10 Commandments of Post-Merger Integration

Now that the merger logjam has been broken, even the most independent bankers are becoming swept up in the consolidation tide.

The current urge to merge is driven by many forces. The main ones are:

* The need for capital.

* The need to cut costs to compete in a brutally tough market.

* Shareholder demand for adequate returns.

* The fear of being left behind.

We've all been predicting industry consolidation. Now it's here. But a legal agreement to merge two or more institutions is not an end in itself.

Once the parties agree on terms, structure, perks - even the name of the new institution - can they make it work?

The following post-merger management guidelines are not engraved in stone, but they have proved their worth many times.

First Commandment

Complete the agreement.

The most important part of the deal has to do with an explicit vision.

The principals of the transaction must agree - before signing the papers - on what they want the merged institution to be. What businesses should it be in? What competitive advantage should it seek? What personality should it have?

Management needs to know where it is going, in products-to-markets terms, before it can determine the best way to get there.

Second Commandment

Define the architecture of your businesses.

Banking is a complex array of products and services, sold to customers, through delivery channels.

Know exactly what products, what customer segments, what channels are involved. Find out - if you don't already know - the profitability of each, using the best competitive benchmarks.

Use this information to guide the merger transformation. Your goal is to balance the needs of employees, customers, and shareholders while managing risks to achieve optimal profitability and franchise value.

Third Commandment

There is no such thing as a merger of equals.

Decide on the dominant culture in the post-merger environment; then acknowledge it and accept it.

Knowing who's on top takes the guessing out and squarely places responsibility where it should be.

Regardless of which culture is implemented, some productivity will be lost. Don't worry about it; talent and merit in both banks will rise. Worry about tomorrow's market and numbers, not what might have been.

Fourth Commandment

Draw a zero-based organization chart.

Pretend you don't know anyone who works at either bank. Think about the vision of the merged institution. Then design an organization chart with the best management structure to serve and guide its businesses.

Each of the management boxes should be blank; don't immediately force in your team.

Don't worry about "dumping" on your top lieutenants. If they're that good, they can be put somewhere other than in their current job and still excel.

When it's time to fill in the blanks, don't do it alone. Get some advice - from your board, your competitors, outsiders, the rest of the management team.

Don't spread responsibility. Open your eyes to other people's assessment of your own managers and get to know managers of the newly merged bank.

Fifth Commandment

Be tough.

The first nine months after the merger will be your barometer of leadership skills.

Cutting costs is easy. For an in-market merger, you should be able to cut 20% to 30%, or more, in less than five years.

Increasing operating profits is hard. But that's what you'll be measured by.

You will lose some customers and market share - some by choice and some not.

You will have to make decisions as tough as any you've ever made. You may have to fire your best friend.

But if you can think of things you'd be unwilling to do to make this a success, stop now. Let someone else take the reins.

Sixth Commandment

Don't patronize your employees.

Your people, new and old - from front line to back office - know more than you do about how both banks work. They are your eyes and ears, your arms and legs, in the transformation process.

Treat them as partners. Be honest. Tell them what you know - and don't be afraid to admit when you don't know.

If you want to keep them, find out how they want to be rewarded, and reward them. If they are likely to lose their jobs, tell them soon, so they can plan.

Security Pacific sent a detailed memo to its 38,000 employees concerning severance benefits less than a week after the merger with BankAmerica was announced.

Seventh Commandment

Protect your customers. They care about their own needs, not about the bank's merger.

Customers like consistency, because change can create anxiety. Don't make them work to stay with you; train your staff to work toward keeping the customers.

Effective consolidation of data systems may mean accepting something below state-of-the-art in the short term. But state-of-the-art is a means, not an end; customer retention is the goal.

Eighth Commandment

Know thy weaknesses. After the merger, they'll probably get worse.

Rather than hide weaknesses, use the merger to solve them. Ask for help where necessary.

Then overinvest, if anything, in the solutions.

This commandment has a corollary:

Ninth Commandment

Don't throw out the baby with the bathwater.

Every bank has strengths. Protect them.

The temptation in cost cutting is to set standards that make everything simpler, cleaner. But sometimes nonstandard is O.K.

Don't kill pockets of excellence in the name of standardization. If you have people who are pushing the envelope - in terms of creativity, efficiency, profit, independence, leadership - nurture them.

Tenth Commandment

Celebrate early successes.

This means defining interim, measurable goals that you can achieve as a team.

And when you achieve them, let the world know.

Get excited. Momentum is catching.

Mr. David M. Partridge is vice president and national director of the financial institutions practice at Cresap, the general management consulting firm of Towers Perrin. His office is in Los Angeles.

Mr. Gary A. Scott is director of the firm's mid-western financial institutions practice, based in Chicago.

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