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FINANCIAL SERVICES
The Architectureo Integration
An essential guide to successul mergers and
acquisitions in Financial Services
kpmg.com
KPMG INTERNATIONAL
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Americas
Ricardo Anhesini Souza
Head o Financial Services Latin
America and Brazil
KPMG in Brazil
T: +55 11 2183 3141E: rsouza@kpmg.com.br
Tim Prince
DirectorCanadian Head o Integrationand Separation
KPMG in CanadaT: +1 416 777 8883E: tprince@kpmg.ca
Carl CarandeNational Account LeaderBanking and Finance
KPMG in the UST: +1 704 335 5565E: ccarande@kpmg.com
Thomas FeketeManagerIntegration and Separation,
Transactions and RestructuringKPMG in the UST: +1 212 954 2182E: thomasekete@kpmg.com
Miguel SagarnaNational Sector Leader
Transactions and Restructuring,Financial Services
KPMG in the UST: +1 212 872 5543E: msagarna@kpmg.com
Tiberius Vadan
Senior DirectorIntegration and Separation,Transactions and Restructuring
KPMG in the UST: +1 212 954 2107E: tvadan@kpmg.com
ASPAC
Bernie Crowe
DirectorFinancial ServicesKPMG in AustraliaT: +61 2 9335 7667E: bernie.crowe@kpmg.com.au
KPMG specialists and contributors
Sam EvansPartner
Transactions and Restructuring,Financial Services
KPMG in ChinaT: +85221402879E: sam.evans@kpmg.com
EMA
Nicholas Grifn
PartnerHead o Financial Services,Transactions & Restructuring
KPMG Europe LLPT: +44 20 73115924E: nicholas.grin@kpmg.co.uk
Stuart M. RobertsonPartnerGlobal Banking Transactions and
Restructuring Sector LeadKPMG in SwitzerlandT: +41 44 249 33 45E: srobertson@kpmg.com
Mohammed SheikhPartner
Head o Integration and SeparationTransactions & RestructuringFinancial Services
KPMG in the UKT: +44 20 78964992E: mohammed.sheikh@kpmg.co.uk
Francesca ShortPartnerGlobal Insurance Transactions and
Restructuring Sector Lead
KPMG in the UKT: +44 20 73115056E: rancesca.short@kpmg.co.uk
Ian Smith
DirectorFinancial Services Strategy Group,Transactions and Restructuring
KPMG in the UKT: +44 20 73111496E: ian.r.smith@kpmg.co.uk
Written by Je Wagland
© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member rms o the KPMG network are aliated.
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ContentsIntroduction –
It is not necessary to change: Survival is not mandatory 2
Executive summary –
Key ndings and ve recurring issues 3
Global M&A –
How nancial services deals compare to other industries 5
Deal drivers –
The changing characteristics o nancial services M&A since 2007 10
Key geographical dierences –A look at how regions and countries are reacting to the new
environment 12
Key actors in managing M&A deals across FS sectors 16
Lessons learned 18
1 Take your time on the due diligence, but integrate ast 18
2 Revenue versus cost synergies 20
3 Communicate careully with the market 22
4 Track progress 24
5 Cultural integration 25
Is the deal going to go well? Six key questions to ask 28
A wave o deals to come –
KPMG proessionals give their view on what to expect 30
The value o using an advisor 32
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Introduction
Jeremy Anderson Global Chairman,Financial Services
John KellyGlobal Head oIntegration & EMA Heado Transaction Services
Above the desk o one senior nancial
services executive in New York is a
ramed quotation rom the 20th century
academic and business consultant DrWilliam Edwards Deming. It says, “It is
not necessary to change. Survival is not
mandatory”.
The truth o this lesson has been
demonstrated in the clearest possibleashion as nancial services (FS)
companies throughout the world have
struggled with the consequences
o a spectacular recession. The old
conventional wisdom on how to run a
successul business has disappeared
under a mountain o new regulation
and radically changed market dynamics.
Organizations wanting to continue in
this sector have had to think very hardabout how and where they want to
operate in the new market environment.
To help anyone contemplating a merger
in the FS sector, we have taken the
conclusions developed in KPMG
International’s latest global survey o
M&A activity, published as “A NewDawn: good deals in challenging times”,
and have asked nancial services
partners around the world to compare
and contrast these with what they
see in the FS markets they know best.The result is this report, which oers a
view on the drivers o FS M&A activity
yesterday, today and tomorrow, along
with proessional guidance on how to
help ensure that a complex deal willdeliver the value it promises.
We want to thank all those who took
part in the original global survey and
the KPMG proessionals whose insight
has allowed us to ocus on what thisactivity means or the nancial services
sector. At a time o huge turbulence anduncertainty, their contributions provide
a ramework to help make sense o the
deals being done today, and give a clear
steer on the drivers o the deals that
will shape the global nancial services
market or the next decade and more.
2 | Introduct ion
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Executive summary
This report examines the main themes o the global FS M&A
market over the last three years and looks orward to what the
FS sector might expect in the short to medium term. It ocuses
on the strategic priorities that have been driving FS companies to
dispose and acquire in this period, in an attempt to pin down
the key actors that can distinguish successul transactions
rom potential ailures.
The source or much o the analysis in this study is the latest in KPMG International’slong-running series o surveys o the global M&A market, published under the title
“A New Dawn: good deals in challenging times”, plus detailed interviews with KPMG
nancial services specialists around the world.
The key fndings are:
• Thewaveofdealsfollowingtherecessionisnowatanend;thereisanewwave coming, the only question is when it will break
• CompetitionwillcomefromAsia-PacicbuyersandfromaresurgentPrivate
Equity sector
• Costcuttinghasgivenwaytorevenuegrowthasaprimarydealdriver;
growing through acquisition is the new normal
• Marketsarestillskepticalofvaluesbasedonrevenuesynergies,buttheycanbe
persuaded by a well-supported argument
• Oldissueswithpoorplanning,poorcommunicationsandlackofattentionto
culturaldifferencesstillpersist;thereisrealvaluetobegainedfromsolving
these problems.
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This last point will be amiliar to people who have read any o the numerous KPMG
reports on the M&A market published in the last decade. These are endemic
problems, and a great deal o thought and energy has been poured into nding ways
to improve the management o major deals. We have seen a distinct improvement
in the levels o proessionalism as a result, but or the FS sector in particular, there
remain ve main lessons or a successul deal:
1. The need or speed. Successul deals are almost always those that are completed
ast. Long, drawn-out merger processes tend to lose sight o the original goal o the
deal, and energy dissipates, leaving integrations only partially complete. Clarity o
thought and rapid action are very important.
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2. Serious attention to revenue
synergies. Markets are naturally
skeptical o revenue synergies, but
i they are an important part o thedeal, they need to be included in the
rationale. Work on developing strong,
persuasive arguments on revenuesynergies is rarely wasted.
3. Communicate careully with the
market. Investors today want to hearbottom-up explanations o all the
value drivers within a deal, delivered
with condence by the CEO.
4. Track progress. One o the most
valuable things a company can dois to develop a reputation or
careully-tracked progress in
delivering the promised benets romits deals. Integration plans need to
have tough metrics built-in.
5. Cultural integration. Deals can anddo ail because not enough attention
was paid to the cultural dierences
between the two sets o people being
brought together. Losing good people
is a hidden cost o poor planning that
markets are looking out or.
We have distilled these lessons into
six key questions that will give a
good indication o whether or not adeal will be successul. They are:
Is there a clear plan in place or
the whole o the deal, including
integration, with agreed metrics
to dene and measure success?
Can the plan be carried out
quickly?
Do we know in detail what we
are going to do the day ater the
deal is completed?
How long is it taking to get
answers to our questions rom
the target company?Are we thinking hard enough
about how we will integratecustomers and employees into
our new, enlarged company?
