Publications & Resources

October/November 2007
Focus: Directors Issues

The Trials and Tribulations of Mergers and Acquisitions

By John M. Floyd

Mergers and acquisitions have as a common goal the creation of a business with enhanced market position and greater cost economies. While the ultimate decision of a financial institution to enter into a merger with, or an acquisition of, another will be based on any number of business considerations, the target is always to increase shareholder value.

Bankers continue to use M&A as part of their strategy to increase their market presence. In its 14th Annual Survey of Bank Executives, Grant Thornton reports that one-third of all banks plan to acquire another bank or financial institution within the next three years.

There are the obvious difficulties inherent in any merger or acquisition of blending the operational, cultural and employee practices of the original operations into a successful and smoothly running new business. There are also the less obvious problems to overcome, such as how to accommodate two vastly different technology systems, how to improve market reach and industry visibility, and how to adjust to the economies of the new scale.

To avoid the many pitfalls of mergers and acquisitions, directors should take the initiative and conduct a comprehensive operational evaluation for the new financial entity. For institutions without the internal infrastructure to handle these types of assessments, using a third-party consultant specializing in serving financial institutions will give you an objective understanding of where performance could be optimized.

An Operational Evaluation Leads to a Stronger Institution After the M&A Process

There are a number of areas that can be adjusted to improve customer satisfaction and increase your profitability, provided you know where to look. This is especially important after a merger or an acquisition has taken place, to streamline divergent bank processes and implement a cohesive technology system. Otherwise, you run the risk of duplicating your efforts, or worse, having customers fall through the cracks in your system!

Here are some of the critical areas that need to be evaluated during a process improvement study:

Structural Analysis: You must determine the new internal structure. What departments are there? Does duplication exist? Senior management will need to determine department functionality and to sort out any staffing issues that have arisen. You will also want to examine each department’s budget to look for ways to improve efficiency and cut costs.

Department Workflow: After you have determined the function of each department, you will need to determine the workload and how it should be distributed among the unit’s staff. Next is determining whether each department has the correct number of employees to successfully complete its responsibilities. This stage involves questions such as “What is the purpose of the work-product produced in this department? Who receives it and why? How is it stored? What fraud protection mechanisms are in place?” By asking these questions, you will get a valid measure of your bank’s workflow and be able to make it stronger where it needs reinforcement.

Technology Compatibility: If you do not have a technology system that allows you to access and share data stored by all bank departments in all your locations, then you are probably missing out on advantages you planned on gaining through your merger or acquisition. To improve your market position you need to effectively cross-sell, which requires state-of-the-art technology to link a number of otherwise disparate internal systems. The information available by using technology allows your customer service representatives to secure continued customer satisfaction and loyalty while increasing product penetration.

Competitive Products and Services: Your new institution must continue to offer your customers the products and services they want while increasing your profitability. That will include the implementation of products and services such as: more stringent fraud detection and protection measures, an overdraft privilege program, the addition of more branch banks, and the availability of Remote Deposit Capture (RDC).

And Others: There are many other useful re-engineering reviews that are part of any good comprehensive process improvement study. These include staffing and salary administration reports and comparisons, income and expense analyses, best practices program suggestions, revenue potential planning programs, and detailed incentive program reviews.

A Successful Merger or Acquisition

Once you have signed on the dotted line to complete your merger or acquisition, you will want to make sure your new bank is a resounding success. The transition will be much smoother for your customers, your employees and your business community if you conduct a process improvement study as part of the integration process. Taking time for this important step will be invaluable to these relationships, and ultimately to your bottom line.

John M. Floyd is chairman and CEO of John M. Floyd & Associates, a profitability and performance improvement consulting firm located in Baytown , Tex. He can be reached at 800-809-2307 or www.JMFA.com.

Unauthorized reproduction of all or part of this material without the express written consent of the author is strictly prohibited. All rights reserved.