Architecture of Integration Report

FINANCIAL SERVICES
The Architecture of Integration

An essential guide to successful mergers and acquisitions in Financial Services kpmg.com
KPMG INTERNATIONAL
KPMG specialists and contributors

Americas
Ricardo Anhesini Souza Head of Financial Services Latin America and Brazil KPMG in Brazil T: +55 11 2183 3141 E: rsouza@kpmg.com.br Tim Prince Director Canadian Head of Integration and Separation KPMG in Canada T: +1 416 777 8883 E: tprince@kpmg.ca Carl Carande National Account Leader Banking and Finance KPMG in the US T: +1 704 335 5565 E: ccarande@kpmg.com Thomas Fekete Manager Integration and Separation, Transactions and Restructuring KPMG in the US T: +1 212 954 2182 E: thomasfekete@kpmg.com Miguel Sagarna National Sector Leader Transactions and Restructuring, Financial Services KPMG in the US T: +1 212 872 5543 E: msagarna@kpmg.com Tiberius Vadan Senior Director Integration and Separation, Transactions and Restructuring KPMG in the US T: +1 212 954 2107 E: tvadan@kpmg.com Sam Evans Partner Transactions and Restructuring, Financial Services KPMG in China T: +85221402879 E: sam.evans@kpmg.com
EMA
Nicholas Griffin Partner Head of Financial Services, Transactions & Restructuring KPMG Europe LLP T: +44 20 73115924 E: nicholas.griffin@kpmg.co.uk Stuart M. Robertson Partner Global Banking Transactions and Restructuring Sector Lead KPMG in Switzerland T: +41 44 249 33 45 E: srobertson@kpmg.com Mohammed Sheikh Partner Head of Integration and Separation Transactions & Restructuring Financial Services KPMG in the UK T: +44 20 78964992 E: mohammed.sheikh@kpmg.co.uk Francesca Short Partner Global Insurance Transactions and Restructuring Sector Lead KPMG in the UK T: +44 20 73115056 E: francesca.short@kpmg.co.uk Ian Smith Director Financial Services Strategy Group, Transactions and Restructuring KPMG in the UK T: +44 20 73111496 E: ian.r.smith@kpmg.co.uk
ASPAC
Bernie Crowe Director Financial Services KPMG in Australia T: +61 2 9335 7667 E: bernie.crowe@kpmg.com.au
Written by Jeff Wagland
2011 KPMG International Cooperative (KPMG International). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Contents
Introduction It is not necessary to change: Survival is not mandatory Executive summary Key findings and five recurring issues Global M&A How financial services deals compare to other industries Deal drivers The changing characteristics of financial services M&A since 2007 Key geographical differences A look at how regions and countries are reacting to the new environment Key factors in managing M&A deals across FS sectors Lessons learned 1 Take your time on the due diligence, but integrate fast 2 Revenue versus cost synergies 3 Communicate carefully with the market 4 Track progress 5 Cultural integration Is the deal going to go well? Six key questions to ask A wave of deals to come KPMG professionals give their view on what to expect The value of using an advisor 2 3
10
12 16 18 18 20 22 24 25 28
30 32
2 | Introdu ctio n
Introduction
Above the desk of one senior financial services executive in New York is a framed quotation from the 20th century academic and business consultant Dr William Edwards Deming. It says, It is not necessary to change. Survival is not mandatory . The truth of this lesson has been demonstrated in the clearest possible fashion as financial services (FS) companies throughout the world have struggled with the consequences of a spectacular recession. The old conventional wisdom on how to run a successful business has disappeared under a mountain of new regulation and radically changed market dynamics. Organizations wanting to continue in this sector have had to think very hard about how and where they want to operate in the new market environment. To help anyone contemplating a merger in the FS sector, we have taken the conclusions developed in KPMG
Jeremy Anderson
Global Chairman, Financial Services
Internationals latest global survey of M&A activity, published as A New Dawn: good deals in challenging times , and have asked financial services partners around the world to compare and contrast these with what they see in the FS markets they know best. The result is this report, which offers a view on the drivers of FS M&A activity yesterday, today and tomorrow, along with professional guidance on how to help ensure that a complex deal will deliver the value it promises. We want to thank all those who took part in the original global survey and the KPMG professionals whose insight has allowed us to focus on what this activity means for the financial services sector. At a time of huge turbulence and uncertainty, their contributions provide a framework to help make sense of the deals being done today, and give a clear steer on the drivers of the deals that will shape the global financial services market for the next decade and more.