I this deal goes wrong, do we
have the resources and energy
to do it all over again and get it
right?
4 | Executive summar y
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Global M&A – how fnancial
services compares
This study o the nancial services M&A market is based, in part, on a wider study o the global M&A
market between 2007 and 20091. So beore looking in detail at M&A in the FS sector, we should
look briefy at the dominant trends at a global level across all sectors, and at how FS deals as a whole
compared with what was happening elsewhere.
Perhaps the most surprising ndingrom the main report was that despite
the impact o the recession on global
economic activity during these years,
the proportion o deals that actually
created value (as measured by the
movements in the acquirer’s share
price relative to their sector) rose rom
27 percent in 2005–2006 to 31 percentin 2007–2009.
Many o the deals done in the FS sectorduring this period were completed by
privately owned acquirers, so or these
deals there is no publicly available
inormation on subsequent share price
movements. But where this inormation
was available, just under 70 percent
o deals were ollowed by share pricechanges that suggested an increase in
corporate value, or at least a decline in
value that was less than that experienced
by the rest o the sector.
Financial
services (34)
Strongly agree
Tend to agree
Tend to disagree
Strongly disagree
Not sure
Global
average (162) 56% 52%
15%
12%
4%6%
23%
21%
5% 6%
By the time your plan for target company is complete, this deal will have createdvalue for your organization
Source: KPMG International , A new dawn: good deals in challenging times, July 2011.
73% o companies in the
FS sector agreed
that by the time the deal was
complete, it will have createdvalue or the organization.
1“A New Dawn: good deals in challenging times” KPMG International, 2011. This is the sixth in a series o KPMG reports on the global
M&A market. The series began in 2000 with a review o M&A in 1997 – 1998.
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The general improvement in perormance
is explained by three main actors:
• Areductionintargetprices,
predominantly in the Atlantic markets,
caused by the gradual withdrawal
o private equity houses rom the
market as the recession took hold
• Thegreaterscrutinythatcompanies
ound themselves under rom
recession-hit shareholders wanting
to be sure that a proposed deal really
would create value
• Aclearswitchinfocusfromdealsthat
were designed to cut costs, to deals
that generated growth in revenues.
This last point seems to have particular
signicance or the FS sector. Asked
about the initial rationale or the deal,
FS companies were much more likely
than others to cite increasing market
share, geographic growth, or expandinginto a growing sector as major actors.
All o these are measures associated
with increasing revenues rather than
consolidation or reducing costs. Cost
synergies were chosen as a rationale
by only 15 percent o FS companies,
compared with 19 percent o all thecompanies surveyed.
Top 3 reasons behind a FS deal
›› Increase market share
›› Geographic growth
›› Expand into a growing sector
6 | Global M&A – how FS companies compare
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Pricing actors
This need or revenues appears again in
the reasoning behind the pricing o the
target company. Here, 68 percent o FS
companies chose revenue enhancement
as their largest single actor in
determining price. Cost savings werechosen as a actor by only 41 percent.
There are clues to this ocus on
revenues in two questions touching
on the market conditions surrounding
the deals. FS companies were morelikely than other companies to agree
strongly that their acquisition had
allowed them to deal better with market
or competitive conditions (55 percent
versus 46 percent). They were much
more likely to agree that the economic
climate has led acquirers to ocus on
revenue rather than cost synergies
(65 percent versus 45 percent).
These responses show that the eect
o recession on the revenues o FS
companies has been relatively greater
than or other companies, and that the
need to rebuild revenue fows played agreater part in FS decisions to acquire
than it did elsewhere.
Turning to the management and
planning that went into integration o
the target company, FS companies
were reasonably quick to get ullyworking management teams in to
their acquisitions, with 44 percent
saying their management team was
in place and working within a month
o completion compared with a globalaverage o 48 percent.
What was the largest single actor
in determining price?
41% 68%Revenue
enhancementCost savings
8 | Global M&A – how FS companies compare
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Planning ahead
But FS companies were ahead in
the amount o planning that they
carried out prior to completion.
A third o respondents in the sector
said that they began their planning
or post-deal management morethan ve months beore completion,
compared with only 25 percent o the
wider sample. A large proportion o
the companies polled in all sectors
(27 percent) did not begin planning
or post-deal integration until around
8 weeks to completion.
Due diligence
Given the longer planning period, it is
curious that FS companies generally
appeared to do less due diligence than
other types o companies. FS companies
ocused on nancial, commercial, legal
and operational due diligence, but ineach o these areas, the proportion o
acquirers carrying out due diligence was
less than the global average.
FS companies were more active thanthe average in carrying out due diligence
on IT systems and strategic matters, but
they shared the general trend o putting
HR due diligence at the bottom o the list.
62%
71%
47%
81%
56%
56%
47%45%
42%
35%38%
44%
50%
62%
Source: KPMG International, A new dawn: good deals in challenging times, July 2011
Financial (including tax and pensions)
Commercial
Legal
Operational
Strategic
IT
Human resources
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Financial services (34) Global average (162)
What types of due diligence did you do?
Financial service companies
did less due diligence than
the global average.The most
common types they did were
nancial, commercial and
operational.
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Deal drivers – the changing
characteristics o fnancialservices M&A
In this section we will look more closely at the main drivers or FS
deals since 2007, and especially how they have changed rom year
to year. The our years since 2007 have clearly been a transition
rom the end o an M&A boom, through deep recession and into a
tentative recovery.
At the beginning o 2007 there was stillenough momentum in the market or
the last big deals to go through at pre-
recession prices.That gave way in the later part o the
year and into 2008 to a slack period, ascompanies came to terms with the idea
that a recession was upon them and
waited to see how bad it would be.
Later in 2008 and into 2009, deal activity
picked up, driven on the sell side bybanks and insurers needing to raise
capital to shore up poorly perorming
businesses, and on the buy side by those
relatively ew organizations able to take
advantage o the opportunity to pick up
good quality assets at low prices.In many cases, these were not assetsthat would, in more normal times, have
ound their way onto the market. FS
companies, particularly in the US and
parts o Europe, were being orced to
‘cash in their chips’ selling highly valued
assets that they would have preerred to
keep, simply in order to raise the capital
necessary to stay in business.
2008-09 2009-102007
10 | Deal drivers – t he changing characteristi cs o FS M&A
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In the US, legislative changes and the nancial crisis drove amultitude o deals that may or may not have added up to much
o an increase in value. It can take two or three years to work outwhether a deal has been successul.
Tiberius Vadan, Senior Director, KPMG in the US, Integration and Separation, Transactions and Restructuring
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Growth throughacquisition is
the new normal. Those
that can’t or won’taccept this will besnapped up
Miguel Sagarna, National Sector Leader,KPMG in the US, Transactions andRestructuring, Financial Services
In Asia, the challenge or many organizations is howto overcome regulatory and valuation issues to access
markets that are growing at 25–30 percent a year. I you get inat the right time, you are growing the market by entering. Thetrick in the current environment is to nd the right partner or
opportunity in an increasingly competitive arena.Sam Evans, Partner, KPMG in China, Transactions and Restructuring, Financial Services
In 2009 and 2010, capital was still king,
but rather than driving the market
orward it acted as a brake. Deals that
might normally make perect sense rom
a business perspective were not being
completed because they would absorb
too much o this precious resource.
This was not just a reaction to the
emerging problems o business done
in the past. It was nervousness o thenew and signicantly tougher capital
requirements that banks and insurers
expected to be imposed on them by
new regulations.
For some o the bolder and better
capitalized companies, however, this
phase o retrenchment has presented
opportunities to do deals that might not
have seemed easible during the boom.
