The Lost Dutchmen of M&A

How to Achieve Cost Related Synergies

In Financial Services Company Mergers & Acquisitions

by William Duncan, author of:

Enterprise Optimization: Making Acquisitions Pay Off

The legend of the Lost Dutchman's gold mine is a big part of the history around Phoenix, Arizona. Jacob Waltz, "the Dutchman" (actually a native of Germany) was said to have located the mine in the 1870s in the Superstition Mountains somewhere around what is known today as Apache Junction. On his death bed in 1891, Waltz purportedly described the mine's location to Julia Thomas, a neighbor who took care of him prior to his death. Neither she nor dozens of other seekers in the years that followed were able to find the "Lost Dutchman's Mine." Subsequent searchers have often met with foul play or death, heightening the superstition and legend that surrounds these mountains.

So it is with the cost related synergies of mergers and acquisitions. Most companies looking for them never realize their sought-after treasure. In Enterprise Optimization: Making Acquisitions Pay Off, I have described a number of studies conducted over several decades by management consulting firms like McKinzie as well as numerous business schools and universities Almost all of them reflect poor performance. My own research and observations over the last thirty years, combined with information from many of these studies, has caused me to conclude that:

• 39% of companies entering into merger and acquisition activity indicate at the outset that they are attempting to reduce the combined direct operating costs through the merger of the two companies. Of that 39%, only 35% of them achieve their goal.
• 9% of companies entering into merger and acquisition activities indicate at the outset that they are attempting to reduce indirect and overhead costs for the combined enterprise. Of that 9%, only 39% achieve their goal.

However, the fact that most fail doesn't mean the task is impossible; it means the task is difficult, and most are not adequately prepared.

Financial service companies have unique opportunities, because so much of that business comes down to the effective and timely management of information. Among the categories of opportunity in financial service companies are:

• Moving to a shared service model and reducing staffing redundancies, especially in areas such as Human Resources, Finance, and Information Technology
• Moving to an increasingly web-based platform of service offerings, and toward an externally hosted environment for internal information systems.
• Integration of databases containing service offering records and customer activity to improve research fidelity, and improve both marketing and customer service processes (within the bounds of privacy protection guidelines and legislation)

These, and many more areas of opportunity, should be clearly identified and evaluated during the Due Diligence phase of the M&A process. The question then becomes: If there are so many clear opportunities for financial service companies to achieve cost-related synergies when they merge or do an acquisition, why do so few of them materialize? In preparing to write my book, I interviewed successful C-level executives from some of the biggest companies in the world, who had extensive backgrounds in M&A activity. Among the reasons they most frequently cited were:

• Lack of clarity around the reasons for the merger or acquisition
• Lack of effective metrics for the success of M&A transactions
• Poor governance; a general lack of accountability among executives over three to five years following the transaction
• Insufficient time and attention to detail in due diligence and integration
• The dynamics of the business environment; some business strategies simply don't hold up over time.

In order to capture the expected cost-related synergies in merging financial service companies (whether the merging results from company mergers or company acquisition), management must do these things:

1. Address all three areas of the business - leadership, processes and systems. Failing to address leadership aspects such as organization structure, performance measures, and alignment of goals and objectives can be deadly. Equally debilitating to the achievement of profitability targets is a failure in understanding the fundamental business processes of the companies involved, so that consolidation efforts yield expected results. In addition, companies who do not focus on getting commonality in their data and information systems often find that doing things like consolidating customer activity records is far more challenging than expected.
2. Move as quickly as possible toward commonality between the companies involved. Those who are most successful in M&A are those to bring acquired businesses quickly and effectively onto a common platform of fundamental business processes and information systems, enabling the most capable processes to be retained and fully utilized, while exploiting the broader information and skills of the combined enterprise to seize additional opportunities without growing infrastructure. Conversely, those who are less successful allow acquired business units to remain more autonomous for longer, stretching out the time to break-even from their M&A transactions. Everything from closing the financial books to performing employee training is hampered in these situations. One of the C-level financial service executives that I interviewed in preparation for my book said: "We have three top priorities in these transactions: gain market share, grow assets, and reduce operating costs in proportion to the assets we manage. Getting the acquired entities onto common processes and systems is strategically critical for us in achieving that third goal. But beyond just our financial performance, it impacts the morale of our employees, our ability to present a consistent face to our customers, and our efficiency in employee training. When a company like ours is systematic in their approach, they can bring new acquisitions onto common processes and systems in six to nine months."
3. Be willing to make the tough calls - especially related to leadership, staffing, and facilities consolidations. The inability of management to make tough calls on consolidation was reported to be "significant-to-severe" by more than 75% of respondents in my recent on-line survey of senior managers with significant M&A experience in their backgrounds. Another "top five" response was management hubris / unwillingness to recognize problems. During the course of my C-level interviews, a number of executives mentioned that "double-boxing" (the practice of putting two people in a single "box" on the organization chart) following M&A transactions had proven disastrous in their experiences. It is important to understand which executives will be in leadership positions following the transaction, and not take the path of least resistance in these situations in order to avoid offending someone. With over 50% of operating costs in financial service companies stemming from personnel and another 8% to 12% comprised of occupancy costs, this area is crucial.
4. Communicate! One of the C-level executives I interviewed said it best: "You can't over-communicate." Effective communication stems the flow of rumors, gets a consistent message out to the troops, keeps everyone focused on the appropriate sources of information, reinforces the newly merged management structure, and eases the concerns of all stakeholders - from the management team to customers and shareholders. It also helps to reduce the attrition rates among key management and staff members. Another executive said: "We had a motto that went: ‘8 times, 8 ways.' In other words, we felt that a message wasn't communicated effectively unless the employees or other recipients of the message heard it eight different times through eight different channels." Those channels included e-Mail, direct one-on-one communications, newsletters, press releases, and so on. Topics surrounding cost reduction, such as the consolidation of facilities, staff reductions, and reorganizations always bring about an extraordinary level of unrest and uncertainty in the work force as well as the customer base. Continuous, accurate communications can make a huge difference in whether those steps are ultimately successful.
5. Plan the integration activity in detail ahead of the announcement, and then execute the plan. The level of detail in planning around integration activity is rarely adequate in M&A transactions. Most often, companies fail to delve deeply enough into the business processes and supporting information systems of targeted acquisitions to understand how they can be appropriately aligned. As a result, the integration team encounters nasty surprises when the time comes to share information and move into shared service operations to reduce overhead costs. By the time the announcement is made, companies should understand their business strategies, the initiatives that will be implemented to achieve combined financial operating targets, what specific actions will be taken at what times, and which executives are accountable for the completion of each of these actions.

Management consultant Bill Duncan helps companies boost their earnings through aligning and strengthening their business processes and information systems. To learn more about Bill Duncan's new book, Enterprise Optimization: Making Acquisitions Pay Off, visit http://www.earningsperformance.com/.