John Kelly
Global Head of Integration & EMA Head of Transaction Services
Th e a r ch i t e c tu r e o f i n t e g r at i o n | 3
Executive summary
This report examines the main themes of the global FS M&A market over the last three years and looks forward to what the FS sector might expect in the short to medium term. It focuses on the strategic priorities that have been driving FS companies to dispose and acquire in this period, in an attempt to pin down the key factors that can distinguish successful transactions from potential failures.
The source for much of the analysis in this study is the latest in KPMG Internationals long-running series of surveys of the global M&A market, published under the title New Dawn: good deals in challenging times plus detailed interviews with KPMG A , financial services specialists around the world.
The key findings are: The wave of deals following the recession is now at an end; there is a new wave coming, the only question is when it will break Competition will come from Asia-Pacific buyers and from a resurgent Private Equity sector Cost cutting has given way to revenue growth as a primary deal driver; growing through acquisition is the new normal Markets are still skeptical of values based on revenue synergies, but they can be persuaded by a well-supported argument Old issues with poor planning, poor communications and lack of attention to cultural differences still persist; there is real value to be gained from solving these problems. This last point will be familiar to people who have read any of the numerous KPMG reports on the M&A market published in the last decade. These are endemic problems, and a great deal of thought and energy has been poured into finding ways to improve the management of major deals. We have seen a distinct improvement in the levels of professionalism as a result, but for the FS sector in particular, there remain five main lessons for a successful deal: 1. The need for speed. Successful deals are almost always those that are completed fast. Long, drawn-out merger processes tend to lose sight of the original goal of the deal, and energy dissipates, leaving integrations only partially complete. Clarity of thought and rapid action are very important.
4 | E xec utive sum m ar y
2. Serious attention to revenue synergies. Markets are naturally skeptical of revenue synergies, but if they are an important part of the deal, they need to be included in the rationale. Work on developing strong, persuasive arguments on revenue synergies is rarely wasted. 3. Communicate carefully with the market. Investors today want to hear bottom-up explanations of all the value drivers within a deal, delivered with confidence by the CEO. 4. Track progress. One of the most valuable things a company can do is to develop a reputation for carefully-tracked progress in delivering the promised benefits from its deals. Integration plans need to have tough metrics built-in. 5. Cultural integration. Deals can and do fail because not enough attention was paid to the cultural differences between the two sets of people being brought together. Losing good people is a hidden cost of poor planning that markets are looking out for.
We have distilled these lessons into six key questions that will give a good indication of whether or not a deal will be successful. They are: Is there a clear plan in place for the whole of the deal, including integration, with agreed metrics to define and measure success? Can the plan be carried out quickly? Do we know in detail what we are going to do the day after the deal is completed? How long is it taking to get answers to our questions from the target company? Are we thinking hard enough about how we will integrate customers and employees into our new, enlarged company? If this deal goes wrong, do we have the resources and energy to do it all over again and get it right?
Global M&A how financial services compares

This study of the financial services M&A market is based, in part, on a wider study of the global M&A market between 2007 and 20091. So before looking in detail at M&A in the FS sector, we should look briefly at the dominant trends at a global level across all sectors, and at how FS deals as a whole compared with what was happening elsewhere.
Perhaps the most surprising finding from the main report was that despite the impact of the recession on global economic activity during these years, the proportion of deals that actually created value (as measured by the movements in the acquirers share price relative to their sector) rose from 27 percent in 20052006 to 31 percent in 20072009. Many of the deals done in the FS sector during this period were completed by privately owned acquirers, so for these deals there is no publicly available information on subsequent share price movements. But where this information was available, just under 70 percent of deals were followed by share price changes that suggested an increase in corporate value, or at least a decline in value that was less than that experienced by the rest of the sector.
of companies in the FS sector agreed that by the time the deal was complete, it will have created value for the organization.
73%
By the time your plan for target company is complete, this deal will have created value for your organization
4% 12%
5% 6%
6% Strongly agree 15% Tend to agree Financial services (34) 52% Tend to disagree Strongly disagree 21% Not sure
Global average (162) 23%
56%
Source: KPMG International, A new dawn: good deals in challenging times, July 2011.
