Today, acquisition activity in the retirement services industry is heating up as banks and nonbank competitors move to transform themselves into full-service providers of 401(k) and defined benefit plans to employers.

But before moving forward with these strategies, providers should stop to consider what "full service" should mean within their businesses. And once full service is defined, organizations must be innovative in their efforts to create it through acquisitions.

In an area like retirement services, in which competition has exploded in recent years, consolidation was inevitable. Buyers today are faced with a confusing array of choices when it comes to retirement services and providers.

Banks, discount brokerage houses, mutual fund companies, money managers, insurance companies, and a host of other nonbank competitors are all offering something from the retirement services menu.

Survivors in the retirement services industry will be those that offer buyers in their distinct markets the specific menu of products and services they desire - no more, no less.

In some markets, the menu may be small. Other markets may demand a larger array of choices.

Regardless of menu size, the important thing is that everything on it is served up in the same place: one-stop shopping and seamless service are still important.

Although retirement services providers are fully aware of the buzz and hum of acquisition activity going on around them today, many have been unable to decipher the complete list of areas in which acquisitions are actually taking place.

Current acquisition activity is primarily occurring in, among other areas, software and technology, benefit consulting, and investment/asset management.

Acquisitions of software providers with record-keeping capabilities are becoming more common in retirement services. Charles Schwab recently acquired Trustmark in a deal of this kind.

Often, technologies and skills are not the only things being purchased in these software company transactions. The acquisitions can include the provider's current client base as well. In such acquisitions, due diligence should focus on determining the long-term value of this "total package."

More and more banks are now beginning to exit the middle-mart and the high end of the retirement services business, paving the way for banks with a commitment to this business to swoop and acquire other properties.

A case in point is Bank of New York's acquisition of Bank of America's institutional custody business, along with its large retirement services clients.

Many providers like these have accurately assessed the small-business market as the focus of choice. After all, that's where the growth is occurring in the 401(k) market.

Because they bring attractive fee opportunities, today's higher-priced deals are acquisitions of investment/asset management organizations. These are typically acquisitions of money managers and mutual fund companies. Understandably, providers are very focused on acquisitions of this kind.

Care should be taken to ensure that this is the best and most cost- effective approach to gaining assets and the management fees that come with those assets.

Examples of recent acquisitions of investment management firms include the Keycorp acquisition of Spears, Benzak, Salomon & Farrell, and PNC Bank Corp.'s acquisition of Blackrock Financial Management.

As organizations pursue retirement services acquisition strategies, they should beware of two major pitfalls along the way:

*Failing to consider less costly approaches to reaching asset-related goals.

*Failing to consider long-term customer retention.

One of the most common mistakes acquirers make is to overlook opportunities to obtain the same benefit at lower cost. In retirement services, high-priced money management deals may - from an asset management perspective - have a similar value over the long term as a lower-priced bank portfolio acquisition.

That's because embedded in the bank deals may be customers and accounts where the retention and acquisition of asset management are also possible.

Over the long run, these customers may allow for the same or better returns as those gained through more costly acquisitions of money management businesses.

In all acquisitions, long-term customer retention is a key consideration when gauging attractiveness and setting price. This is especially true in the area of retirement services because the barrier for clients to leave or switch providers is not very high.

As banks review their retirement services acquisition options, they should consider opportunities that open doors to cross-selling and geographic expansion.

With these objectives in mind, providers acquire much more than meets the eye.

Banks acquiring businesses - and subsequently, customers -from noncompeting banks or stand-alone organizations are in a position to seize huge cross-selling opportunities.

In the retirement services business, cross-selling synergies exist particularly among retirement services and high-net-worth individuals, rollover IRA money, and cash management.

Retirement services acquisition strategies also present a key opportunity to chart different geographic territories that open up new directions within new markets.

Through such strategies, organizations can buy market presence, location and expertise.

However, geographic expansion through acquisition should only be considered when it fits into the bank's overall strategic goals.

As providers consider the notion of "full service" in the retirement services business, they should take cues from the marketplace. For those pursuing acquisition as a strategy to build a breadth of retirement services, innovation is key.

Providers must be creative enough to consider all the possible sources of acquisition in this changing industry. Only then will they have chosen carefully from the full-service menu.

Ms. Errett is chairman and chief executive of Spectrem Group, San Francisco, a consulting firm.

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