In case you hadn't noticed, the top-200 list of mortgage bankers is moving and shaking. Today, it's missing many of the top players of the early 1990s.
Consolidation in the mortgage banking industry is all too familiar for many - Fleet and Plaza, Chemical and Margaretten, Chase and American Residential, Chase and Troy & Nichols, PNC and Sears, GE and Shearson, to name only a few.
Consolidation, through acquisition or merger, does create real opportunities for the combined entity. The resulting company has the unique opportunity (and corporate responsibility) to put the pieces of its new operation together in a more productive and profitable way to maximize its return on investment.
Say due diligence has been completed, and the final purchase price negotiated. The acquisition finally closes, but as acquisition veterans know, this is when the challenge really begins for the people responsible for making the acquisition/merger work operationally.
Management's focus has been on critical short-term issues, not long-term strategic planning. Management must now ask, What will determine the acquisition's ultimate success?
Usually, success or failure is based on the ability to operate at planned levels - to achieve the specific level of net income used in the decision to proceed with the acquisition.
The acquirer assigned a value to the acquired company based on certain assumptions of performance. Assumptions about synergy and/or economies of scale that have been built into the planned performance level should be clearly identified.
Now the focus is on quickly and painlessly implementing a strategy to turn these assumptions, which may have been vague or overly aggressive, into reality. Financial and operational assumptions built into the plan may not consider human resource capacity, and cultural, political, and emotional issues that will be major factors in the integration.
For the majority of post-acquisition or post-merger mortgage banking companies, the goals are simple: identify the most productive and cost- efficient structure for originating and servicing mortgage loans.
Certain basic steps must be taken to create the foundation for a successful integration. These steps can be modified and tailored, based on specific goals, time lines, and resources.
Developing and communicating short-term and long-term goals and strategies for the combined mortgage banking company is the first challenge. How does this acquisition fit into the company's existing strategic plan? The objective is to identify a consistent direction for the integration that has buy-in among senior management and establishes the priority and timing of tasks to follow.
Don't underestimate the importance of this step. For example, if the merged entity's strategic goal is to become a national originator and focus on acquisitions on the opposite coast in the near term, it could delay its timing on centralizing newly acquired operations. The strategic goal - to become a national originator with regional operations on both coasts - may drive the integration decision more than the immediate goal of reducing expenses.
The second step of a basic integration plan is taking stock of the two operations - understanding the process flows and organizational structure, and objectively identifying the core strengths and weaknesses of each operation.
This involves an intensive review of the operations, focusing on significant issues - productivity levels, risks inherent in the process, and special organizational constraints including cost, deadlines, contractual obligations, use of technology, competitive factors, and profitability. Based on the review and your existing knowledge of the entities and their cultural environments, hypothesize the operational, political, and emotional issues that could inhibit the integration.
A thorough review of technology and how it is used in servicing and production operations is critical at this stage. Systems conversion issues during integration can often be the difference between success and failure. This review should also focus on system limitations, contracts currently in place, and a needs analysis for the combined entity, based on strategic objectives.
As the integration process continues, comparing the results of each entity against industry statistics will be invaluable in determining when neither company's existing operational processes should prevail.
Next: Developing a target environment and realistic pro forma financials.
Mr. Horn and Mr. Oliver are partners of KPMG Peat Marwick and co- directors of its national mortgage finance group in Washington. Ms. Reed is senior manager of the group.