The Bank o America/Merrill Lynch
merger, or example, was a surprise to
those who elt that the cultures o thetwo organizations were so dierent
as to be entirely incompatible. But
Bank o America was able to pick up a
distribution channel or its investment
banking division which gave them a
clear benet which might not have been
available at any other time. Similarly,
the wave o acquisitions in Europe and
the US made by the big Spanish banks,Banco Santander and Banco de Bilbao,
were elt by many to be an opportunistic
reaction to a unique and possibly
unrepeatable set o circumstances.
Tiberius Vadan, rom KPMG’s US
member rm says that the upheaval
in the FS market has had a liberating
eect on thinking about how businesses
should be organized. “Right now, people
are listening to creativity.” he said. “A lot
o strategic new thinking and value isbeing created by unlocking assets that
were stuck in environments where they
were not allowed to fourish.”
But this is not an entirely comortable
experience, especially or the old guardo FS managers, many o whom have
ound their undamental belies about
their business either challenged or
completely shattered. Miguel Sagarna,
also rom KPMG in the US, says that FS
organizations have gone through a painul
period o sel-examination. The market is
demanding growth, and those that have
realized that the prospects or organic
growth in their existing businesses arepoor, have had to take the stark decision
o whether to be an acquirer or a target.
“The sector is still trying to sort itsel
out,” says Miguel Sagarna, “but it’s
clear that the new normal is that growth
through acquisition is going to be parto any organization’s strategy going
orward. Those that can’t or won’t
accept this will be snapped up.”
2008-09 2009-102007
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Key geographical dierences
Asia-Pacifc region
In the Asia-Pacic region (ASPAC), thevery active M&A markets o 2007 and
2008 have cooled as the delayed impact
o global recession has had its eect.
By contrast with some o the Atlantic
markets, ASPAC FS companies have
not had signicant capital pressureor a need to implement a very heavy
round o cost-cutting. Increasingly FS
companies are ocused on controlling
costs and improving cost/income ratios,
but there has also been, and continues
to be, an emphasis on delivering growth
and expansion into new markets.
The last 12 to 18 months have seen a
signicant amount o transaction related
activity in the bancassurance sector, as
banks and insurance companies look to
secure potentially lucrative distribution
opportunities. Many regional players
have used bancassurance opportunitiesto gain access to high growth
developing markets.
But governments in the region also
recognize the value that their economies
have to oer oreign acquirers, so it iscommon to nd legal restrictions on the
percentage o a domestic FS company
that can be owned by a oreign partner.
“Ownership restrictions typically prevent
oreign companies gaining control,” says
Sam Evans rom KPMG’s member rm in
Hong Kong, “so there tend to be a lot o
joint ventures and strategic investments,
combined with capability transerprograms where big banks and insurers
ocus on helping their local partner
develop their businesses.”
Australia
In Australia the FS sector has remained
relatively untouched by recession, leaving
the large banks well capitalized and
looking or opportunities to consolidate
their position.
12 | Key geogr aphical dierences
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Deal rationale andmotivation in Asia
is quite dierent, andthis has implicationsor the way youapproach the post-deal
environment. Oten,you are not looking at aormal integration.
Sam Evans, Partner, KPMG in China,Transactions and Restructuring,Financial Services
China
In China, banks and insurers have
been ocusing on opportunities in their
domestic market. But there is evidence
o a gradual shit in ocus towards
overseas markets, with some Chinesebanks pursuing opportunities in the
US and South America. Going orward
we expect to see a signicant increase
in activity, as the major banks and
insurers turn their attention to overseas
acquisitions.
There is also evidence among oreign
investors o a more undamental review
o ASPAC strategies and how best to
leverage the signicant opportunitiesacross the dierent markets.
“In the initial phase, everyone jumped
in, thinking that they really need to have
a business in China.” says Sam Evans
o KPMG’s member rm in Hong Kong.
“But now, in the second phase, peopleare asking themselves whether they
are really making money here. There is
a much greater awareness o what is
strategically important, who is the right
partner, and what parts o the market
should be ocused on. Some companies
have pulled out entirely, while others
have sold non-core assets to ocus on
their main business.”
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14 | Key geogr aphical dierences
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The Atlantic markets
There is a view emerging rom the
global M&A survey that deals done
recently in the US markets havegenerally been more successul at
creating value than those done in
Europe. It is not clear that this can be
said o deals done in the FS sector.
It has been argued that the sheer size othe US market or nancial services will
tend to make deals more successul,
with relatively ewer regulations and
restrictions than the more complex
European markets, combined with labor
legislation which makes downsizing
easier to accomplish.
But successul deals in the Atlantic
markets have generally been those that
have been done quickly and with a clear,
achievable rationale in mind. Speed o
integration is a major actor in the success
or ailure o a deal, and deals where
cultural or organizational issues have not
been thought through and resolved in
advance, tend to run a high risk o beingseen by the markets as unsuccessul.
USThere has been a brisk market in ailed
or troubled US banks and insurers, but
most o the big deals have now been
done. Whether they were successul
ornotremainstobeseen;alotof
deals were done at high prices, and the
market is watching to see how well the
integration plans and synergies workbeore coming to a judgment.
There is a clear appetite now or deals
that will generate growth. Potential
acquirers eel they have come through
the worst o the cost cutting and want to
move into an expansionary phase. What
is holding this back is uncertainty over
imminent regulatory changes combined
with a determination not to overpay.
Brazil
Economic problems in the developedeconomies have highlighted strong
growth in other parts o the world,
particularly in Brazil. Reuters puts
Brazil’s average annual economic
growth rate since 2004 at 4.4 percent,
peaking last year at 7.5 percent, its
astest pace in 24 years.
This prosperity has stimulated demand
or nancial services, so it is little
surprise that the past our years has
seen a vigorous round o consolidation
among the large retail institutions,with Santander and Banco do Brasilespecially acquisitive. In the rst six
months o 2011 there were 22 major
deals, compared with 28 or the whole
o 2010. Activity is expected to remain
high, or the rest o this year at least.
Canada
Canadian nancial services companies
have a rare opportunity to make somemajor acquisitions in other countries
on avorable terms. Canadian banks
have come through the global nancial
crisis relatively unscathed, and they
are now very well capitalized with ew
opportunities or acquisitions or organic
growth at home.
Their primary area o interest is,
naturally, the huge US market south
o the border. There is already alot o interest in selecting suitable
acquisitions, especially banks that are
strong at the state level which can serve
as a base or urther expansion. But
some institutions are venturing urtheraeld, assessing possible acquisitions in
South America, particularly Brazil, and in
the Asia Pacic states.
Canadian nancial services people are
generally cautious and conservative,and there is a history o ailed oreign
acquisitions whose lessons they arekeen to learn. There will be activity
in this market, but it will be careul,
deliberate, and done on the right terms.
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European Union
For those countries hit hardest by debt
crises, particularly Ireland, Greece,
Spain and Portugal, fnancial servicessectors problems have switly become
sovereign debt problems as banks
have turned to governments or
support. Widespread exposure to the
weaker economies has damped down
M&A activity across the continent,
but well capitalized FS companies,
particularly those based in Switzerland
and, paradoxically, the large Spanish
banks, have taken the opportunity to
strengthen their market positions.
There is some pent-up demand in thesector, which is being held back (as in
the US) by uncertainty over the detail o
orthcoming legislation and changes in
capital adequacy requirements. There arealso signs o interest in the sector rom
acquisitive Russian interests, who may
play a signifcant role in the next ew years.
UK
The atermath o the fnancial crisis is stillworking its way through the UK fnancial
services sector, with several majorbanks still eectively under State control
and being required to divest non-core
businesses. At the same time, and in
addition to the anticipated impact o new
European legislation, the UK Finance
Minister has announced plans or a major
overhaul o fnancial sector regulation,
which will include proposals to require
banks to separate their retail operationsrom their investment banking arms.