A New Dawn: good deals in challenging times KPMG International, 2011. This is the sixth in a series of KPMG reports on the global M&A market. The series began in 2000 with a review of M&A in 1997 1998.
6 | G lobal M&A how FS c om pa nies c om pa r e
The general improvement in performance is explained by three main factors: A reduction in target prices, predominantly in the Atlantic markets, caused by the gradual withdrawal of private equity houses from the market as the recession took hold The greater scrutiny that companies found themselves under from recession-hit shareholders wanting to be sure that a proposed deal really would create value
A clear switch in focus from deals that were designed to cut costs, to deals that generated growth in revenues. This last point seems to have particular significance for the FS sector. Asked about the initial rationale for the deal, FS companies were much more likely than others to cite increasing market share, geographic growth, or expanding into a growing sector as major factors. All of these are measures associated with increasing revenues rather than consolidation or reducing costs. Cost
synergies were chosen as a rationale by only 15 percent of FS companies, compared with 19 percent of all the companies surveyed.
Top 3 reasons behind a FS deal Increase market share Geographic growth Expand into a growing sector
What was the initial rationale behind the acquisition of the target company?
Increase market share/presence Geographic growth Expanding into a growing sector Cost synergies Investment opportunity Enter a new market Acquire brand/additional services Diversify Acquire intellectual property or new technology Transformation strategy Expansion/increasing assets Strengthing of Capital Base Other Refused 0% 1% 10% 20% 30% 40% 50% 60% 70% 9% 15% 19% 29% 27% 35% 44% 62%
48%
18% 15% 17% 15% 13%
10% 6% 8% 6% 8% 4% 3% 1% 6% 6%
15%
Financial services (34)

Source: KPMG International, A new dawn: good deals in challenging times, July 2011
Global average (162)
8 | G lobal M&A how FS c om pa nies c om pa r e
Pricing factors This need for revenues appears again in the reasoning behind the pricing of the target company. Here, 68 percent of FS companies chose revenue enhancement as their largest single factor in determining price. Cost savings were chosen as a factor by only 41 percent. There are clues to this focus on revenues in two questions touching on the market conditions surrounding the deals. FS companies were more likely than other companies to agree strongly that their acquisition had allowed them to deal better with market or competitive conditions (55 percent versus 46 percent). They were much more likely to agree that the economic climate has led acquirers to focus on
revenue rather than cost synergies (65 percent versus 45 percent). These responses show that the effect of recession on the revenues of FS companies has been relatively greater than for other companies, and that the need to rebuild revenue flows played a greater part in FS decisions to acquire than it did elsewhere. Turning to the management and planning that went into integration of the target company, FS companies were reasonably quick to get fully working management teams in to their acquisitions, with 44 percent saying their management team was in place and working within a month of completion compared with a global average of 48 percent.
What was the largest single factor in determining price?
68% 41%
Revenue enhancement Cost savings
Planning ahead But FS companies were ahead in theamount of planning that they carried out prior to completion. Athirdof respondents in the sector said that they began their planning for post-deal management more than five months before completion, compared with only 25 percent of the wider sample. A large proportion of the companies polled in all sectors (27 percent) did not begin planning forpost-deal integration until around 8weeks to completion.
Due diligence Given the longer planning period, it is curious that FS companies generally appeared to do less due diligence than other types of companies. FS companies focused on financial, commercial, legal and operational due diligence, but in each of these areas, the proportion of acquirers carrying out due diligence was less than the global average. FS companies were more active than the average in carrying out due diligence on IT systems and strategic matters, but they shared the general trend of putting HR due diligence at the bottom of the list. Financial service companies did less due diligence than the global average. The most common types they did were financial, commercial and operational.
What types of due diligence did you do?
Financial (including tax and pensions) Commercial Legal Operational Strategic IT Human resources 0% 10% 20% 30% 47% 50% 47% 45% 44% 42% 35% 38% 40% 50% 60% 56% 56% 62% 62%
71%
81%
70%
80%
90%

10 | D eal d rive rs the cha nging cha r a c t er is t ic s of FS M& A
Deal drivers the changing characteristics of financial services M&A

In this section we will look more closely at the main drivers for FS deals since 2007 and especially how they have changed from year , to year. The four years since 2007 have clearly been a transition from the end of an M&A boom, through deep recession and into a tentative recovery.
