by Stefan Beglinger
Associate Director
March, 2020
Involving IT transformation consultants in the due diligence process before a potential acquisition means banks could avoid costly mistakes, writes Stefan Beglinger
The flurry of bank consolidations over recent years has taught the industry a lot about merging IT systems – yet it’s still no picnic. IT is no longer simply a business tool but is often closely tied to the bank’s business model, which dictates process. This means that any merger should consider much more than connectivity to be a success.
So often the rationale for mergers and acquisitions comes down to synergies. Indeed, it has been estimated that more than one-third of all synergies come from merged IT systems. But if integration of the two systems is dysfunctional, overall performance of the merged business will likely be stymied.
What can go wrong? Merged systems may not be able to provide all the functionality required – for different business lines, for example. This means parallel systems would need to be run for a while, eating into projected synergies and absorbing resources that could otherwise add value elsewhere.
But it’s also possible for merged systems to fail to provide basic access to data, making compliance reporting harder. This in turn might prevent the completion of customer transactions. In short, a botched merging of IT systems could inhibit growth and reduce synergies.
To minimise risk, banks often consult a transformation partner during the due diligence process, with many selecting an existing IT partner to maximise discretion and reduce the chance of rumours starting ahead of any firm offer.
Working with a partner that already knows your business has an added bonus: their knowledge of the applications and software being run usually makes a thorough IT audit much simpler to complete. But firms should pick a partner that has wide experience merging IT systems so they can quickly hone in on areas that might cause trouble.
Other benefits of involving a third party include the value of an objective view – independence that is vital during negotiations because the different parties will always champion their own processes and systems. What’s needed is an informed opinion to help assess priorities and decide what bits of whose systems are best for the merged entity. Similarly, a specialist partner will ideally know the strengths and weaknesses of the different applications the two firms use and could advise – without bias – which to proceed with.
Sometimes the merged entity will require a redesigned IT system. Again, having an experienced transformation partner means they would be able to assess what can be reused from the two original companies and what will need to be acquired, as well as provide a timeline for how long the process would take and outline training requirements. All of this will have a cost, which can affect the terms of any deal.
Specialist IT advice is even more important if the two merging firms have different types of businesses – wealth management and commercial banking, for example. Each business will require quite different processes and the regulatory reporting for each unit will be different again. The specialist would be able to assess both system landscapes and pinpoint realistic synergies after identifying what should be retained or acquired.
A good partner would also be able to assess the quality of the bank’s customers – some require more regulatory oversight than others, and the post-merger IT systems will need to be able to deal with all of them. By preparing the ground ahead of any deal, the buyer should have a far more accurate picture of any potential savings or costs.
It’s a similar story for divestments. Orbium recently helped a long-term client sell a business unit. The bank realised the sale would affect its IT systems and wanted to use the opportunity to look at how to make improvements. It was running multiple platforms and we were able to advise in a non-intrusive way by drawing on our experience of the market and from working with the bank. We were also able to provide an efficiency review and assess what was working well in terms of IT. The divestment was smooth and today the bank is running tighter IT systems.
So, just as a firm will pull in specialist lawyers and business consultants for the value they add when it comes to a merger or acquisition, so too can it gain value from having informed IT advice. Without it, the bank risks spending more than necessary on the target, on integration post-deal and on running the merged entity’s IT well into the future. It’s a simple matter of a little preparation likely saving a lot of trouble down the line.