This is ertile ground or a lively M&A
market, and a substantial number o UKFS companies are undertaking internal
reviews which will almost certainlyresult in new assets coming on to the
market in the next two to three years.
Shrewd acquirers will be active, and
commentators are expecting a
re-emergence o the PE houses in
this market, as well as trade buyers
rom the UK and elsewhere.
European banksgenerally think
they can easily integratethe US arm into thebank’s Europeanoperating model. Butthey soon realize thatsignifcant dierencesin products, servicesand customer/employeeculture exist. Addressing
those dierencescan lead to extendedintegration timelines,incomplete integrationand synergy leakagewhich could ultimatelyundermine the successo the deal.
Thomas Fekete,
Manager, KPMG in the US,Integration and Separation,Transactions and Restructuring
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Key actors in managing
M&A deals across FS sectors
In this section we have summarized the main characteristics o the M&A deals carried out recently in
each o the main FS sectors. This is not intended to be an exhaustive list o deal eatures. Rather, it is
here to highlight the key dierences in approach between the sectors, and to give some insight intothose actors most likely to shape deal negotiations now and in the immediate uture.
Banking
Common deal
drivers
Common deal
priorities
Deal team
structure and
management
Pre-deal planningPost-deal
integrationCultural ft
Distribution
Geographical/
market growth
Capitalrequirements
Regulation
Technology
Cash
management
Operations
Continuity
Deal teams otenseparate rom
implementation
teams.
Small groups
ocusing on
particular
aspects o the
deal with limited
understanding othe whole.
Patchycommunication.
Tendency to ocuson cost savings
– assumptions
o 25–40 percentsavings not
uncommon.
Establishing core
and non-core
businesses.
Cultural issues
generally low
on the list opriorities.
Day 1 continuity
very important
or customer
condence –
means much
attention paid
to IT.
Not a strengthor this sector,
especiallyor big retail
banks. Teams
responsible or
implementing
the deal are oten
dierent rom
those who do pre-
deal planning,
so key targets are
oten lost or nottracked.
Integration takes
18–24 months,
which is too long,
energy ades andIT/cultural issues
are oten let
unresolved.
Internal culturesare oten strong,
but relatively
little attention
is paid to how
they might aect
the success o a
deal. A common
view is that i
a deal makes
commercialsense, then the
cultural aspectsare not relevant.
Dierent
customercultures, e.g.,
US customer
expectations
versus those
common in
Europe, can also
prove dicult to
assimilate.
16 | Key actor s in mana ging M&A deals acro ss FS se ctors
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Insurance
Common deal
drivers
Common deal
priorities
Deal team
structure and
management
Pre-deal planningPost-deal
integrationCultural ft
DistributionScale benets
Cross-selling/
bancassurance
Capital
requirements
RiskContinuity
Talent retention
Large teams withmany specialists.
Team
management at a
premium.
In-house M&A
teams becoming
more common,
but matched
by increased
willingness to
seek outside help.
Attention todue diligence
generally
improving,especially in
ASPAC ollowing
past due diligence
ailures.
Focus on risk andactuarial analysis,
distribution
matters
especially wherebancassurance
is a deal rationale
and where
dierent sales
orces are
involved.
Merging big
insurers is still a
developing eld.
Shares many othe problemso the banking
sector.
Rare to see
convincing
stretch targetsbeing developed
and introduced
centrally.
Integration plans
oten devolved
too ar down theorganization, and
let to the wrong
people.
Merging dierent
sales orces with
well-developed
cultures is a
particularly
dicult problem.
Becoming moreimportant in
deal planning,
especially i
sales orces are
involved. But still
not an area o
strength.
Investment Management
Common deal
drivers
Common deal
priorities
Deal team
structure and
management
Pre-deal planningPost-deal
integrationCultural ft
Core business
model relies on
growth through
acquisition
Product range
enhancement
Distribution
Better asset
growth through
improved
management
Retaining key
personnel
Speed
Oten M&A
specialists with
wide experience.
Well organized,
ocused, clear plan
o action.
Where merger
specialists
are involved,
can be a very
well organized
process. May be
seen as infexible,but generally very
eective.
Clear idea o what
parts o the target
are valuable,what to do with
them, and how
to dispose o the
rest.
Tends to be done
quickly and well
by the merger
specialists, helped
by strong expertise
and a clear plan.
Generally a less
complex task
than merging a
big retail bank or
insurer, but close
attention to the
real value drivers
in the business
and to those with
the customer
relationships
means a greaterchance o
measurable
success.
A key driver o deal
planning, and a
ocus o attention
where individuals
and teams are
seen as having
commercially
important client
relationships and
und perormance
track records.
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Lessons learnedKPMG’s long-term analysis o the actors behind successul M&A
deals, combined with the comments on recent activity rom our
specialists, has highlighted some common issues relating to the
FS sector. We have summarized them here.
1. Take your time on the due diligence,but integrate ast.
Some o the very biggest recent deals
in the FS sector have been completedater astonishingly short due diligence
periods. There are undoubtedly some
very talented analysts working in the
sector who may indeed be able to
assess a business in a matter o hours,
but it stretches credibility i two large
banks, or example, claim that they are
ideal candidates or merger ater only aew days’ work.
Carl Carande, who leads the FS integration
practice o KPMG’s US member rm, says
there is no way that proper due diligencecan be completed over a weekend. “Thepre- and post-completion work really need
to be seen as one process,” he says, “and
i the early work is not done well, the
integration will be dicult. With one recent
client, they thought they had nished the
due diligence, but we then handed them
a urther set o around 90 questions
covering important details about operating
platorms, tenure o key people, product
lines and operational capabilities that were
vital or integration planning. They had tohave this inormation i the integration was
going to go smoothly.”
But with the due diligence complete,
successul deals are generally completed
ast. The FS sector leaders in this area arethe asset managers, possibly because
so much o the value in the deals they do
is tied up in the individuals in the target
company who may leave unless they eel
secure and valued. Ian Smith, o KPMG’s
UK member rm is very clear on what
makes the asset managers successul.“They create a very ocused and clear
model or growth through acquisition,”
he says. “What makes it work is the
clarity, the thinking and planning that
goes into creating a ramework that they
can drop organizations into. When theyhave a deal, they don’t prevaricate, they
integrate very quickly, putting pressure
into the system to get it nished ast.”
This ocus on speed o implementation
is relatively rare in nancial services.
It can be ound in the insurance sector
where the past two years have seen
some very well executed deals. But
among those deals that ail to live upto their promise in terms o revenue or
cost synergies, it is common to nd that
the pace o integration has been slow.
In investment banking, a European bank
aced the task o integrating a newlyacquired trading team, chose to integrate
ast. Age Lindenbergh, a Partner in
KPMG’s Transactions and Restructuring
Dutch practice recalls, “They had
derivative traders that had been head-on
competitors or most o their lives and
we were concerned about their ability to
work together. Bringing them together,
to work on one foor immediately ater
closure o the transaction turned outto be a decisive actor in building astrong, new, joint culture and to reap the
expected synergies.
Depending on the size o the
organization, proper integration can’t
really be completed in less thannine months. But KPMG specialists
across the world cite deals where the
integration process is still not nished
two years later, oten because the
planning necessary to decide which
parts o the business should be kept andwhich should be sold, or how dierent
parts o the combined business will
work together, does not even start until
ater the deal has been completed.
Deals done astmay look good
nancially, but i you are
planning to leave yourunderlying systems andoperational integrationuntil later, you are storingup trouble. The longeryou leave it to completeyour integration, theharder and moreexpensive it gets.
Carl Carande,
National Account Leader,KPMG in the US,Banking and Finance
2. Revenue versus cost synergies
3. Communicate careully with the
market
1. Take your time on due diligence,
but integrate ast
4. Track progress
5. Cultural integration
18 | Lessons learned
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When you are integrating a business, youocus on three things, protecting the value
in the deal, managing and mitigating any risks,and creating momentum.
