Time is of the essence when integrating an acquisition. “Speed is the main thing I would change,” says Lars Nordstrom, CEO of Nordea, reflecting on the merger of four banks from four countries to create the largest bank in the Scandinavian region. While every deal is different – size of operation, location, local labour laws, longevity of the management team, current economic circumstances, and many factors play a part – all participants from the cases mentioned in this article agreed that speed was the top priority.
“When it comes to integrating banks, there are two key aspects: speed is more important than precision; and your human team,” says Vitalino Nafría, managing director in charge of Latin America at Spanish bank BBVA and formerly in charge of the merger of BBVA’s Mexican operations with Bancomer, one of the country’s top three banks.
Destroying value through acquisitions is easy; creating it is difficult. Yet for many commercial banks in mature markets, strong growth is only available through acquisition, so how they go about integrating the target is the most important part of a headline-grabbing deal. When the excitement of the chase and the press conferences are over, the momentum has to be maintained.
Change expected early on
“Speed is of huge importance,” says Damian Ringwood, a consultant at Dublin-based business strategy consultants Prospectus. “The first quarter after the deal closes, people expect change. There is a strategic window of opportunity to change things. If you leave it, existing ways of working become institutionalised and six months later it will be an uphill struggle.’’
This applies to all aspects of an integration, ranging from technology to culture to organisational structures to communications. “Speed is critical – particularly in technology, where it is possible to spend a lot of time not making decisions,” jokes Matthew Edwards, a partner in the banking practice of Accenture. He argues for what he calls the “a or b” principle. “It is better to choose the set of systems of one bank and then improve them than try to create a best of breed or mismatch them,” he says.
When Royal Bank of Scotland took over National Westminster Bank in the UK in 2000, for example, the latter moved on to the acquirer’s systems, which meant a diminution of some of the capabilities of its old systems, but ensured consistency.
Bancomer’s technology strategy
In Mexico, Bancomer’s technology was not as good as that of Probursa, a much smaller institution that it had bought and not integrated. Mr Nafría decided Probursa’s was the right one for the new, merged bank and promised investors that the “operative merger” – by which he meant all branches using the same computer systems – would be finished within 18 months. It was done step by step, first using fictitious branches, then integrating small branches, then 10 at a time but in populated areas where help was available, and finally 100 branches at a time in far-away locations until all 1665 domestic branches were on board.
In the meantime, to keep client dissatisfaction to a minimum, the banks used a telecoms connection between the different systems. It allowed the most common bank operations (transfers, home bill payments and cheque payments, responsible for 80% of all retail transactions) to be processed smoothly before the integration was completed. The technology integration was completed three months sooner than expected. Profit on average capital at BBVA Bancomer is 26.4%, while pre-merger in 1999 it was 23.8%. It has 25,704 employees compared with 42,000 for the pre-merger banks, and total assets are $41.5m compared with $22.5m in 1999.
“The final reading is whether you have lost clients,” says Mr Nafría.“We lost 1% the first year but in the second year our market share rose 1.5%.”
Flexible approach
Nordea’s case is very different. In the merger of Danish, Finnish, Norwegian and Swedish banks, the decision was taken to keep four separate technological platforms. Asset management and corporate banking are the only two areas where the banks have one platform.
“In retail, the costs were weighted against buying a new system. I am not sure it is a disadvantage to have different platforms,” argues Mr Nordstrom. “But we are not religious about that, we are keeping an eye on it. We have entered an agreement with IBM on a joint venture of our IT-production operations, an area where we will be able to reduce costs and complexity.”
The Nordic bank, which finally started beating forecasts when it posted a 71% increase in operating profits to $643m for the second quarter to June 30, has also taken a more hands-off attitude to culture. Creating a new culture out of four major banks seemed too difficult. Instead, the emphasis is on shared values.
Lars Nordstrom, Nordea: “If I were to do it [merge] now, I would be much tougher on execution and implementation”
Making winners out of losers
The case of Intesa, Italy’s largest bank by assets at $294bn (but one of its least profitable), was different again. After Intesa was formed from the merger of three medium-sized banks, Banco Ambrosiano Veneto, Cariplo and Banca Commerciale Italiana, CEO Corrado Passera was parachuted in over a year and a half ago to save the troubled organisation. He had to deal with a culture of defeatism.
Intesa CEO Corrado Passera: “There was a lack of confidence inside. After many years of disappointment, we had to convince [staff] internally that we can become the best bank.”
“Three banks had merged where each of them was a loser, not a winner. There was a lack of confidence inside. After many years of disappointment, we had to convince [staff] internally that we can become the best bank,” he says. His view was that there was a need not just to restructure the bank but also to create a positive mood by relaunching it. From day one, despite the cost, the bank began investing in technology and training.
“People have to see from the first day that there is a return for their sacrifices,” says Mr Passera. He argues that postponing the creation of new platforms for growth would have meant losing time in which to create revenues and losing the crucial momentum that makes a merger work.
Arguably, that momentum had already been lost as the infighting reportedly reached astronomical proportions, but his arrival last year, after sorting out the mess of the Italian Post Office, provided a boost.
“People have to accept it is a new house, not look for the corner where all their friends are,” he says. Changing the culture also involved changing top management. He got rid of 200 top and middle managers and brought in a large number who had no loyalty to any of the heritage banks. Existing middle managers were assessed with the help of outside consultants, partly to prove to them that evaluations were based on facts, rather than on who their friends were.
Creating a new culture will take a long time but the bank is starting to deliver in terms of results. Ordinary income for the six months to June 30 rose by more than four times to €1148m from €261m in the same period last year. The cost/income ratio has started to come down, from 66.5% to 61.7%, while targets were achieved in the relaunch of the group, including over 800,000 training days planned for staff and €2bn of IT-related projects to improve service quality.