2007
2008-09
2009-10
At the beginning of 2007 there was still enough momentum in the market for the last big deals to go through at prerecession prices. That gave way in the later part of the year and into 2008 to a slack period, as companies came to terms with the idea that a recession was upon them and waited to see how bad it would be. Later in 2008 and into 2009, deal activity picked up, driven on the sell side by banks and insurers needing to raise capital to shore up poorly performing
businesses, and on the buy side by those relatively few organizations able to take advantage of the opportunity to pick up good quality assets at low prices. In many cases, these were not assets that would, in more normal times, have found their way onto the market. FS companies, particularly in the US and parts of Europe, were being forced to cash in their chips selling highly valued assets that they would have preferred to keep, simply in order to raise the capital necessary to stay in business.
In the US, legislative changes and the financial crisis drove a multitude of deals that may or may not have added up to much of an increase in value. It can take two or three years to work out whether a deal has been successful.
Tiberius Vadan, Senior Director, KPMG in the US, Integration and Separation, Transactions and Restructuring
2007
2008-09
2009-10
In 2009 and 2010, capital was still king, but rather than driving the market forward it acted as a brake. Deals that might normally make perfect sense from a business perspective were not being completed because they would absorb too much of this precious resource. This was not just a reaction to the emerging problems of business done in the past. It was nervousness of the new and significantly tougher capital requirements that banks and insurers expected to be imposed on them by new regulations. For some of the bolder and better capitalized companies, however, this phase of retrenchment has presented opportunities to do deals that might not have seemed feasible during the boom. The Bank of America/Merrill Lynch merger, for example, was a surprise to those who felt that the cultures of the two organizations were so different as to be entirely incompatible. But Bank of America was able to pick up a distribution channel for its investment banking division which gave them a clear benefit which might not have been available at any other time. Similarly, the wave of acquisitions in Europe and the US made by the big Spanish banks, Banco Santander and Banco de Bilbao, were felt by many to be an opportunistic reaction to a unique and possibly unrepeatable set of circumstances.
Tiberius Vadan, from KPMGs US member firm says that the upheaval in the FS market has had a liberating effect on thinking about how businesses should be organized. Right now, people are listening to creativity. he said. A lot of strategic new thinking and value is being created by unlocking assets that were stuck in environments where they were not allowed to flourish. But this is not an entirely comfortable experience, especially for the old guard of FS managers, many of whom have found their fundamental beliefs about their business either challenged or completely shattered. Miguel Sagarna, also from KPMG in the US, says that FS organizations have gone through a painful period of self-examination. The market is demanding growth, and those that have realized that the prospects for organic growth in their existing businesses are poor, have had to take the stark decision of whether to be an acquirer or a target. The sector is still trying to sort itself out, says Miguel Sagarna, but its clear that the new normal is that growth through acquisition is going to be part of any organizations strategy going forward. Those that cant or wont accept this will be snapped up.
Growth through acquisition is the new normal. Those that cant or wont accept this will be snapped up
Miguel Sagarna, National Sector Leader, KPMG in the US, Transactions and Restructuring, Financial Services
In Asia, the challenge for many organizations is how to overcome regulatory and valuation issues to access markets that are growing at 2530 percent a year. If you get in at the right time, you are growing the market by entering. The trick in the current environment is to find the right partner or opportunity in an increasingly competitive arena.