Ian Smith, Director, KPMG in the UK, Financial Services Strategy Group,Transactions and Restructuring
“Too oten people do not have a clear
idea o what to do once the deal has
been done,” says Nicholas Grin, Head
o Financial Services, Transactions &Restructuring, KPMG Europe LLP.
“On day one they start the conversations
and so begins 6–12 months odiscussions over the merits o the
respective models and systems, trying to
nd common ground. Eventually, energy
dissipates, everyone orgets what was
driving the deal in the rst place. They
move on to other matters, oten leaving
legacy problems unresolved.”
The most immediate problem o
slow integration is managers getting
distracted rom their day-jobs, and the
underlying perormance o the business
declining as a result. A measure odistraction is almost inevitable, but the
problem is amplied i managers are
co-opted onto workgroups to implement
the integration o their parts o the
business, without adequate externalsupport and with no clear idea o their
own uture with the organization.
Bernie Crowe, o KPMG’s Australian
member rm, points to one recent
example where “... the work streams
that had support rom advisers worked
well. But those that didn’t suered rom
a lack o ocus and were less able to
dene a target uture state and execute
a plan to implement it.”
The most dicult problem causedby slow integrations is the one
mentioned by Ian Smith – dissipation
o energy leading to the acceptance
o integration issues that should be
solved. An integration that is only part
completed can create an organizationthat is a jigsaw o dierent IT systems,
management systems and cultures.
KPMG’s past investigations into M&A
management and value creation haveshown that it is very challenging or
partly-integrated organizations to deliver
the value that their shareholders expect.
It is even more dicult or them to do
the next merger or acquisition, because
they are oten still struggling with the
legacy problems o the last.
One example o successul
integration management planning
involved a large US bank which was
acquiring a smaller but strategically
important rival.
The acquirer had not done a major
deal or 10 years, so it brought in
a team rom KPMG’s US memberrm to support the in-house
Integration Management Oce
(IMO) in its planning or deal closure
and post-deal integration.
The KPMG team’s rst task was to
evaluate the IMO team itsel and
suggest any necessary changes to
the structure o the team and the
program o work it had planned.
With no recent experience oa merger, the IMO team was
not amiliar with the progress inmanagement techniques that had
been made in the past decade,
so KPMG advisers were able
to suggest a range o project
management tools, templates and
collaboration processes that would
improve the running o the project.
The assessment phase o the
project was completed with the
assistance o the KPMG team,
leading to an integration program
involving 21 dierent work streams,with separate integration teams
covering areas including retail and
sales management, operations,nance, HR, training, and consumer
and corporate credit.
Coordinating these streams was
a major task, but it was very
important that there was eectivecross-unctional monitoring and
regular reviews to ensure that the
integration plan would deliver the
promised business benets, costand revenue synergies. KPMG
advisers worked closely with the
IMO team on this task, resulting
in a seamless deal closure and the
development o a highly eective
target operating model or post-deal
conversion.
A KPMG adviser who worked on
the deal comments, “I think we
identied two main issues rom
this project. First, the need or a
strong, well resourced IMO teamvery early in the deal, able to begin
the integration planning well beore
completion.”
“Second, the importance
o keeping close track odependencies and interconnected
risks in the management o the
integration teams. This was vital
to allow the IMO to maintain an
accurate picture o the critical
program path, while allowing the
integration teams to understandhow their work aected the
realization o the deal goals.”
Integration managementCase study
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2. Revenue versus cost synergies
For most o the FS companies
covered in the study, and also or the
clients o the KPMG teams that have
contributed to this report, the phase o
ocusing heavily on cost cutting is overand the emphasis now is on nding
opportunities or growth.
That means looking or opportunities to
build revenues, oten through expanding
distribution, developing new product
lines, or entering new markets. But,
compelling though these opportunities
might seem when the deal is being
negotiated, revenue synergies arerarely given much weight by the
equity markets when they are valuing
a deal. This undervaluing o growth
opportunities has caused substantial
problemsforacquirers;dealshave
collapsed because o it.
Source: KPMG International, A new dawn: good deals in challenging times, July 2011
0% 10% 20% 30% 40% 50% 60% 70%
Growth of market share in existing markets
Expansion into new geography
Cross selling products and services
Expansion into a new sector
Leverage of intellectual property and technologies
Other
None/refused7%
3%
3%
20%
30%32%
37%53%
46%53%
56%62%
9%
2%
Financial services (34) Global average (162)
Which of the following revenue synergies were targeted in the deal?
Financial service companiesgenerally target more revenue
synergies than the averageespecially in cross selling
products and services.
2. Revenue versus cost synergies
3. Communicate careully with the
market
1. Take your time on due diligence,
but integrate ast
4. Track progress
5. Cultural integration
20 | Lessons learned
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I have a databaseo 3–400 deals
which shows that whilecost synergies are otenannounced, revenuesynergies are talkedabout, but that’s all.More robust analysis orevenue synergies willdenitely help.
Tim Prince, Director,Canadian Head o Integration andSeparation
The underlying logic or this skepticism
is clear. Cost reductions are directly
under the control o the acquirer, who
can, or example close redundantdepartments or reduce a labor orce
virtually at will. Revenue synergies,
however, are oten in the hands oclients and customers, who may or
may not choose to do business in the
way that the architects o the deal
are predicting. It is the extra level o
uncertainty that leads markets to
be skeptical o deal values based on
anticipated revenue growth.
Despite this, it is possible to persuade
markets o the value o revenue
predictions, provided the arguments
are strong enough. Francesca Short
o KPMG’s UK member rm says that
acquirers need to be able to answersome pretty undamental questions.
“I businesses can absolutely prove that
they wouldn’t get the growth without
acquiring a particular business, then the
revenue argument might have somevalue,” she says. “But there is always
the question, ‘Why can’t you do that
anyway? Why do you have to do the deal
to get this growth?’ This is especially
true in bancassurance, or example,
where businesses may well have done
several similar deals in the past and
may be challenged on whether they are
making good use o the distribution they
already have.”
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Separation and transitional service agreements
In the complex group structures
that are common in today’s FS
companies, it can be very dicult to
separate out businesses earmarked
or sale i a signicant part o theiroperational support, in the orm o
IT processing, nance or HR,
is provided centrally by the group.
In these cases, a solution may
be to agree Transitional ServiceAgreements (TSAs), so that the
support services continue to be
provided by the seller or an
agreed period post-separation.
This was the case with a US-basedinternational nancial services
organization which KPMG’s US
member rm helped in the disposal
o its retail asset management
business. A key rationale or the
deal was to allow the KPMG
client to ocus on developingits institutional client base, but
in the course o the disposal
to an independent investmentmanagement company, it became
clear that i both businesses were
to remain operational during thetransition period, some orm o
TSA would be needed.
As Mohammed Sheikh rom
KPMG’s UK member rm says,
the vendor is rarely a specialist
in providing services to externalclients, which means that the
operation o the TSA may not be
as ecient as it could be rom a
specialist provider. A urther issue
is that the acquirer does not have
ull control o the business they
have bought until the ull process o
transition is complete, meaning that
the integration process takes longer
and can cost more.
In this case, the KPMG team ocused
on eective communications to
all stakeholders throughout the
process, and developed a governancemodel consisting o senior nanceexecutives to ensure that issues were
identied and reported promptly, and
executive decisions made in good
time. When it emerged early on that
TSAs would be needed, the KPMG
team worked with the client and the
acquirer to identiy precisely where
support was necessary, and to iron
out the details.
A KPMG adviser who worked
on the deal says, “The deal was
completed seamlessly, and we
were glad that we had been able to
start shaping the TSAs early in the
process, because they were key
to the successul operation o the
post-close interim and long term
business model.”