Promoting culture of proximity
In Mexico, BBVA wanted to ensure its culture of proximity came across. “A goal for us is to have people know what they work for and to be close to it,” says Mr Nafría. Top executives went around the country visiting branches, an unusual practice for a place where social differences are marked. It helped that Mr Nafría had been living in Mexico for three years, that BBVA had had operations there since 1992 and that there was a common language.
Implanting HSBC’s culture on its November 2002 Mexican acquisition, Grupo Financiero Bital, happened rather differently. HSBC’s CEO in Mexico, Sandy Flockhart, was intent on transmitting the bank’s culture as quickly as possible to Bital, which it had bought for $1.1bn.
“However, I now understand that the ‘Day 1’ circulation of the rather dry HSBC’s Core Values and Principles, together with the history of the group and a welcome message from me, was information overload,” he admits. “Sending the messages as a large e-mail attachment to all the staff and crashing the system was also a mistake we have not repeated!”
Mr Flockhart denies that his inability to speak Spanish was a hindrance, a statement rather at odds with an institution that prides itself on being “the world’s local bank”.
HSBC had done its due diligence in June and from September Mr Flockhart was in Mexico. Several weeks before closing he took up residence in the management area, which allowed him to meet executives and get an idea of who would be on board the new ship. “We did not shilly-shally,” he says. “We talked straight. This was not a merger, it was an acquisition.”
The Bital structure consisted of managers with strong fiefdoms; HSBC’s consisted of executives running the business side and other people running the support operations. In effect, this meant telling executives that instead of running three things they would now be running one – a loss of responsibility and face. “As we were putting people into key positions, the retained Bital executives had to understand what the structure would be going forward, with power being lost and influence shared,” says Mr Flockhart.
The new organisational structure was communicated to management as soon as closing took place, with any difficult decisions taken as quickly as possible.
HSBC’s Sandy Flockhart: intent on transmitting the bank’s culture to the acquired Bital as quickly as possible
Settling new structures
Uncertainty is what can lead to a dramatic drop in productivity as people wonder whether their jobs are secure, as Mr Ringwood points out.
“The best acquirers rush in as quickly as possible to put new organisational structures in place. It settles people. All positions should be confirmed by the first quarter. Cisco [the technology company] says it can do it in 30 days,” he notes.
Mr Flockhart says with hindsight he would have been more proactive in ensuring all the information HSBC made available was cascaded down to the bottom of the organisation (he wrongly assumed it would be). However, on the communication front, senior Bital executives were sent immediately to meet colleagues in London across all business lines, while on the home front, due diligences were performed by teams made up of staff from both HSBC and Bital. “This got people on planes and around tables together from the get-go,” he says.
Identifying revenue opportunities
One risk is that the focus while integrating acquisitions can become too inward. Consultants say identifying and acting on new revenue opportunities as quickly as possible is also crucial. HSBC Bital is exploring leveraging the strengths of Household, the group’s US-based consumer finance arm, and has also bought a pension fund manager.
Jackson Tai, chief executive officer of DBS Bank, Singapore’s largest bank, also emphasises this point. “Integration starts with buying the right bank. You can’t integrate sub-par assets. You also start with the proposition of merit – you take the best from both worlds. The leader hopefully has something to offer. We were swift, focused our harmonisation and extracted costs,” he says. “The most important, though, is to discover new revenue opportunities.”
DBS’s bold move in taking over Dao Heng Bank in Hong Kong put it at the forefront of expansion for Singaporean banks (see page 77). The acquisition of the territory’s fourth largest banking group (after the merger of Dao Heng with DBS Kwong On Bank and Overseas Trust Bank is included) has its detractors because the price was 3.6 times book value.
Mr Tai dismisses suggestions of overpayment, however: “It is not how much you pay, it is what you make of it. The synergies are in new revenue opportunities, not just in costs. We have transformed the bank.” Although his thesis on payment is arguable, there is no doubt about the latter assertion. For instance, Hong Kong now out-sells Singapore in wealth management products.
BBVA’s Vitalino Nafría: “When it comes to integrating banks, speed is more important than precision”
Mistakes to be avoided
It is interesting to know what people might have done differently with the benefit of hindsight. Even the best integrations have errors and blunders (although few are willing to admit to specifics).
Mr Nafría agrees: “Of course you make mistakes! The 5000 decisions you need to take can be made quickly or in a very tried-and-tested way. But you have to accept that you will make mistakes.”
With Nordea, arguably the most ambitious commercial bank merger of all, the four successful banks that merged went in as equals. What went wrong was the absence of ruthlessness, according to management. This ties in with the need for speed. “If I were to do it now, I would be much tougher on execution and implementation,” says Mr Nordstrom.
He also argues, however, that without the “starting point of four big banks, a lot of negotiation, a friendly, kind atmosphere, some political dimensions, management being recruited from the four banks and people being too polite to each other”, the merger would not have taken place at all.
Nordea has only recently started to meet its targets but the bank argues that this is due to the slowing economy rather than problems related to the merger. Changing from a sheep into a wolf overnight when the merger was signed would not necessarily have worked, with so many banks merging and without a clear king of the forest.
In this sense, an outright takeover rather than a merger may be seen as an advantage, although not everyone agrees. Mr Edwards insists that the old City adage that ‘acquisitions work but mergers don’t’ is wrong. “It is about making choices early on. With a merger you can create the same dynamics that you have in an acquisition,” he says. That, at least, is the model.
In effect, whatever the circumstances of the deal and whatever its location, whatever the management structure and whatever the business plan, the need for speed is paramount. As Mr Passera observes: “If you have to do something, do it immediately. Better that, than an agony that never ends.’’
