Masters of Integration

GROUP 1 | OCTOBER 2014

ANTNIO CORREIA (1043), BRUNO LEMOS (1044), JORGE PINHEIRO (1061), MIGUEL HERCULANO (1062)
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Masters of Integration

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Executive Summary
History and Growth
Project Columbus
NatWest Acquistion
RBS and BoS Bidding
Gains from Integration
Multi-Brand Strategy
Cultural Impact

Agenda

10. Outcomes
11. Integration Plan
12. Managing the Integration
Plan
13. Major Challenges
14. Minimise Customer
Perceptions
15. Centralizing Specific
Divisions
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Masters of Integration

Executive Summary

Royal Bank of Scotland is a regional bank operating mainly in the UK, that grew primarily through acquisitions
The Columbus project focused on consumer segmentation and multi-brand and helped to prove the
capabilities of the management team of handling an integration process
NatWests underperformance made it a good acquisition target for the RBS. The combination of cost savings,
flexibility and business complementarity would result in a leading bank and business
RBSs shrewdness and knowledge of NatWests activities allowed them to devise an ambitious, detailed and
feasible acquisition and integration plan which won them the right to buy the bank
The benefits of the merger accrued mostly from improved efficiencies, economies of scale but also business
growth, to which RBSs multi-brand strategy was pivotal
RBS and NatWest succeeded on minimizing customer perceptions regarding the integration process through
a 4 stage plan: empowerment of employees, training program, enhancing a single operational system and
design of a detailed incentives scheme
Therefore not only customer perceptions were minimized but also the satisfaction level of clients increased
gradually allowing the retain and further increase of the clients base and revenues while implementing a strict
synergies plan
RBS and NatWest credit and finance departments centralization was design through 3 main vectors:
decrease risk with the increase in information flow, decrease information analysis costs and increase the level
of confidence in decision making
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Masters of Integration
Williams and Glynns
Bank acquisition

Deacons Bank
acquisition

RBS
Foundation
1874

After WWI

History and Growth

1960s

1727

Citizens
Financial Group
acquisition
Late

1980s

1980s

London
Expansion

Drummonds
Bank acquisition

Two Main Sources of growth:

Mergers & Acquisitions
Organic Growth

Merger with the

National Bank of
Scotland

Main Services:
Banking
Finance
Insurance

Organic Growth:
Direct Line
Online Banking
Joint Ventures with
Santander, Tesco and
Virgin Direct
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Masters of Integration

Project Columbus

Changes

Results

Consumer segmentation

Higher Revenues

Services focused on each segment

Lower costs

Reengineereing of retail banking business

Decrease in cost-income ratio

Re-structuring and improvements in technology

Higher efficiency

Specialized centers

Enhance profitability

Multi-brand strategy

Integration of business unit and technology department

Evidence for investors of RBS

management skills and
capabilities

Masters of Integration
Possible reasons

Natwest Acquisition

Natwest as a good acquisition candidate

Poor management and

inneficiency

Cost-income ratio: RBS (-4pp); NatWest (+2pp)

Revenues: RBS (+16%); NatWest (+4%)
Profits: RBS (+31%); NatWest (+17%)

Overlapping and
diversification of services

High degree of overlapping in retail and

commercial banking business
Strong synergies

Gaining a competitive
advantage or larger
market share

Undervaluation

#1 corporate bank
#2 retail bank

#1 private bank
#1 offshore bank

No indication of NatWest being undervaluated

Masters of Integration

Natwest Acquisition

THE COMBINED ENTITY WAS EXPECTED TO:

Leverage the distribution capability in the UK

Expand the international presence of the institution
Create options for future growth outside the UK

How can a smaller bank acquire another almost three times its size?

Strategy of second mover: Information on initial bid, market reaction and NetWest defense
BoS hostile bid resulted in a large decrease of the stock price
Innovative financing vehicle: Additional Value Shares (AVS)
Cost savings and increasing capabilities

Masters of Integration

BoS and RBS were similar...