“But a key lesson we took rom the
deal was that there are signicant
benets to be had rom changing
nance arrangements as early
as possible to avoid the need or
TSAs in uture. Partnering with the
buying entity is vital to help ensurethe smooth running o the deal, but
once the process is completed, the
cleaner the break can be, the better
or all concerned.”
Case study
3. Communicate careully with themarket
Markets are generally easier to
persuade o the value o revenue
synergies i the CEO is able to speak
condently and convincingly about
them. It’s common to hear business
leaders telling their audiences thatthere is a strategic rationale or the deal,
they are going to pay a certain amount
or the acquisition, there will be these
cost savings and, i all goes well, the
deal team thinks that this combination
o businesses will produce revenue
synergies o X.
This may seem to be a prudent and careul
line to take with skeptical markets, but i
revenue growth assumptions are built intothe price (and vendors will do their best to
make sure that they are) then the markets
will need to hear a good explanation ohow these assumptions will be realized.
In some countries, like the UK orexample, there are requirements built
into the rules governing takeovers to
ensure that the acquirer does report
on all the synergies cited during
price negotiations. This might make a
2. Revenue versus cost synergies
3. Communicate careully with the
market
1. Take your time on due diligence,
but integrate ast
4. Track progress
5. Cultural integration
The story needsto be complete,
clear, compelling andconvincing or all theaudiences that willneed to hear it.
Tiberius Vadan, Senior Director, KPMGin the US, Integration and Separation,Transactions and Restructuring
22 | Lessons learned
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dierence to the amount o inormation
that an acquirer will want to make
available to the market at the point
where they are gathering support or
the deal. But it does not change the
principle that the better the explanation
or the price being paid, the more likely
it is that the markets will accept it.
Miguel Sagarna cites cases where thesynergies predicted or a deal have
relied partly on media announcements
o synergies or similar deals in the
recent past. “This might have been anacceptable method o benchmarking
in the past, but it isn’t any longer. Even
though it may be dicult to arrive at
detailed numbers, people are getting
more and more interested in seeing
the results o a bottom-up approach to
synergies. The premiums the market is
prepared to tolerate now are much lower
than those they were prepared to accept
in the past.”
Tiberius Vadan agrees on the
need to dene and justiy synergy
assumptions very clearly, but he goes
on to recommend an equally clear set o
priorities which need to be communicatedboth externally and internally.
“It needs to be clear to your internal team,
and to the market, that your rst priority
is not to lose any customers.” he says. “I
CEOs shy away rom talking about their
plans in detail, or it’s not clear what they
plan to do, then that in itsel runs the risk
o leading customers to go elsewhere.”
Detailed bottom up
process
24%
Top down high level
approach
76%
Source: KPMG International, A new dawn: good deals in challenging times, July 2011
Did pre-completion synergy assessment involve a top down high levelapproach or a detailed bottom up process
You need tobreak the price
down into componentsand be able to explainyour thinking to themarket. I you are notconvincing, the marketmay conclude that youare overpaying. And,in act, they may beright.
Miguel Sagarna, National Sector Leader,KPMG in the US, Transactions andRestructuring, Financial Services
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You may be a serial acquirer, but unless youare tracking, how do you know whether you
are successul or not? People are waking up tothis, and are looking or improvements in trackingperormance.
Mohammed Sheikh, Partner, KPMG in the UK, Head o Integration and Separation
Transactions & Restructuring, Financial Services
4. Track progress
In a sector where doing deals is the lie
blood and primary purpose o so manyparticipants, we should probably not
be surprised that tracking revenue and
cost synergies once the deal has been
completed tends not to receive much
attention.In the banking sector in particular, there
is a curious reluctance to check on the
promises and assumptions that ormed
a key part o the negotiations, to see
i they were delivered. Tim Prince, o
KPMG’s Canadian member rm, sees
this as a unction o the separation
o the deal-making teams rom the
operational teams. “The deal maker’s
accountability stops once the deal has
been done, so there is no motivation
on them to see the process through tocompletion.” he says. “I have clients
telling me that it is not their job to track
synergies, so they don’t really care
whether they are delivered or not.”
This is a signicant problem, and
one which seems increasingly to be
concerning shareholders. Mohammed
Sheikh o KPMG’s UK member rm
reports an increasing view that the
quality o the tracking o deal synergies
should be a measure o the success
and skill o the acquiring company in
completing the deal.
Tracking can mean tracing deal-specic
cost savings or 18 months or two yearsater a deal is done, when the temptation
may be to simpliy matters by including
them in a larger pool o costs to bereduced over time. This can seem a
more sensible use o scarce accounting
resources, but it is an essentially short
term view. One o the most valuable
things an acquisitive company can do
is to build up a reputation or careully
tracked progress in previous deals, which
will add credibility to the predictionsmade or uture acquisitions.
Tracking benets can, however, be
complicated, and in an ever-changing
and growing business establishing
reliable metrics can really help. BernieCrowe says that in one business the
projected headcount reduction benets
were not captured, because the people
were re-absorbed back into the business
to support an unexpectedly high level
o growth. This doesn’t mean that the
synergies were lost. Eciency metrics
showed that, although headcount did
not reduce, eciency improved.
2. Revenue versus cost synergies
3. Communicate careully with the
market
1. Take your time on due diligence,
but integrate ast
4. Track progress
5. Cultural integration
24 | Lessons learned
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5. Cultural integration
FS companies are not alone in relegating
cultural and HR issues to the bottomofthelistofduediligenceitems;inthe
general survey only 38 percent said they
had carried out any HR due diligence,
well behind all other matters. But with
the exception o those in the assetmanagement sector, virtually all the FS
companies polled conceded that their
management o people and cultural
issues was not good.
Illustrating one approach to this
problem, an investment management
CEO rom the UK said, “It was pretty
straightorward. We understood that the
new employees were dierent and we
just took that into account. We createdthe best o both worlds.”
A dierent, more directive approach was
revealed in a comment rom a Korean
insurance executive who said “We used
training and workshops to educate thenew employees”. By contrast, a retail
banker rom Germany said, “I think we
just ignored the issues that arose.”
There is a business logic in spending
relatively little time on cultural issuesin the case o, say, two large retail
banks where much o the benet o
Culturalrealignment is a
major issue, especiallywhen it comes tomergers o equals. Thebig banks have built updistinctive cultures overmany, many years, sowhen there is a mergerit is a really big event.People reak out.
Tiberius Vadan, Senior Director, KPMGin the US, Integration and Separation,Transactions and Restructuring
32%22%
12%
12%
6%
6%
3%
2%
2%
1%
1%
1%
9%9%
10%
6%
3%
5%
4%
9%
18%7%
20%
What were the top three people lssues?
Source: KPMG International, A new dawn: good deals in challenging times, July 2011
0% 5% 10% 15% 20% 25% 30% 35%
Retention
Culture
Redundancy processes
Operating model
Appointments
Terms & conditions
Communications
Recruitment
Harmonizing/integration
Remuneration Packages
Pensions
Restructuring
Other
None/refused
Financial services (34) Global average (162)
2. Revenue versus cost synergies
3. Communicate careully with the
market
1. Take your time on due diligence,
but integrate ast
4. Track progress
5. Cultural integration
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the deal comes rom bringing together
and reducing the size o two branch
networks. The logic begins to break
down when lack o attention to peopleissues results in the loss o important
IT or und management sta. It breaks
down completely i cultural problemsresult in the ailure o the deal.
Francesca Short is very clear that lacko attention to cultural dierences can
destroy value in a deal very quickly. “I
have seen a recent case where a global
insurer bought a local player without
taking the time to ensure that key people
in the local company realized they were
going to be part o a global organization
and were willing to make the necessary
adjustments. The deal is ailing because
o this, and the acquirer realizes it.”