Sam Evans, Partner, KPMG in China, Transactions and Restructuring, Financial Services
12 | Key ge og rap hical d iffer enc es
Key geographical differences

Asia-Pacific region In the Asia-Pacific region (ASPAC), the very active M&A markets of 2007 and 2008 have cooled as the delayed impact of global recession has had its effect. By contrast with some of the Atlantic markets, ASPAC FS companies have not had significant capital pressure or a need to implement a very heavy round of cost-cutting. Increasingly FS companies are focused on controlling costs and improving cost/income ratios, but there has also been, and continues to be, an emphasis on delivering growth and expansion into new markets. The last 12 to 18 months have seen a significant amount of transaction related activity in the bancassurance sector, as banks and insurance companies look to secure potentially lucrative distribution opportunities. Many regional players have used bancassurance opportunities to gain access to high growth developing markets. But governments in the region also recognize the value that their economies have to offer foreign acquirers, so it is common to find legal restrictions on the percentage of a domestic FS company that can be owned by a foreign partner. Ownership restrictions typically prevent foreign companies gaining control, says Sam Evans from KPMGs member firm in Hong Kong, so there tend to be a lot of joint ventures and strategic investments, combined with capability transfer programs where big banks and insurers focus on helping their local partner develop their businesses. Australia In Australia the FS sector has remained relatively untouched by recession, leaving the large banks well capitalized and looking for opportunities to consolidate their position.
Th e a r ch i t e c tu r e o f i n t eg r at i o n | 13
China In China, banks and insurers have been focusing on opportunities in their domestic market. But there is evidence of a gradual shift in focus towards overseas markets, with some Chinese banks pursuing opportunities in the US and South America. Going forward we expect to see a significant increase in activity, as the major banks and insurers turn their attention to overseas acquisitions. There is also evidence among foreign investors of a more fundamental review of ASPAC strategies and how best to
leverage the significant opportunities across the different markets. In the initial phase, everyone jumped in, thinking that they really need to have a business in China. says Sam Evans of KPMGs member firm in Hong Kong. But now, in the second phase, people are asking themselves whether they are really making money here. There is a much greater awareness of what is strategically important, who is the right partner, and what parts of the market should be focused on. Some companies have pulled out entirely, while others have sold non-core assets to focus on their main business.
Deal rationale and motivation in Asia is quite different, and this has implications for the way you approach the post-deal environment. Often, you are not looking at a formal integration.
Sam Evans, Partner, KPMG in China, Transactions and Restructuring, FinancialServices
14 | Key ge og rap hical d iffer enc es
The Atlantic markets There is a view emerging from the global M&A survey that deals done recently in the US markets have generally been more successful at creating value than those done in Europe. It is not clear that this can be said of deals done in the FS sector. It has been argued that the sheer size of the US market for financial services will tend to make deals more successful, with relatively fewer regulations and restrictions than the more complex European markets, combined with labor legislation which makes downsizing easier to accomplish. But successful deals in the Atlantic markets have generally been those that have been done quickly and with a clear, achievable rationale in mind. Speed of integration is a major factor in the success or failure of a deal, and deals where cultural or organizational issues have not been thought through and resolved in advance, tend to run a high risk of being seen by the markets as unsuccessful. US There has been a brisk market in failed or troubled US banks and insurers, but most of the big deals have now been done. Whether they were successful
or not remains to be seen; a lot of deals were done at high prices, and the market is watching to see how well the integration plans and synergies work before coming to a judgment. There is a clear appetite now for deals that will generate growth. Potential acquirers feel they have come through the worst of the cost cutting and want to move into an expansionary phase. What is holding this back is uncertainty over imminent regulatory changes combined with a determination not to overpay. Brazil Economic problems in the developed economies have highlighted strong growth in other parts of the world, particularly in Brazil. Reuters puts Brazils average annual economic growth rate since 2004 at 4.4 percent, peaking last year at 7 percent, its .5 fastest pace in 24 years. This prosperity has stimulated demand for financial services, so it is little surprise that the past four years has seen a vigorous round of consolidation among the large retail institutions, with Santander and Banco do Brasil especially acquisitive. In the first six months of 2011 there were 22 major deals, compared with 28 for the whole
of 2010. Activity is expected to remain high, for the rest of this year at least. Canada Canadian financial services companies have a rare opportunity to make some major acquisitions in other countries on favorable terms. Canadian banks have come through the global financial crisis relatively unscathed, and they are now very well capitalized with few opportunities for acquisitions or organic growth at home. Their primary area of interest is, naturally, the huge US market south of the border. There is already a lot of interest in selecting suitable acquisitions, especially banks that are strong at the state level which can serve as a base for further expansion. But some institutions are venturing further afield, assessing possible acquisitions in South America, particularly Brazil, and in the Asia Pacific states. Canadian financial services people are generally cautious and conservative, and there is a history of failed foreign acquisitions whose lessons they are keen to learn. There will be activity in this market, but it will be careful, deliberate, and done on the right terms.
