morphogenesis: New IT organizational organs: Isban,
Produban anb Geoban and new IT governance
(1)Reduction of software dis-economies of scale
(2)Substitution of costly expatrations by the use of technology
(Portals and Front-Office applications ,e.g.)
(3)Sofware as engines for growth at customer level (externalities)
(3)Organizational Learning and Capabilities: (a) short
and long term (b) encapsulating complexity by
endogenizing technology
23

24. Emergence as radical novelty (2)
• Organizations have been studied mainly as “functions of
production” but there is a large path to better understand
functions of innovation – in fact new digital firms are
different species
• Technology has been studied largely as an enabler for
business design, we suggest that technologies are the
backbone of organizations, where (1) business models
emerge from systems of technology and (2) where the
strategic interaction between tecnology and the
organization produces new organs
• We suggest that more research is needed to better
understand coordination and the costs of adaptation
(more than costs of transactions) in systems
24