Gartner : 5 Success Factors for Post-Merger Integration in Financial Services

M&A activity in financial services continues at an aggressive pace. Large players buy mid-cap players, mid-cap players buy each other, and firms of all sizes acquire fintechs. In this environment, financial services leaders must ensure that their firms possess the necessary capabilities for post-merger integration in order to guarantee deal value capture.

The criticality of post-merger integration is not totally unique to financial services. Gartner surveys have consistently shown that the top source of deal error across industries is not that companies do the wrong deals, nor that they overpay, but that they fail to integrate acquisitions successfully. And yet several dynamics unique to financial services mean that industry leaders face even more pressure than pan-industry peers to ensure that deal integration capabilities are at par:

• The pace of industry consolidation - financial services is an inherently consolidating industry. This phenomenon means that deal activity will proceed at a healthy clip, particularly in markets like the US where consolidation has not yet progressed as far as other markets.
• The level of technology transformation - a recent Gartner survey revealed "accelerating investments in new technological capabilities" as the top priority for financial services leaders over the next 6-12 months. With financial providers transforming their business models via blockchain, public cloud, APIs, microservices, and other innovations, deal integration becomes more difficult as transactions often involve both the acquirer and the target in a state of flux.
• The rise of fintech acquisitions - financial providers are increasingly making technology acquisitions to build fundamentally new capabilities. These deals often involve buying smaller firms with cultural norms, processes, and ways of working that differ significantly from legacy financial providers. The unique value of these acquisitions can easily be destroyed during integration without proper care.
• The role of financial providers in client empowerment - of all the reasons why M&A integration particularly matters in financial services, this one is most critical. No industry played a more crucial role than financial services in helping consumers, business owners, and high-net-worth individuals navigate the COVID-19 pandemic. And financial services firms continue to play an indispensable role in helping clients navigate the recovery. Providers cannot afford to have their critical role in customers' lives disrupted by a rocky integration.

Moreover, Gartner research suggests that financial services leaders feel less than fully prepared to navigate these dynamics. A recent Gartner survey revealed that only 41% of financial services leaders feel highly or extremely confident to successfully manage partnerships with other companies. And if partnerships are challenging, full-blown acquisitions are only more difficult. In light of these and other factors, financial services leaders must build a world-class discipline for M&A integration. Here are 5 integration success factors to ensure that deals deliver their intended value:

• Maintain focus on deal synergies - the purpose of a deal is not to merge an acquired firm's Legal department into the acquirer's, or to rationalize duplicative supplier relationships, or even to consolidate legacy IT systems. These "connecting the pipes" activities matter but are rarely the primary rationale for the deal. Deals instead are driven by a few key revenue synergies that involve merging unique capabilities, products, technologies, and channels to deliver differentiated client value. During the integration process, integration teams must maintain a laser-focus on these synergies which can easily get lost in the hard work of connecting the pipes of two organizations. To accomplish this objective, one firm that Gartner works with assigns dedicated owners for each deal synergy. The synergy owners have decision rights to dictate integration resource trade-offs to ensure that synergies are achieved.
• Quantify culture gaps and take them seriously - cultural mismatch between the acquirer and target company is among the biggest barriers to successful post-merger integration. That said, "culture" itself is a fuzzy concept and culture gaps can be scapegoated for anything that might go wrong during integration. To get ahead of culture gaps during integration, identify a concrete set of attributes that comprise your culture to better assess gaps with the target firm. One firm Gartner works with uses a culture gap scorecard to quantify differences with target firms to address during integration.
• Conduct integration planning collaboratively rather than in silos - post-merger integration involves interdependencies across functions. At times during the process, certain functional teams can be delayed with their integration responsibilities until they receive inputs from other functions. To maximize overall integration speed, bring different functional teams together early for collaborative integration planning. One firm Gartner works with conducts collaborative integration planning workshops to identify integration tasks that each function should complete early to unlock the ability of functional partners to complete their responsibilities.
• Be judicious about where to integrate - conventional wisdom has long been to integrate acquisitions quickly and aggressively but leaders are increasingly rethinking that logic. Particularly for acquisitions of smaller technology-driven firms, integrating too quickly can squash the value of the target company. Leaders are being increasingly selective about which functions and businesses to integrate and which to leave standalone, at least initially. One company Gartner works with has established decision criteria for the pace of integration based around the level of deal complexity.
• Think of the process as more than a conversion - "conversion" is a term for post-merger integration commonly-used by financial services leaders. The term reflects the importance of systems integration which is no doubt critical. But the risk in thinking of an integration as a conversion is that the big picture gets lost. Deals are about integrating systems but also cultures, people, ways of working, and decision processes, all toward the goal of creating original client value that the two firms could not have delivered on their own. Leaders must remain focused on the strategic objectives of the deal and the full range of success factors to achieve them.

For more information on post-merger integration best practices, please access our Mergers and Acquisitions Primer. And we encourage you to schedule an inquiry with our experts to discuss how Gartner can help you develop critical competencies for deal integration.