European Union For those countries hit hardest by debt crises, particularly Ireland, Greece, Spain and Portugal, financial services sectors problems have swiftly become sovereign debt problems as banks have turned to governments for support. Widespread exposure to the weaker economies has damped down M&A activity across the continent, but well capitalized FS companies, particularly those based in Switzerland and, paradoxically, the large Spanish banks, have taken the opportunity to strengthen their market positions. There is some pent-up demand in the sector, which is being held back (as in the US) by uncertainty over the detail of forthcoming legislation and changes in capital adequacy requirements. There are also signs of interest in the sector from acquisitive Russian interests, who may play a significant role in the next few years.
UK The aftermath of the financial crisis is still working its way through the UK financial services sector, with several major banks still effectively under State control and being required to divest non-core businesses. At the same time, and in addition to the anticipated impact of new European legislation, the UK Finance Minister has announced plans for a major overhaul of financial sector regulation, which will include proposals to require banks to separate their retail operations from their investment banking arms. This is fertile ground for a lively M&A market, and a substantial number of UK FS companies are undertaking internal reviews which will almost certainly result in new assets coming on to the market in the next two to three years. Shrewd acquirers will be active, and commentators are expecting a re-emergence of the PE houses in this market, as well as trade buyers from the UK and elsewhere.
European banks generally think they can easily integrate the US arm into the banks European operating model. But they soon realize that significant differences in products, services and customer/employee culture exist. Addressing those differences can lead to extended integration timelines, incomplete integration and synergy leakage which could ultimately undermine the success of the deal.
Thomas Fekete, Manager, KPMG in the US, IntegrationandSeparation, Transactionsand Restructuring
16 | Key factors in m ana ging M &A dea ls a c r os s FS s e c t o r s
Key factors in managing M&A deals across FS sectors

In this section we have summarized the main characteristics of the M&A deals carried out recently in each of the main FS sectors. This is not intended to be an exhaustive list of deal features. Rather, it is here to highlight the key differences in approach between the sectors, and to give some insight into those factors most likely to shape deal negotiations now and in the immediate future.
Banking
Common deal drivers Common deal priorities Deal team structure and management Pre-deal planning Post-deal integration Cultural fit
Distribution Geographical/ market growth Capital requirements Regulation
Technology Cash management Operations Continuity
Deal teams often separate from implementation teams. Small groups focusing on particular aspects of the deal with limited understanding of the whole. Patchy communication.
Tendency to focus on cost savings assumptions of 2540 percent savings not uncommon. Establishing core and non-core businesses. Cultural issues generally low on the list of priorities. Day 1 continuity very important for customer confidence means much attention paid to IT.
Not a strength for this sector, especially for big retail banks. Teams responsible for implementing the deal are often different from those who do predeal planning, so key targets are often lost or not tracked. Integration takes 1824 months, which is too long, energy fades and IT/cultural issues are often left unresolved.
Internal cultures are often strong, but relatively little attention is paid to how they might affect the success of a deal. A common view is that if a deal makes commercial sense, then the cultural aspects are not relevant. Different customer cultures, e.g., US customer expectations versus those common in Europe, can also prove difficult to assimilate.
Insurance
Common deal drivers Common deal priorities Deal team structure and management Pre-deal planning Post-deal integration Cultural fit
Distribution Scale benefits Cross-selling/ bancassurance Capital requirements
Risk Continuity Talent retention
Large teams with many specialists. Team management at a premium. In-house M&A teams becoming more common, but matched by increased willingness to seek outside help.
Attention to due diligence generally improving, especially in ASPAC following past due diligence failures. Focus on risk and actuarial analysis, distribution matters especially where bancassurance is a deal rationale and where different sales forces are involved. Merging big insurers is still a developing field.
Shares many of the problems of the banking sector. Rare to see convincing stretch targets being developed and introduced centrally. Integration plans often devolved too far down the organization, and left to the wrong people. Merging different sales forces with well-developed cultures is a particularly difficult problem.
Becoming more important in deal planning, especially if sales forces are involved. But still not an area of strength.
