In today's consolidating markets, financial institutions can create shareholder value by using mergers and acquisitions to cut costs and increase profits. Analysts and investors put a premium on companies that efficiently deliver promised cost cuts with their acquisitions.

This applies to acquisition strategies throughout the industrialized world. But it is particularly true in the United States, where landmark legislation has removed regulatory obstacles to integrated financial services companies, and in Europe, where a new wave of banking consolidation is now starting.

Institutions that merge successfully can use their track records to create value for shareholders. Once investors have seen an institution execute a big merger successfully, they will be more likely to believe in its next acquisition.

The Challenge of Capturing Value

Mergers of big financial institutions, however, are hard to achieve. Integrating businesses after a merger is seldom a core management skill. Experienced consolidators, such as GE Capital and the new Bank of America, are the exceptions in financial services. At most financial institutions, sizable mergers are rare. Most managers are not trained to cope with the astonishing burdens that mergers impose. They underestimate the complexity of integrating two companies. Managers often focus on the transaction and leave little time to prepare and execute the integration.

But research by Boston Consulting Group shows that implementation is usually far more important for future value than the absolute price paid or the details of the agreement.

Such difficulties help explain why value is so often lost in mergers. In the United States, three-quarters of acquirers among the top 250 banks lagged the stock price performance of their peer group by more than 20% within two years of an acquisition. After five years that gap increased to more than 30%.

When big financial mergers are carried out skillfully, they cut costs and increase scale and reach, increasing shareholder value substantially. For example, the mergers of Chase Manhattan and Chemical Bank in the United States, ABN and Amro in the Netherlands, and Lloyds Bank and TSB in the United Kingdom saved about 15% of these institutions' operating costs.

The Imperatives of Integration

As with any partnership, the goals should be clear from the start. The key objective during the integration is to maintain profitability and stability. That will help achieve the related goals of reducing uncertainty, retaining good employees, and reassuring customers.

To create sustainable shareholder value, managers should move rapidly to cut costs and adopt a new business model. If they do not, value will slip away. They also must agree on a strategy for the merged company.

Here are some guidelines for managing mergers:

Manage the integration as a discrete process.

Create project teams, separate from the core business, to handle the merger. This will minimize - but will not eliminate - the merger's effects on customers and business. Design a clear structure and set of principles for the merger. Give managers overseeing the process a mandate to implement decisions quickly.

Integrate as rapidly as possible.

Use all the time you have - particularly the weeks after the deal is agreed upon but before it takes effect - to prepare for integration. Successful acquirers quickly capture the long-term benefits of integration while containing the merger's destabilizing impact on employees and customers.

Make the tough decisions and monitor their implementation.

Successful acquirers make hard choices and consolidate aggressively. Always have a clear idea of your cost targets and routinely measure yourself against them.

Deal explicitly with people issues. Handling employees well will enhance retention and morale internally, and reputation externally; handling them poorly will jeopardize the entire merger. Establish the necessary human resources support. Create a transparent, objective and rapid process for selecting top-level managers.

Communicate, especially internally. Good communication demonstrates that the merger process is under control. It allays the fears of employees, customers, shareholders, and potential investors. It also enhances the reputation of the merged entity.

Define and integrate each company's operating model.

Companies have different operating models. Some have top-down planning and budgeting; others use a bottom-up approach whereby individual units devise their own plans and budgets, and then have them authorized from the center. Define each company's operating model and integrate them properly so the new entity has a clear framework.

Manage customer attrition.

In big financial services mergers, customer attrition can exceed 5%. By identifying the drivers of attrition - such as pricing and product changes, branch rationalization, and rebranding - and explicitly addressing the timing and sequencing of the merger, the two institutions can stem customer defection.

Select one IT system.

Chosing an IT system is a key part of the merger, and integrating IT departments can be challenging. Don't try to pick the best of both systems. Instead, choose one. Successful managers of mergers are willing to sacrifice superior technology and consolidate around a single system.

Manage the timing and sequence of the integration of the customer interface. How and when the merging companies integrate brands, harmonize products, and merge delivery channels have measurable effects on the value of their brands. Brands require careful management to ensure that their value is protected during the merger.

Understanding how to merge companies is an increasingly important part of the senior executive's mission. Many acquirers, particularly those that manage costs poorly, end up being acquired. If you are going to acquire a company, prepare to move rapidly to cut costs and capture value.

Catastrophes are rare, but failing to realize the potential value is common. Successful implementation can determine whether you create a merger that builds shareholder value or destroys it. Mr. Viner and Mr. Rhodes are vice presidents in the London office of Boston Consulting Group. Mr. Dumas is a senior vice president in the firm's Paris office, and Mr. Ivanov a vice president in its New York office.

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