Why do M&A activities falter?
As companies are growing, they look for ways to leap frog over the competition quickly and capture market opportunities. One way to accomplish fast growth is through a merger or acquisition. The ultimate purpose of mergers and acquisitions (M&A) is to grow the company and, in many cases, increase profitability. In the past few years, M&As have reached an all-time high since the financial meltdown of a decade ago.
Successful M&As result in better market coverage and increased valuations of those companies. However, it’s interesting to point out that there are a significant number of failures. According to a Harvard Business Review1 report, typically, 70% – 90% of acquisitions are failures. There are many reasons for these failures. Cultural mismatch, lack of clarity on the integration process, limited due diligence and capacity planning failure for potential growth are some of the top reasons.
What to keep in mind
In a financial institution (FI) M&A, there will be significant due diligence before the merger. The question becomes about how comprehensive the due diligence is. Is the focus mainly on the target’s market penetration and their revenues, or do FIs delve into specific details of each revenue generating item? For example, when looking at secured loans, is the due diligence limited to whether the loans are compliant with regulations or is the risk associated with each loan also evaluated? Is the debtor’s history reviewed in addition to their liens to assess the risk? There could be other areas like these that may not be part of the due diligence checklist. To mitigate the risk, banks need to ensure that all areas are covered. If the FIs don’t have enough resources or the right skills, they should engage third parties who have the experience to ensure that any issues are exposed early enough and can help fix them.
There are multiple integration points to be diligent about after a merger. System integration is one of the challenging ones given that there will be disparate systems in the merged organizations. The challenge is to maintain customer satisfaction during the system integration process. As the IT teams focus on the integration, bank employees might be using multiple tools and potentially multiple data sources to support their customers and their management requirements. For lien management activities, employees might be working with multiple Loan Origination Systems (LOS) and multiple lien data sources (Secretary of State, third parties, in-house data) depending on their legacy processes and systems. This not only complicates processing in the short term but also decreases employee productivity, which in turn could delay loan processing times. The lack of integrated solutions and limited capacity to handle increased load due to a merger could result in a reduction in productivity.
For a successful merger, FIs must assess any portfolio risks and ensure that they are mitigated to the greatest extent possible. In addition, it’s critical to determine ways to maintain customer satisfaction and improve employee productivity by ensuring that temporary excess workload is handled by experienced vendors who not only process the work quickly but accurately. As a long-term solution, FIs should look into integrating tightly with relevant solutions (like lien processing with their LOS) to improve overall efficiencies.
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1 M&A: The One Thing You Need to Get Right; https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right