A quick guide for identifying, capturing, and tracking operational cost savings from deal inception through post-close.
It is widely acknowledged that two priorities generally drive bank mergers and acquisitions: one, the desire to expand the business through scale, geography, products, or capability, and, two, to strategically eliminate competition. A third, less discussed driver is synergy capture. ‘Synergy’ is defined as a mutually advantageous conjunction of distinct business participants or elements. In simpler terms, it means the whole is greater than the sum of the parts.
Folding an entire company into an existing organization breeds complexity, particularly with an increased volume of work for back-office and shared service functions. With deal approval often predicated on the ability to streamline the integration with greater efficiency and lower costs, achieving post-deal synergy is a must. We’ve outlined key considerations and best practices for managing synergies throughout the deal life-cycle.
Though difficult, the most successful acquirers incorporate their synergy planning and estimates into the diligence process. Alongside assessing financial health and asset quality of the target organization, acquirers should also consider how easy it will be to sell, manage, and service the existing banking products for the target client base, in addition to adding new products and services from the target to the bank’s existing portfolio.
Common Methods: While due diligence is taking place, leaders commonly keep the deal confidential, even from key stakeholders within their own companies. Using simple top-down estimates, investment bankers, CFOs, and other executives estimate cost savings associated with retiring redundant technologies and reducing duplicative headcount. This method generally uses high-level assumptions and can include any number of “buffer” or “general savings” categories in addition to expected hard cost reductions. While directionally sound, rudimentary models can be troublesome later when more detail and scrutiny is required.
Best Practices: The synergy target is a key input into deal approval by the bank’s board of directors and, for publicly traded companies, is articulated to the market and investors. The need for the deal to produce savings at or above estimates is paramount, and the simple top-down estimates should be balanced against a thorough bottom-up analysis. By expanding the deal team to include key lines of business or function owners, bank leaders will be able to better understand the data and intricacies of the integration. West Monroe often walks clients through the development of Target Operating Models to apply the appropriate people, processes, and technology to the future combined organization. The result allows the deal team to move any redundant systems or vendors into the savings estimates and re-deploy talent into new areas for new hire avoidance in high-growth situations.
It’s also probably a good idea to let the financial experts decide how to account for things like fixed assets and accrued expenses during and following a merger. The Integration Management Office should also help to identify and categorize expenses, as well as work with integration teams to estimate a savings percentage for each vendor. With many different accounting philosophies out there, critical expenses can be hidden in things like accruals, pre-pays, fixed assets, or miscellaneous general ledgers. It is vital that these are explored and capitalized or written-off according to the bank’s methods.
Once the integration work has started, it’s time for the synergy capture to begin. This is typically the first time vendors and software providers are notified of the deal and that the expected volumes will increase, or that their services may no longer be needed. The integration is also the point at which succession planning and severance packages are developed and then distributed to any applicable target bank employees. We generally see around 50 percent of the total cost savings related to bank personnel, with an additional 20 percent savings due to overlapping rent and facilities within markets. The final 30 percent of savings is generally tied to technology and outside services.
Common Methods: Due to the speed and complexity of mergers, integration teams are formed to handle the work within confined lines of business or functional groups. This keeps the subject matter experts close to their work and improves the quality of the integration. However, with this benefit, there is also a drawback. By allowing the integration teams to manage their own functions, they are responsible for identifying and terminating any of their contracts or services that are no longer needed. They are also responsible for building the integrated team and talent. For a bank that has not challenged the status quo recently, this can result in business leaders simply adding transaction volume to their existing teams and platforms, straining the future state. While synergies will be achieved, operational effectiveness is put at risk. Decisions made in silos can have unintended effects throughout the organization.
Best Practices: Alternatively, highly effective acquirers will centralize the function of vendor management and people decisions. A central authority will be able to look at the use of systems and services across business lines to better address their continuation or retirement. Letters can then be sent notifying go-forward vendors of new billing information, in addition to cancellation letters for contract and non-contract service providers.
For go-forward vendors, a merger is a great time to begin thinking about contract renegotiations. The vendor management group should seek better pricing for scale, in addition to considering tiered pricing for future growth. As an example, a recent client nearly doubled their ATM network and used the opportunity to re-price their maintenance contracts to allow for an additional 30 percent growth at a cheaper price point. Strategies like this can ensure synergies are maintained even through subsequent deals.
Finally, while some employees and roles are viewed as redundant, infrastructures are not always positioned to accept the new work flow and volume. In some cases, business leaders feel they need additional resources to complete their work at the same pace and quality as before the deal. This can be counterproductive to original synergy estimates as the goal was to streamline, not add to staff. Cross-functional steering committees should act as the governing body as it relates to areas where staff are added or how a growth strategy is executed.
Following Client Day One, the synergy work is far from over. Our clients often set 12–18 month target goals for fully capturing the cost savings they committed to their board or the market. With the flurry of activity and onboarding of new customers and employees, and with contracts that may not be immediately ready for termination or renewal, it can be easy to let synergies fall off the radar.
Common Methods: Most of the time, our clients remain fully engaged in the integration through Day One and can rightly celebrate a successful merger. This simply signals the functional integration of the technology and workforce. With a focus on meeting new customers, continuing to train new employees, and looking forward to new sales targets and metrics, operations quickly become business as usual. While the Target Operating Models may have seemed aspirational, the reality is that only a fraction of the future state is actually achieved as attention is drawn away from continuous improvement.
Best Practices: West Monroe Partners is an advocate of building solutions and road maps that our clients can sustain after we’ve left their offices. Due to the competing priorities following a merger, we sometimes see banks come up short against their original synergy estimates or feel that they are at capacity and have little room to scale efficiently. We use industry milestones (such as surpassing $10 billion in assets for community banks) as baselines for developing the Target Operating Models. When a bank needs to free up additional capacity in order to grow, but also avoid adding headcount, we turn to lean methodologies and Value Stream Mapping workshops to eliminate waste in processes that are often overlooked during deal execution. With up to 20 percent savings in labor requirements, banks can then redeploy these employees to more critical or strained areas of the organization to help with sustainability and scalability.
An acquisition can be a growth catalyst for banks, particularly those nearing critical milestones. A thoughtful approach to synergy planning, capturing, and monitoring is a way to ensure the shareholders and board members are comfortable with the deal. More so, synergy capture can be realized using some of the methods mentioned above. When synergy planning, capture, and monitoring is positioned as a driver of the proposed deal, the newly combined organization will be better positioned for growth, and come out the other side the deal a healthier, more efficient operation.
Date: April 08, 2019