Architecture of Integration Report

8/3/2019 Architecture of Integration Report

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FINANCIAL SERVICES

The Architectureo Integration

An essential guide to successul mergers and

acquisitions in Financial Services

kpmg.com

KPMG INTERNATIONAL

http://www.kpmg.com/




Americas

Ricardo Anhesini Souza

Head o Financial Services Latin

America and Brazil

KPMG in Brazil

T: +55 11 2183 3141E: [email protected]

Tim Prince

DirectorCanadian Head o Integrationand Separation

KPMG in CanadaT: +1 416 777 8883E: [email protected]

Carl CarandeNational Account LeaderBanking and Finance

KPMG in the UST: +1 704 335 5565E: [email protected]

Thomas FeketeManagerIntegration and Separation,

Transactions and RestructuringKPMG in the UST: +1 212 954 2182E: [email protected]

Miguel SagarnaNational Sector Leader

Transactions and Restructuring,Financial Services


Tiberius Vadan

Senior DirectorIntegration and Separation,Transactions and Restructuring


ASPAC

Bernie Crowe

DirectorFinancial ServicesKPMG in AustraliaT: +61 2 9335 7667E: [email protected]

KPMG specialists and contributors

Sam EvansPartner

Transactions and Restructuring,Financial Services

KPMG in ChinaT: +85221402879E: [email protected]

EMA

Nicholas Grifn

PartnerHead o Financial Services,Transactions & Restructuring

KPMG Europe LLPT: +44 20 73115924E: [email protected]

Stuart M. RobertsonPartnerGlobal Banking Transactions and

Restructuring Sector LeadKPMG in SwitzerlandT: +41 44 249 33 45E: [email protected]

Mohammed SheikhPartner

Head o Integration and SeparationTransactions & RestructuringFinancial Services

KPMG in the UKT: +44 20 78964992E: [email protected]

Francesca ShortPartnerGlobal Insurance Transactions and

Restructuring Sector Lead


Ian Smith

DirectorFinancial Services Strategy Group,Transactions and Restructuring


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.



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




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




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.

The architectur e o in tegrat ion | 3


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.



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




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.





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




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




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.





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


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



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

The ar chitecture o i ntegrat ion | 11




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




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.”

The archite cture o integra tion | 13




14 | Key geogr aphical dierences


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.



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


© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member frms o the KPMG network are afliated.



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




Insurance

Common deal

drivers

Common deal

priorities

Deal team

structure and

management



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



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.

The archite cture o in tegrati on | 17




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


market

1. Take your time on due diligence,

but integrate ast

4. Track progress

5. Cultural integration

18 | Lessons learned




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






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.


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%


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.



market


but integrate ast

4. Track progress






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.”

The architec ture o integra tion | 21




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



market


but integrate ast

4. Track progress


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





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%


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





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.



market


but integrate ast

4. Track progress







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.


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?


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




market


but integrate ast

4. Track progress





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.





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 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


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




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





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.


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)


30 | A wave o d eals t o com e




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 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




A new dawn: good deals

in challenging times

Related Publications

Bruised but not broken:

The global banking growth agenda




Contact us

Jeremy Anderson

Global Chairman

Financial Services

KPMG in the UK

T: +44 20 7311 5800

E: [email protected]

Frank Ellenbürger

Global Sector Leader

InsuranceKPMG in Germany

T: +49 89 9282 1867


John Kelly

Global Head o Integration &

EMA Head o Transaction Services

KPMG in the UK

T: +44 20 7694 3528


David Sayer


Retail BankingKPMG in the UK

T: +44 20 7311 5404


Michael J. Conover


Capital Markets

KPMG in the US

T: +1 212 872 6402


Wm. David Seymour


Investment ManagementKPMG in the US

T: +1 212 872 5988


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