RBS and BoS bidding for NatWest

...But RBS had an upper hand

Major rivals

RBS had spent significant resources

evaluating acquisition deals

Much smaller than NatWest

Its business had greater overlap with

that of NatWest

Highly efficient

Competed with and hired former

employees of NatWest

Both could gain from acquiring the less

efficient NatWest

Had a better understanding of the

functioning of the acquiree
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Masters of Integration
First,
RBS
waits for
BoS
move...

RBS and BoS bidding for NatWest II

They could learn about BoSs bid, NatWests response and the market reaction
The offer was met with positive reaction, and weakened NatWests position
However, it was missing on details and integration plans for branches, IT and
bancassurance
RBS took advantage of the fall in stock prices and the knowledge it gained from the first
mover

...then
they
made a
move

Their integration plan was ambitious (but achievable) and more detailed than BoSs
It gave more emphasis to revenue growth, rather than cost cuts

Their focus was to become the best bank not just for shareholders, but also for
customers and employees
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Masters of Integration
Integration would create value from
Centralization of services
o

Concentration of the manufacturing part

of the business

Additional segmentation of business lines

Gains from integration

3-year profit change (predicted)

Before Deal was Closed

+ 1,935 m
+ 1,570 m
595 m

390 m
580 m

Increase in market power and distribution

capacity in the UK
Potential for international growth

After Deal was Closed

1,340m

600 m
De-duplication Initiatives

Efficiency Improvement

Total Cost Reduction

Business Revenue
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Masters of Integration

Multi-Brand Strategy

The advantages of RBSs multi-brand strategy

Having multiple brands is consistent with the spirit followed by RBS before the merger
o
o
o

Sales potential is increased by the flexibility it allows

It avoids dilution of brand image
The bank can follow customers as they migrate between brands

Keeping NatWests brands was also desirable for a smoother integration process
o
o

The change of ownership remains invisible for customers

Brand attachment of employees and customers is preserved

Having brands with overlapping target groups allows for intra-group competition
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Masters of Integration

Cultural Impact

What was the expected cultural impact of the merger?

RBS aimed at passing on part of its own culture and strategy in the integration process
o
o

A customer-focused approach
Embracing diversity and flexibility

This entailed some integration risks which RBS expected to be able to mitigate
o
o
o

The bank had a tradition of being open to receiving outside executives in management
Maintaining branches and brands helped smooth the transition
RBS considered both its own and NatWest executives for relevant management positions

One concern of creating a huge institution was the erosion of RBSs can-do culture
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Masters of Integration

Key facts

Key Facts:

Natwest was nearly three times the size of RBS at the date of the acquisition;
At 21B, the deal was the largest (hostile) acquisition in the history of the UK Banking and the 4th transaction in
Banking Worldwide;
Following the Integration, RBS group had over 20M UK costumers, 400B in assets and 110,000 employees
making it one of the leading world Banks;

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Masters of Integration

Integration Plan

Important aspects of the Integration plan:

Very well prepared. RBS maked sure managers from all lines of business were involved in the preparation of the
offer document;

Highly detailed. The plan outlined thoroughly, initiative by initiative how RBS would integrate Natwest describing
cost savings, job cuts, income gains, who would be responsible for each initiative and timelines;

Business acumen. RBSs holistic approach to integration was an important contribute to the success of the plan;

Support. The plan benefited from expert opinion of Goldman Sach, PWC, Delloite and IBM.

I had never seen a merger integration plan in my entire career that was so detailed and thorough as RBSs plan
Merril Lynch banker

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Masters of Integration

Outcomes

Promised benefits:

Within 3 years revenues could grow by 390M based on 43 different initiatives outlined in the plan;
Cost savings would amount to 1,180M based on 72 de-duplication initiatives and efficiency improvement;

At this stage the financial community remained skeptical Natwest is a supertaker, you cant turn it around quickly
Financial Analyst

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Masters of Integration

Managing the Integration

How did RBS manage to ensure that promised benefits would be ultimately delivered ?

RBS presented their 30 day progress report to the investment community revising revenue growth and cost
savings from the initial 390M and 1,180M to 595M and 1,340M respectively;

Each business unit prepared detailed action plans and 3-year operating budgets consistent with these estimates;

Incentives and bonus plans for each executive were linked to the achievements of various initiatives outlined in
the plan;

The new group architecture was implemented immediately. Appointments were made quickly and decisively and
those who did not fit the new organization were removed.

