Want to Merge? Here's How to Avoid a Fiasco
Will the recently announced bank mergers work?
A number of studies -- and certainly a large body of folklore -- indicate that many mergers don't work at all. And only a few achieve the initial objectives.
Nevertheless, bank acquisitions and mergers can succeed if done properly. Our analysis of case histories, discussions with experienced executives, and work with clients has yielded three fundamental requisites for successful integration:
* Unemotional, business-based decision-making
* Judicious treatment of people
* Expeditious planning and execution.
These fundamentals are embodied in a number of practices that have been adopted by successful integrators:
Don't Understate the Impact
Clearly understand what you are getting into and why.
First and foremost, no chief executive should underestimate the tremendous impact that an acquisition or merger will have on the organization. Nor should the CEO minimize the size and difficulty of the undertaking.
The structural change inherent in any merger threatens people, particularly if the implicit or explicit motivation is to achieve "economies of scale."
Productivity is likely to decline significantly, at least temporarily, as people spend time trying to secure their own positions, participating in merger-related activities, or worrying.
Talented people often decide to leave rather than wait to learn what role, if any, they will play in the new organization. Individual concerns aside, the blending of two cultures -- two distinct traditions of work -- can cause tremendous friction.
In addition to the monumental people issues, the sheer logistics of effecting a successful merger are daunting.
A Demanding Process
Handling product and market selection, identifying improvement opportunities, and redefining policy and procedures while not missing a beat with the customer is quite a feat.
To make it work, executives have to commit significant time and emotional energy and ensure their own visibility and charisma.
Because of the tremendous effort, disruption, and potential for failure, executives need an air-tight business rationale and concrete objectives for pursuing an acquisition strategy.
Further, these objectives must go beyond economies of scale, even if significant potential savings can be identified. As W. Randolph Adams, senior executive vice president of consumer banking at Mercantile Bank in St. Louis, points out: "People have overrated the economies of scale of integration; as a result, premiums are too high."
Similarly, Bipin Shah, former vice chairman of CoreStates Financial Corp., comments, "When two inefficient organizations come together, what makes them think that together they'll be any better?" Besides, cost-cutting and streamlining give only a little breathing room. That's not how business grows.
Clarifying the Benefits
Formulate a realistic vision for the combined entity.
Banks known for their successful acquisitions, such as Banc One and NCNB, seem to always have a clear picture of what they are looking for, what the overall organization will look like after the merger, and what benefits they intend to achieve with each acquisition.
This helps in identifying the right partner in the first place, circumventing disaster early on, and also provides the organization with the "big picture" that helps drive the integration process.
As Mr. Adams notes, acquiring organizations need to establish their basic operating model before making a deal.
For instance, they need to determine whether they will organize around business lines or geography; to what degree products and processes will be standardized; and which authorities will be centralized and which delegated to local managers.
Narrowing the Choice
Find the right partner.
Targeting a bank because it happens to be available or because "if we don't buy it, one of our competitors will" can be a disaster. The key is to establish selection criteria up front.
These criteria should include culture, product, customer and geographic focus, management strength, availability of other resources, and desired benefits.
The criteria simplify the search for a partner and facilitate quick and intelligent responses to unexpected opportunities.
Finally, in assessing a potential partner, the due diligence needs to be rigorous to ensure that perception equals reality. The euphoria and pressure of the acquisition process often impede sound, rational judgment when it is most needed.
Obtain senior management commitment without giving away the store.
It is imperative that the senior managers of the new organization embrace the objectives of the merger in order to ensure that those objectives are actually achieved.
At the same time, "There are tremendous egos involved in the creation of a new enterprise ... the natural loyalty of each management team is to its company, to its processes, to its people, to its identity," says Barry T. McNamara, partner, D'Ancona & Pflaum.
In an attempt to overcome these forces, either in the heat of the deal-making or in the immediate aftermath to forestall the departure of senior executives -- there is a tendency to make promises that can't be kept or that are detrimental to successful integration.
The very reason the merger was conceived is often forgotten when the people issues (such as titles and authorities) arise.
Assignments to top level positions -- and even the design of the new organization structure itself -- are often motivated by personality or political considerations rather than by the best business interests of the corporation.
The CEO must always keep in mind the reasons the acquisition or merger was initiated, base strategic decisions upon those reasons, and make appointments in a rational, unemotional way.
That means, for instance, that if a particular combined position is too demanding for either incumbent, the CEO ought to look elsewhere for the talent to fill the position.
Virtue in Being Early
Carefully plan the post-merger process early on.
At a 1990 conference on post-merger integration, Chester Winters, senior vice president at Meridian Bancorp, said, "Upfront planning will not eliminate pain or stress, but it can go a long way to reducing it. Achievement of early cost savings and revenue improvements can depend on a set or well-defined ... strategies, objectives, and action programs."
There is no single, correct approach that works in every situation, and each approach has its advantages and disadvantages. Every organization must decide its preferred way of working.
Thus, integration recommendations and plans can be developed by joint task forces, managers of one of the organizations; outside consultants, or some combination.
Similarly, a number of integration philosophies can be considered: acquiror's way; acquired's way; best of both worlds; total redesign, or variation by unit or function.
Overall, the process should be fair, orderly, cost-effective, fast-paced, and business-based (rather than politically-based). The process should be clear on its objectives (e.g., financial and service targets) and on its scope in terms of organizational units, processes, etc. to be integrated.
To ensure sustained adherence to the process, specific timetables, responsibilities (including responsibility for the process overall), and tracking tools need to be instituted.
The process should be ready to go soon after the deal is announced.
Shaking Off Inertia
It often takes a long time for-integration to begin either because of inertia or because, as part of the deal, the acquired bank is promised that its organization will remain intact for some period.
The end result is that not only are the original objectives not met, but in some ways the situation is worse than before because of a more complex (and redundant) management structure.
Once the process is in motion, it should be managed to conclude quickly and on schedule so that attention can return to the customer and marketplace. Issues should be prioritized and critical decisions made early.
While decision-making should be fact-based, issues should not be researched to death.
For example, in determining which operations unit or information system should survive, Mr. Shah advises, "Don't spend weeks trying to determine whose systems or whose products are better. If it's not immediately obvious, just pick one and go with it. Then, add any desired features to it later."
So, it seems that you can beat the odds in bank mergers if you adopt these practices. And, while there are no guarantees -- much of success is just a lot of hard work and good luck -- these practices can go a long way toward ensuring that the benefits originally envisioned will in fact be achieved.
Mr. Raab is president of Raab & Co. in Teaneck, N.J. Mr. Clark is a partner at Business Dynamics in Nyack, N.Y. Both specialize in organizational and operational issues at financial institutions.