What distinguishes a fair deal from a great acquisition? Effective expense reduction and disciplined merger integration. Expense reduction in the target bank is usually the first topic addressed in considering an acquisition. We believe you should ask, What does the combined bank look like, and what can be eliminated in both banks to get there?
First, estimate the synergy potential. Apply industry benchmarks to the target's cost structure and your own. In our work, we apply up to 300 benchmarks to quantify the potential savings with high precision. Dispassionate review and data-driven decisions are critical. If benchmarks are not available to you, line up each business unit (yours and the target's) alongside each other, showing expenses and staff. Take 25-35% of the smaller unit's (yours or theirs) expenses as the range of targeted integration savings.
Senior management synergies are best quantified by creating a "trial" organization chart encompassing the first two layers of management under the CEO from both entities. Many mergers attempt to "save" the senior management of both companies, and they create byzantine organizations to do it. Instead look for substantial reductions in these two layers.
Target overhead synergies in finance, human resources, legal and administration amounting to at least 40-60% of the smaller unit's staff. Trim equipment, telecommunications and occupancy in proportion to your overall head-count cuts. Review other major expenses item by item, such as the likely FDIC insurance premium for the combined entity.
Your preliminary analysis helps you to make an acquisition offer — what's next? Merger integration, and this is the trickiest part. Mergers often succeed or fail based on the effectiveness of their integration, which must be crisp, data-focused, disciplined and fair. Here are a number of key steps we have found helpful in managing a successful integration:
Avoid making false promises, such as "there will be no layoffs." You damage your credibility at the best, and severely limit merger synergies at the worst.
Set core principles to guide decisions. Make these decisions based on cost-effectiveness and cultural fit.
Assemble six to 10 top executives from both firms who are respected as decision makers. Conduct a review of the initial integration savings, to uncover added savings and unforeseen obstacles. Appoint a dispassionate facilitator of the review, such as an outside consultant who will help avoid a turf-protection mentality.
Identify the likely leadership team early. Both the banks and the affected executives are best served by an honest review of retention and rapid exit with appropriate severance packages, post-merger. Later, identify high-performing or high-potential employees who are not needed in their current jobs but who should be considered first for open positions.
Establish a steering committee to oversee a dozen or so task forces to address major chunks of integration synergies. These should be organized around common synergy drivers, not necessarily along organizational lines.
Organize a program office. It could be a clearing house for all submissions, identification and resolution of problems and questions arising during the integration, in close consultation with and support of steering committee leadership.
Develop templates for all integration reporting. Management should be able to focus on the content rather than format.
Establish targeted progress updates. These should focus on crisp, standardized reports rather than lengthy narratives.
Map each entity's general ledger to the other. Keep current cost centers for now to permit "before and after" analysis.
It's also important to avoid the common pitfalls of managing an integration. There are many. Taken individually most are not critical, but cumulatively they can result in failed acquisition integration. For example, it is critical to challenge any "dual heads" or excess layers. Almost certainly, these are attempts to preserve senior- and middle-management jobs, and to avoid the hard choices. You should be skeptical of attempts to replace expense cuts with projected revenue growth. Don't allow "creative" reporting on merger tasks — these reports are nearly always cover for failure to achieve assignments. Watch for task forces that push expenses out of their area and claim an expense reduction. Recognize policy issues that are mentioned by multiple teams and issue policy guidance decisively. Be proactive in selecting the most appropriate HR programs for the new company, and don't just revert to the most generous policy.
This is just a small sampling of the do's and don'ts that need to be managed in an integration; the number of challenges you will encounter is limited only by the imagination of the parties involved.