Acquiring new customers
These issues seem to arise most
readily in those sectors where nancial
services is seen primarily as a numbers
business rather than one relying on
social customs, preerences andhabits o thought. It may be possible
to overcome these issues within an
organization by removing people whose
views do not t. But it becomes more
dicult when the cultural dierencesare between a FS company and its
newly acquired customers.
This has proved a problem or some o
the European banks who have moved
into the US markets, where the time
needed to integrate US acquisitions has
been longer than they had anticipated
because o the need to adjust European
products and services to US regulations
and customer expectations.
It has also proved to be an issue or FScompanies moving into China, where,
despite a tendency to ocus on nancial
matters in due diligence, personal
relationships have a particularly stronginfuence over how and with whom
people do business. Building the required
relationships can take more time than
acquirers are initially prepared to allocate,
and this may be one o the reasons
or the reassessment o the value o
Chinese tie-ups mentioned by Sam
Evans earlier in this report. In China manycapability transer programs ail to deliver
enhanced value because o relationship
issues as opposed to problems with thecontent o the program. We are aware o
organizations spending 12–18 months
building relationships with their partner, to
create mutual trust and buy-in to a tailored
program or local market conditions.
There are eective diagnostic tools
that can help to pinpoint and deal with
potential cultural clashes. These are
gaining increasing acceptance in theFS sector. I used more widely they could
have a signicant impact on the levels o
success in post-deal integration.
26 | Lessons learned
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There are many dierent sub-
cultures in the nancial servicessector, but two very common
primaryculturesstandout;the
outsourced, commission-based,
independent salesorce, versus the
in-house, employee-based version.
Many o the large retail banking,
insurance or bancassurance deals
that KPMG member rms advise on
involve bringing together these two
cultures in a single organization. Thiscan prove to be very dicult.
In one recent case, a large insurerwith a model based on in-house
und management and an employed
salesorce had acquired an equallylarge competitor which did very
little in-house und management,
preerring to direct clients to unds
managed by others, and relied heavily
on an independent, commission-only
salesorce.
The deal was presented to
shareholders primarily as a method
o removing a competitor, but it was
clear rom the start that the merged
organization would also need to
pursue revenue synergies i the deal
was to be seen to be successul.
This would involve nding a way or
the two very dierent approaches towork together.
The solution proposed by the KPMG
team was to segregate the market
into distinctly dierent audiences,
and develop distribution channels
and product oerings designed
specically or each channel.
“We needed to recognize
where there was a sensitivity to
independence and where there
was not,” says the partner who led
the team. “People wanting detailedinvestment advice generally needed
a much higher level o service and a
wider range o unds than those whowere simply looking or a good deal
on a mortgage or a sae home or
their pension money. So we needed
to develop a very fexible ramework
that allowed advisers to give the
high service that some clients
demanded, while encouraging them
to channel suitable investments into
the parent company’s own managedunds, where security rather thanindependence was the priority.”
This is a short to medium term
solution. It has meant leaving
some parts o the target company
unintegrated, but adapting themerged organization’s support and
management systems to cope withthe dierent ways o doing business.
In the longer term, the KPMG
proposal is to ocus on developing
the skills, market knowledge and
protability o the adviser teams, so
that distinctions between employedand independent advisers take
second place to the quality o the
service that any adviser provides
to clients, and the prots theygenerate.
“Younger advisers are hungry to do
business,” says the partner, “the
issue is how you train them, support
them, and make writing the right
kind o business easy or them.
This does mean letting go those
advisers who are not protable,
and you have to have the metrics
in place to determine who those
people are. But i you can develop a
properly motivated and incentivizedsalesorce with the right mix o
skills, concerns about where they
originated will all away as they
compete or new business.”
Merging dierent salesorce culturesCase study
The architec ture o integra tion | 27
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The combined experiences o KPMG’s
specialists around the world suggest
that there are six key questions that
need to be asked regularly in the
planning o a deal. The answers to
these questions will give some valuable
indications o potential uture problems.They are:
1. Is there a clear plan in place or
the whole o the deal, including
integration, with agreed metrics to
dene and measure success?
2. Can the plan be carried out quickly?
3. Do we know in detail what we are
going to do the day ater the deal is
completed?
4. How long is it taking to get answers
to our questions rom the target
company?
5. Are we thinking hard enough about
how we will integrate customers and
employees into our new, enlargedcompany?
6. I this deal goes wrong, do we have
the energy and the resources to do it
all over again and get it right?
In ASPAC where control can be dicult
to achieve, it is also important to ask –How well do you understand the local
market and your potential partner. Is
there motivation on both sides or
a true partnership? Where can your
organization really add value?
Is the deal going to go well?
Six key questions to ask
Patchworkorganizations
reveal poorly executedprevious integrations.Some can hit a buttonand tell you theinormation you need,others need to go toeach dierent systemand ask individually.It can take months.
Miguel Sagarna, National Sector Leader,KPMG in the US, Transactions and
Restructuring, Financial Services
Source: KPMG International, A new dawn: good deals in challenging times, July 2011
Perform better due diligence
“I would definitely expand the due diligence in some
areas.”
UK, Insurance, VP
“We would carry out far more detailed due diligence.”
US, Investment management, Managing director
Understand the different labor laws andcultures between countries
“We must understand the culture and context of the
country where the acquisitions are being made.”
Spain, Investment management, CFO
More focus on cost/finances
“Be less aggressive in revenue projections from the
acquired business.”
US, Retail banking, Finance director
Conduct faster implementation/integration
“We would have a team that specialized in acquisitions
to speed the proceedings up.”
Spain, Corporate & investment banking, CFO
“We would integrate the target business quicker."
Korea, Insurance, Finance controller
Understand the target company’s market
“I would say that I would do a more thorough survey of
the market to have all the tools needed to acquire the
companies that we want to acquire.”
Brazil, Corporate & investment banking, CFO
HR planning
“I would handle difficult managers better.”
US, Investment management, Director
What will you do differently in your next deal? Answers from FS executives
28 | Is the deal going to go well? Six key questions to ask
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Two organizations might say they are on thesame system, but one could be using the
original version, patched up, customized and nolonger supported, while the other could be using
the very latest release. You have to ask the rightquestions to nd out things like this.
Carl Carande, National Account Leader, KPMG in the US, Banking and Finance
Pre and post-deal planning
Much o the discussion in this
report has ocused on the valueo pre-deal planning and thorough
due diligence. The problems that
can arise when these processes
are not carried out eectively
were illustrated in one recent dealinvolving two large FS companies,
on which a KPMG team advised.
As is relatively common on large
scale FS mergers, the negotiations
and regulatory approval processtook the best part o a year to
complete. Possibly as a result o adesire to get the deal completed,
the ormal due diligence process
was completed very quickly and,
unusually or a deal o this size, was
carried out by an in-house team
without signicant external support.
Diculties began to appear when
the acquirer tried to run a reasonably
extensive pre-completion planning
phase, but ound that many o the
key questions that should have
been answered in the due diligenceprocess had been let unresolved.
“We ound that there were still
too many unknowns surroundingthe operating models o the target
company,” says one KPMG adviserwho worked on the deal, “so we
had to put o a lot o key decisions
until ater completion when we
could see in detail what the target
company looked like.”
The post-completion phase beganwith two weeks o intensive
immersion in the businesses on each
side. The whole process was split into
several work-streams, with detailedpresentations rom each team
intended to give the other side the
in-depth knowledge o the business
necessary or urther planning.
Next came a hypothesis generation/
joint design phase in which each
work stream was asked to develop a
plan or the parts o the business or
which they were responsible.
“This was a very patchy process,”
says the KPMG adviser. “Some o
the work streams did very well, but
they all suered rom the lack o an
overall baseline rom which to work.
