PMI – the new popular trend returns?
Post Merger Integration (PMI) and the divestment of select business units are becoming increasingly common in the financial industry, especially given the pressures from both regulatory and commercial sources
Regulatory pressure for major financial institutions to divest certain parts of their businesses stems back to the point in time when many received state aid at the height of the credit crunch. As of Q1 this year (2017), regulatory institutions are again showing signs of alarm, as major market indicators turn red. As an example of one such ‘alarm bell’, the hedge fund industry now officially has over $3.02 trillion in global assets under management (Source: Bloomberg).
There is an ongoing general desire to see a reduction in the size and complexity of large banking groups, with regulatory bodies continuing to apply pressure on major banks. There is even discussion of the possible revival of the 1933 Glass-Steagall Act, mandating the separation of investment and commercial banks. There is no political desire for any repeat mention of the ‘too big to fail’ mantra.
On top of possible further regulatory changes, there is ongoing commercial pressure forcing financial services businesses to reassess their organisational models, leading to numerous post-merger integration projects across the European market. Over the last decade, the absolute number of banks has decreased – and continues to decline – at an almost steady rate. The consolidation of the EU banking sector has been in play since 2008 across both the Euro and non-Euro zones: December 2008 saw a total of 8,310 monetary financial institutions, compared to a figure of 5,926 in December 2016…a figure that has further declined to a total of 5, 864 earlier this year!
Large financial services groups, particularly of the global and systemically important kind, are immensely complex entities. Therefore, when it comes to divesting or even engaging in any form of PMI activity, both represent highly complex processes, with changes required to legal entity structure, systems and processes to ensure the ongoing survival of both the parent and the divested business.
It’s not all hard work and no benefit…
We see potential pitfalls (but also opportunities, of course) in three major areas:
- Strategy & planning (e.g. failure to agree a combined vision, leading to an ultimate reduction in value for both parent and the divested unit)
- Delivery management (insufficient focus on retention of customers)
- Culture and people (lack of effective communication of merger goals and status to shareholders, staff and customers alike)
The underlying critical success factors are always those referred to as the “soft factors” which ultimately determine whether the PMI-project is successful or not.
Overall, before starting the integration programme, the following fundamental critical areas need to be honestly and rigorously assessed and addressed, starting with the number one question – will “synergies” realise cost optimisation, or are the synergies designed to stimulate longer-term growth?
There are three distinct phases following the merger decision: the acquisition, the integration and the optimisation phase. Considering each phase carefully and in detail will ensure the ultimate success of the PMI project in question:
1. In the acquisition phase, the focus needs to be on understanding and defining the business, financial and regulatory boundaries the firm will be operating within, and designing a high-level enterprise that can take full advantage of the opportunities available to it
2. From there, during the integration phase, the new target-operating model for the integrating companies can be designed, and work can begin on implementing the plan. The focus in this phase is on identifying and implementing the major change activities that will be required to the meet the design requirements set out during the initial acquisition phase – changes to meet sales goals, regulatory compliance rules, cost reduction targets, financial performance targets such as earnings per share, etc. .
3. With the key integration hurdles out of the way, firms can then turn to the optimisation phase, where the Target Operating Model is reviewed and refined to realise a deeper level of benefits from the merger
Large-scale financial mergers will continue for years, but the ground rules for determining success versus failure are becoming clearer. Firms that look deeper and further than the immediacy of Day One merger activities, and that work towards a complete and comprehensive post-merger integration will be both rewarded by their customers in the short-term, and positioned for sustained profitability over the long haul.