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Buyer beware: the value of IT strategy in financial services M&A

Tuesday 26 June 2018 IT Integration

Dominic Rowles's picture
By Dominic Rowles

Global M&A activity is booming and the financial services sector is no different from any other. Banks large and small have completed deals in recent years, or are in the midst of takeover talk. At the larger end of the market, the mooted mega-merger between Barclays and Standard Chartered may be some way off happening, but falling values are set to prompt consolidation among challenger brands like Clydesdale and Virgin according to analysts.

However, while M&A activity has a range of benefits for market share and some  high level efficiency savings and synergies, deep seated technology integration problems can arise which undermine the reasons for deals. For example, if efficiency savings are scheduled to appear in a short space of time for the deal to make financial sense, projects that become far more complex than anticipated can over-run and create significant financial issues. And if the technical challenges increase, they can also impact on performance.

Big bang solutions

TSB-Sabadell has recently hit the headlines with its struggles centring on a new technology platform which was required following the acquisition. Last year, CACI analysed the deal and predicted further issues could arise due to this IT strategy. From a technical point of view, we identified that the “silver bullet” of building a new technology platform for the bank would be difficult to execute without significant challenges. At the time, this manifested in project over-runs, but since then we have seen considerable issues as the switchover to the new platform has gone live.

Ultimately, this affected company performance and the bottom line. It proved that IT integration could become a real stumbling block to successful operations. As customers continue to report problems following the switchover, further damage has been done to consumer confidence. This compares particularly poorly with the projections from the business contained in its investor presentations about the deal. Instead of realising all important synergies, they may be dealing with customer attrition and unhappy investors.

Under the bonnet

The TSB integration highlights the difficulties of “big bang” solutions in IT strategy following M&A activity. Building a new technology platform is clearly a significant undertaking, so IT strategy needs to be carefully thought out for integration success. Before assessing whether one technical solution or another will be necessary, careful planning needs to be put in place.

First and foremost, M&A activity involves detailed due diligence. IT systems shouldn’t be an afterthought in this process: it’s as important to understand how and where data is stored, as it is to get under the skin of the accounts. It can only be done successfully if CIOs/CTOs and their technology experts are involved at an early stage to really understand how the business works. For example, no systems are ever truly comparable even if they run the same branded technology – instead, bespoke alterations are the norm and IT due diligence should attempt to get to this level of detail. If you are the prospective buying party in an M&A deal, I would recommend spending time taking a look at what sort of skills have been used in the Technology due diligence process, and what efficiencies have been promised.

Once a deal is signed, while the you may have unknowingly overestimated your integrations savings, you can make sure you don’t compound this error by making sure you go into the appropriate level of detail and skill in further in analysing the business. It is crucial to understand the business strategy of the new entity; the people and processes required to achieve it; the architecture of the systems; and finally, the design and deployment of the right solutions. You can then create the all-important integration strategy document, which outlines each step towards integration.

However, this document is only as good as the solutions it includes. As TSB found out, big ticket projects are challenging, but it isn’t just risky to set up new technology platforms. For example, something as simple as merging similar datasets can quickly run into problems. Avoiding big ticket projects and implementing smarter solutions is the secret to success. For example, data virtualisation allows you to “pool” two separate datasets virtually, giving you access to information without requiring the merging of two potentially radically different datasets. Ultimately, by being realistic in the ambitions for IT projects in integration, you can minimise the risk of challenging and costly over-runs which could threaten deal success.

Download our guide "Life after M&A"  to find out the steps you need to take towards successful IT integration during an M&A or joint venture deal.

While M&A activity has a range of benefits for market share and some high level efficiency savings and synergies, deep seated technology integration problems can arise which undermine the reasons for deals.

Buyer beware: the value of IT strategy in financial services M&A

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