Internal control systems were set up quickly. Internal accounting and accounting systems were integrated so that
senior managers could monitor performance of different units of the new group.

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Masters of Integration

Major Challenges

What has RBS done particularly well ?

Hard Work, Focus, discipline, and concentrating on what our customers need. Its quite a simple formula really, but weve just been very
consistent with it Fred Goodwin, Chief Executive of RBS

How did they minimize cultural problems ?

Overall, 42,000 of Natwest employees were integrated. RBS certified that new employees were trained and mobilized towards the
groups success by granting them additional benefits. Another important aspect that avoided cultural problems was the investment in the
revitalization of Natwests brand giving their former employees the sentiment of being regaining their lost glory and being part of the
2nd most valuable bank in the UK.

What is so special about the groups new architecture ?

The new architecture combined a flexible strategy based on multi-brands while increasing economies of scale by centralizing supporting
business units.

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Masters of Integration

Another Way
Employees and
clients started

believing that
the change
was beneficial
for NatWest

Training
Program
Each branch
employee underwent
approximately

40 hours of
training over a 6-

Minimise Customer Perceptions

Systems

Objectives

A single

Incentives to
deliver ongoing

technical
system for both
RBS and NatWest

month period

business
performance and
integration initiatives

Dunkirk Spirit
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Masters of Integration

Minimise Customer Perceptions

Positive changes: Branch closing stopped, reopening and

Another Way
Employees and
clients started

believing that
the change
was beneficial
for NatWest

refurbishment of selected branches

Another

Way aggressive advertising campaign

Revitalization of NatWest Brand

Both

brands existed to complement each other

Reinforce commitment to serve NatWest customers better

Branch visits to meet employees and answer questions: build trust
and undermine informal opposition

Costumer centric culture

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Masters of Integration

Training
Program
Each branch
employee underwent
approximately

40 hours of
training over a 6-

Minimise Customer Perceptions

Information about products

mechanics

and new

Reduce the number of complaints

business

focusing on existing

problems
Train emotional-behavior

Focus of client needs

month period

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Masters of Integration

Minimise Customer Perceptions

Systems

Platforms to enhance pro-activity

Improvement of back

A single

technical
system for both

office support

New workflows
Identification and rapid fixing of bugs and technical
problems

RBS and NatWest

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Masters of Integration

Minimise Customer Perceptions

Objectives

Financial incentives (variable bonus, RBS and AVS shares)

Incentives to accelerate

Incentives to
deliver ongoing
business
performance and
integration initiatives

integration

Focus on organization and client

driven activities

Market recognition
Quality improvement
Incentive schemes to enhance

productivity and profitability

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Masters of Integration

Dunkirk Spirit (Solidarity

Minimise Customer Perceptions

spirit) in the NatWest integration

Changing processes
Changing systems

Changing mentalities
with minimal client perception

Dunkirk Spirit
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Masters of Integration

Minimise Customer Perceptions

Increasing customer
satisfaction levels

Retain and increase clients

Synergies imperceptive to
clients (back office operations)

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Masters of Integration

Centralizing specific divisions

The problem: independent Finance and Credit divisions across two brands

Finance

Credit

Finance

Credit

RBS Model of risk analysis

NatWest Model of risk analysis

RBS client segments

NatWest client segments

In-house information

In-house information

RBS liquidity management

NatWest liquidity management

Better possible decision for RBS

Better possible decision for NatWest

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Masters of Integration

Centralizing specific divisions

The Solution: centralized, fully integrated Finance and Credit divisions at

Group Level
Finance and Credit Division

Finance

Credit

Finance

Credit

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Masters of Integration
+ Decrease Risk
increasing information

Centralizing specific divisions

Information

Decision

Analysis costs

Capacity

Risk management

Centralization of information

Brand independent decision

Risk Diversification

Costs reduction

Liquidity management

Synergies in risk analysis

Communications synergies

Minimize capital consumption

Better estimation power of risk

models

Best practices
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