This should have been produced by
the nance department, drawing onthe pre-completion work, but the
nance team was scarcely involved
in these discussions.
“Each team was allowed to pick
the data it wanted to illustrate itsplans, which meant that it was
very dicult to see whether the
perormance predictions being
oered or each part o the business
were stretching or not. It was very
noticeable that those work streams
that brought in external advisers,to analyze the data careully and
to help devise proper metrics and
KPIs, produced better and more
convincing plans than those whochose to do it by themselves.”
The integration process or this
deal looks set to go on or at least
another 18 months. “It really
should be done aster,” says theKPMG adviser, “but we are nding
ourselves doing work now that
should have been completed beorethe deal was signed.”
Case study
The architec ture o integra tion | 29
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A wave o deals to come
KPMG’s specialists are unanimous in
their view that there is a wave o FS M&A
activity about to break. The next three
years or so is expected to be a processo reocusing, re-shaping and transacting
or FS businesses all over the world. The
only question is when it will begin.
These plans are being driven by
a unique combination o actors.Internally, as we have already seen,
many organizations have gone through
a severe round o cost-cutting and
are now lean and mean enough to be
looking or growth opportunities as a
matter o priority. But there is still a
huge amount o internal reorganization
under way, as businesses struggle with
the implications o a new economic
environment where clients no longerhave the high levels o trust they once
enjoyed, and business practices that
were once entirely acceptable are nowviewed with suspicion and mistrust.
These changes are leading big FS
companies to look very hard at their
operations, splitting out those that
they think are non-core and runningthem separately, in preparation or a
possible disposal once they have shown
themselves to be viable stand-alone
businesses.
Some o this activity is being driven bylegislation like the Dodd-Frank Act in
the US, and by recovery and resolution
plans which will require some large
institutions to assess what actions they
could take to recover rom a range o
stresses, and i necessary to achieve anorderly wind down.
People havegone to hell
and back with therecession. They seemto think now that weare coming out o it.Clients are saying theywant to concentrate ongrowth – that’s acrossall sectors.
Tiberius Vadan, Senior Director, KPMGin the US, Integration and Separation,Transactions and Restructuring
67% o companies in the
nancial service sector agree that
M&A will bounce back in their
country next year.
Financial
services (34)
Strongly agree
Tend to agree
Tend to disagree
Strongly disagree
Not sure
Global
average (162)
26%
32%
3%12%
7%15%
38% 35%
17% 15%
M&A will bounce back in my country next year (2011)
Source: KPMG International, A new dawn: good deals in challenging times, July 2011
30 | A wave o d eals t o com e
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We are going tosee a lot more
cross-border M&A,with interest romChina and Russia.Premiums will increase.We will get back to theglory days, but not or awhile yet.
Tim Prince, Director,Canadian Head o Integration andSeparation
It is key to actorin the impact and
cost o regulation inyour bid – new capitaland liquidity rules willhave a proound impacton uture prot and
return on assets.Stuart M. Robertson, Global BankingTransactions and Restructuring Sector Lead
External actors driving change include
the imminent appearance o large, well-
capitalized Chinese acquirers on the
market, with strong government backingand an urge to take the Chinese economy
to the next stage in its development. They
will nd themselves in competition withacquisitive Russian interests, and with a
resurgent private equity sector keen to
shed the assets that they have not been
able to sell on while markets were low,
and nd new targets or their skills.
Uncertainty over regulation
What is holding these transactions back
is uncertainty over the detailed eect o
new regulations plus regulatory reorm
and associated opening up o markets
in ASPAC. The ull implications o therevised capital requirements contained
in the Basel III rules, or example, are
still being worked out, and banks will not
want to take major action on disposals
or acquisitions until they have a good
idea o how their overall capital prolewill look under the new regime.
“In Europe, the introduction o Solvency
II, combined with wide ranging changes
to regulation o distribution, will drive
the insurance industry into some major
realignments.” says Francesca Short.
“The increased sophistication in riskanalysis required will orce insurers to
reassess their capital deployment. For
example, the benet o holding closed
lie unds within large groups may come
into doubt as the capital they tie up will
increase signicantly over Solvency Irequirements. The tension between
reducing complexity to reduce need or
capital, and increasing the attractiveness
o products to entice customers topay explicit sales charges is causing
interesting shits in the balance o
power between manuacturers and
distributors o retail insurance products,
which will spark numerous transactions
as distribution channels are realigned.”
Globally, insurers will likely increasingly
look or growth in underdevelopedmarkets where oten the acquisition o a
local player is a saer option than starting
up a completely new operation. The key
to the success o these deals, as we
have said earlier in the paper, is to stamp
the mark o the global player on the
new acquisition to achieve consistent
operational methods and governancestructures, while retaining and using the
unique local knowledge acquired.
These issues will be resolved in time,
and our best estimate is that there is5–7 years o large-scale restructuringahead or nancial services. Whether
this restructuring will end up adding
value to the sector or not, depends to a
large extent on whether the key lessons
o the recent past can be learned,
absorbed and applied.
The architec ture o integra tion | 31
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The value o using an
advisor
It might seem paradoxical, but
experience shows that the more
practised a business becomes at
carrying out successul acquisitions,the more they tend to rely on external
advisors to help them manage the
process. Studies suggest that dealswhere there has been a good external
advisory team will realize, on average,
around 30 percent more value than
those that are done entirely in-house.
The key contributions that KPMG
advisors can make to the success o a
deal are:
• Experiences o past deals – no two
deals are the same, but the same
problems and issues do appear
regularly. A good advisor will havehandled these matters beore, and
will know what works and what
doesn’t.
• Adetailedprogramplanthatwilltake
a deal rom initial due diligence right
through to completion o integration,
with all issues properly resolved.
• Specic,up-to-dateknowledgeof
the relevant regulations, including
labor laws, tax matters, and local
ownership requirements.
• Specialistknowledgeandexperience
on areas o due diligence that may be
unamiliar to the acquirer.
• Knowledgeonhowtoshapethe
new entity, bring together a team
specically to manage the transition
rom two organizations to one, and
drive the process rom beginning
to end.
• Resourcestohelpgetthroughthe
more dicult tasks, including present
revenue synergies in a compelling
way to the market.
• Perspectivetohelpensurethat
targets are stretching, but achievable,
that opportunities are not missed,
and that the rationale that made the
deal attractive in the rst place is
delivered.
32 | The value o u sing a n advis or
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A new dawn: good deals
in challenging times
Related Publications
Bruised but not broken:
The global banking growth agenda
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Contact us
Jeremy Anderson
Global Chairman
Financial Services
KPMG in the UK
T: +44 20 7311 5800
E: jeremy.anderson@kpmg.co.uk
Frank Ellenbürger
Global Sector Leader
InsuranceKPMG in Germany
T: +49 89 9282 1867
E: ellenbuerger@kpmg.com
John Kelly
Global Head o Integration &
EMA Head o Transaction Services
KPMG in the UK
T: +44 20 7694 3528
E: john.kelly@kpmg.co.uk
David Sayer
Global Sector Leader
Retail BankingKPMG in the UK
T: +44 20 7311 5404
E: david.sayer@kpmg.co.uk
Michael J. Conover
Global Sector Leader
Capital Markets
KPMG in the US
T: +1 212 872 6402
E: mconover@kpmg.com
Wm. David Seymour
Global Sector Leader
Investment ManagementKPMG in the US
T: +1 212 872 5988
E: dseymour@kpmg.com
The inormation contained herein is o a general nature and is not intended to address the circumstances o any particular individual or entity. Although we endeavor to
provide accurate and timely inormation, there can be no guarantee that such inormation is accurate as o the date it is received or that it will continue to be accurate in
the uture. No one should act on such inormation without appropriate proessional advice ater a thorough examination o the particular situation.
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