Introduction
IT will be rightly focused on integration following any M&A program, but there are other considerations, notably regulation and what regulators demand of financial services companies. This falls into business resilience, including skills and security, and the management of fintechs – the likely takeover targets.
Valuations
One of the more surprising effects of the COVID-19 pandemic has been the turmoil that company valuations have seen. This has produced opportunities for financial services companies to merge with or acquire competing or complementary companies.
Company valuations have been in flux because of changes to the way people work and use services. Some companies have benefitted from the sudden shift to home working, while others have suffered by losing market share. Changes will be long-lasting, with many companies continuing with the new ways of working adopted during the lockdown.
Regulation
These opportunities could be wise to seize, but it’s worth remembering that M&A’s put more stress on a business than any other activity. It’s also worth remembering that financial services companies are heavily regulated, and any M&A must take this into account.
For example, the EU General Data Protection Regulation (GDPR) has changed the regulatory landscape for every business dealing with data in Europe, and the California Consumer Privacy Act (CCPA) will impose similar restrictions on companies using data in the US.
But regulation goes much deeper than personal data. Generally, regulators have special concerns for financial services companies, including specific banking requirements like tailoring criteria on capital, stress testing, liquidity, etc.
There are further concerns for IT professionals in financial services – the regulation of fintechs, which are likely targets of M&A activity, and operational resilience.
Fintechs
As fintech companies will be the likely targets of M&A activity, they deserve special consideration.
Regulators have until now attempted to strike a balance between innovation and protecting the consumer when looking at fintechs. This can give rise to potential problems when considering M&A activity.
For example, will the fintech firm fall under greater scrutiny in the future because it operates in a potentially risky area? Are there specific markets where fintech operates that require additional regulation? Could new markets be problematic or even impossible for the fintech to roll out post-M&A because of their own regulatory framework?
Essentially, if your M&A is to absorb a fintech firm, could the additional regulation stifle the operation of that firm? (1) In many countries, takeovers in financial services need regulatory approval as a minimum. But practically, how will a large incumbent integrate a modern fintech successfully, particularly if the goal is to scale or otherwise monetize that firm?
IT resilience
Operational resilience is the overwhelming concern for regulators. Disruption is simply unthinkable in this hyperconnected world as downtime costs money in addition to heavy regulatory scrutiny. As PwC’s Operational Resilience in Financial Services: Time to Act paper, published in June 2019 explains, “In an increasingly connected and digitalized financial system, the threat of operational disruption is ever more acute. Firms face a range of risks to business as usual that include IT renewal programs, cyber-attacks, and the impacts of evolving relationships with third parties.”
The threats to financial services firms have never been greater and are growing. The need to remain resilient has never been so important.
Cyber attacks
Over the past few years, cyber-attacks have been on the increase.
Since the global pandemic, cyber criminals have further increased their attacks, as The Guardian reported in May 2020. Criminals see the lockdown as an opportunity – people are working at home and may not have the right security protocols in place or may download malware from personal accounts that could cross-infect with business accounts. Now is a good time to double down on security in anticipation of any M&A activity
Skills
According to recent PwC research, “Almost three-quarters of FS executives in our survey said they are looking to the technology industry to access engineering, data analytics, and other key skills they need to develop and implement fintech.”
Eighty percent of financial services firms, both fintechs and incumbents, struggle to hire and retain people with the required skills for innovation. M&A’s are one way to find and develop those skills wholesale.
Or, could an M&A program overwhelm existing IT resources? It’s clearly more effective to harness the IT resources of any target company to help with the final integration. Talented staff are at a premium, and the M&A target could be the resource you need to make the integration happen smoothly.
Climate change
The threat of climate change is of growing concern to regulators and stakeholders and for any IT department.
Perhaps the most important indication of this came at the start of 2020, when Larry Fink, the CEO of the world’s largest single investor (Blackrock) with around $6.5 trillion under management, told CEOs that climate change is now of premium importance.
“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital,” he wrote. This letter should not be understated. It represents a warning to CEOs to take sustainability seriously or face challenges from shareholders or other investors. This applies as much to IT departments as to any other department – sustainability should always be a consideration.
Conclusion
In IT, regulation relates to resilience. Using a blend of Hybrid IT, Colocation, Edge, and on-premise solutions designed specifically for the user will be crucial. “One-size-fits-all” may seem cheaper initially, but experience shows that bespoke solutions are necessary for complex integrations, particularly in industries as tightly regulated as financial services.
Panduit, alongside our vast partner ecosystem, gives your business the most secure foundation to take advantage of any merger or acquisition using the right mix of Hybrid IT, Colocation and Edge computing.
To learn more, download our eBook here.
References:
(1) https://www.dlapiper.com/en/us/insights/publications/2019/09/fintech-m-and-a-key-issues/
