The COVID-19 pandemic and subsequent lockdown has thrown business valuations into chaos and shown financial services organizations that the shift to digital products and services is not a nice-to-have, but a necessity.
M&As were already anticipated in a crowded market, but the changing behavior of customers has made them a necessity. They make sense from both a strategic and technical point of view, with IT accounting for up to 60% of possible synergies in any M&A deal.
According to McKinsey, “Organizations that have flexible IT systems in place are better positioned to capture the 10 – 15 percent cost savings that M&A can produce” and these occur in four specific areas:
Lower IT costs
On paper, lower IT costs leap out. One company using one system uses less resources than two companies using two systems.
However, these economies can only be realized when there are synergies between the two IT systems in play. An EY paper from October 2019 shows this clearly, “Synergies represent the most direct correlation with M&A integration costs.”
The research looked at 70 M&A deals, including financial services deals, in the US. The paper found a simple calculation—the more change required to make the M&A work, the less the potential savings overall. This was particularly true for IT systems.
The paper draws a comparison to the oil exploration industry. If two companies in oil exploration were to merge, the synergies should be obvious—the value of the oil rigs, and the value of the oil in the ground. This is a relatively simple calculation.
For financial services, a similar calculation is far more complex. Not only will there be areas of overlap, but potential synergies will make a significant impact. Together, this makes any M&A in financial services much more complex. Preparation is everything.
Reduced head count
The same EY paper examines head count and severance. Their research shows that the one-time ‘hit’ for an M&A can represent 50% of total integration costs but viewing this as a single impact is misleading. “Given that such costs often creep back in over the near term, it is critical to track these cost synergies for at least three to five years post-close,” the EY report reads.
Reducing headcount too soon and in the wrong places may be a false economy. Acquisitions bring new talent into a business. These skills and local or industry-defining knowledge may be crucial to the success of the emergent new entity.
“Companies may need to place more emphasis on the talent that they are acquiring and put the resources in place to secure the commitment of individuals who are essential to the organization’s future success,” reads the report.
The Financial Times suggested that a focus on keeping and nurturing staff would be in the long-term benefit of the combined business. After all, what is a business if not its people? For IT this will be doubly important. Any M&A activity will need the influx of specialist people to keep the combined business innovative and competitive.
Economies of scale
McKinsey describes six successful M&A strategies, and three of them relate to economies of scale.
Firstly, consolidation to remove capacity from the market. The financial services sector is super-saturated with competitors, from long-term incumbents to the steady stream of new entrants. This makes M&A in financial services both a viable and necessary strategy.
Secondly, an innovative new company may work wonderfully but have limited market access. A buy-out by a larger incumbent immediately gives that incumbent the ability to sell new services to a much wider audience. This is another well-worn and reliable strategy.
Lastly, there can be economies of scale where the combined entity uses the same basic resources. In financial services, this will likely mean underlying IT infrastructure, and shows the crucial importance of IT in M&A, whether on-premises, edge, colocation, or hybrid solutions.
Approaches to M&A
McKinsey suggests a systematic approach to M&As, with regularly updated hitlists of potential targets made and remade for focus, supplemented with opportunities to meet and get to targets.
A CEO focused on M&As, with specific personnel focused on integrating and making the most of this will have a significant advantage. Those prepped and ready to exploit deals will exceed estimated savings by between 200% and 300% according to McKinsey.
Of course, a significant part of these synergies are technology benefits, and the technology roadmap will be crucial. If technology integration goes well, then it could represent 70% of cost synergies, but delays can quickly add costs.
This is where Panduit comes in. We understand the unique challenges financial service institutions face around controlling costs, increasing efficiencies, and simplifying data center management. By partnering with us, you get access to a vast portfolio of cutting-edge IT infrastructure, and all the support you need around process and deployment.
Taking seriously the different aspects, synergies, and potential savings available from an M&A campaign will be a significant factor in the overall success of the M&A strategy itself.
Using the strategies above will help you develop a plan to take advantage of potential synergies—IT costs may well be the single most significant factor in any M&A program.
Panduit, in collaboration with our vast partner ecosystem, has the experience to develop tailored systems using the right mix of physical infrastructure solutions. Our consultative approach allows us to identify customer requirements and align appropriate partners to provide services that span the project lifecycle, from planning and design to delivery, deployment, maintenance, and operation. We’re the partner financial services companies need for a successful M&A.