Investment Management
Common deal drivers Core business model relies on growth through acquisition Product range enhancement Distribution Better asset growth through improved management Common deal priorities Retaining key personnel Speed Deal team structure and management Often M&A specialists with wide experience. Well organized, focused, clear plan of action. Pre-deal planning Post-deal integration Tends to be done quickly and well by the merger specialists, helped by strong expertise and a clear plan. Generally a less complex task than merging a big retail bank or insurer, but close attention to the real value drivers in the business and to those with the customer relationships means a greater chance of measurable success. Cultural fit A key driver of deal planning, and a focus of attention where individuals and teams are seen as having commercially important client relationships and fund performance track records.
Where merger specialists are involved, can be a very well organized process. May be seen as inflexible, but generally very effective. Clear idea of what parts of the target are valuable, what to do with them, and how to dispose of the rest.
18 | Les so ns learne d
Lessons learned
KPMGs long-term analysis of the factors behind successful M&A deals, combined with the comments on recent activity from our specialists, has highlighted some common issues relating to the FS sector. We have summarized them here.
1. Take your time on due diligence, but integrate fast 2. Revenue versus cost synergies 3. Communicate carefully with the market 4. Track progress 5. Cultural integration
1. Take your time on the due diligence, but integrate fast.

Some of the very biggest recent deals in the FS sector have been completed after astonishingly short due diligence periods. There are undoubtedly some very talented analysts working in the sector who may indeed be able to assess a business in a matter of hours, but it stretches credibility if two large banks, for example, claim that they are ideal candidates for merger after only a few days work. Carl Carande, who leads the FS integration practice of KPMGs US member firm, says there is no way that proper due diligence can be completed over a weekend. The pre- and post-completion work really need to be seen as one process, he says, and if the early work is not done well, the integration will be difficult. With one recent client, they thought they had finished the due diligence, but we then handed them a further set of around 90 questions covering important details about operating platforms, tenure of key people, product lines and operational capabilities that were vital for integration planning. They had to have this information if the integration was going to go smoothly. But with the due diligence complete, successful deals are generally completed fast. The FS sector leaders in this area are the asset managers, possibly because so much of the value in the deals they do is tied up in the individuals in the target company who may leave unless they feel secure and valued. Ian Smith, of KPMGs UK member firm is very clear on what makes the asset managers successful. They create a very focused and clear model for growth through acquisition, he says. What makes it work is the clarity, the thinking and planning that goes into creating a framework that they can drop organizations into. When they have a deal, they dont prevaricate, they integrate very quickly, putting pressure into the system to get it finished fast. This focus on speed of implementation is relatively rare in financial services. It can be found in the insurance sector where the past two years have seen some very well executed deals. But among those deals that fail to live up to their promise in terms of revenue or cost synergies, it is common to find that the pace of integration has been slow. In investment banking, a European bank faced the task of integrating a newly acquired trading team, chose to integrate fast. Age Lindenbergh, a Partner in KPMGs Transactions and Restructuring Dutch practice recalls, They had derivative traders that had been head-on competitors for most of their lives and we were concerned about their ability to work together. Bringing them together, to work on one floor immediately after closure of the transaction turned out to be a decisive factor in building a strong, new, joint culture and to reap the expected synergies. Depending on the size of the organization, proper integration cant really be completed in less than nine months. But KPMG specialists across the world cite deals where the integration process is still not finished two years later, often because the planning necessary to decide which parts of the business should be kept and which should be sold, or how different parts of the combined business will work together, does not even start until after the deal has been completed.
Deals done fast may look good financially, but if you are planning to leave your underlying systems and operational integration until later, you are storing up trouble. The longer you leave it to complete your integration, the harder and more expensive it gets.
Carl Carande, National Account Leader, KPMG in the US, Banking and Finance
When you are integrating a business, you focus on three things, protecting the value in the deal, managing and mitigating any risks, and creating momentum.
Ian Smith, Director, KPMG in the UK, Financial Services Strategy Group, Transactionsand Restructuring
Too often people do not have a clear idea of what to do once the deal has been done, says Nicholas Griffin, Head of Financial Services, Transactions & Restructuring, KPMG Europe LLP . On day one they start the conversations and so begins 612 months of discussions over the merits of the respective models and systems, trying to find common ground. Eventually, energy dissipates, everyone forgets what was driving the deal in the first place. They move on to other matters, often leaving legacy problems unresolved. The most immediate problem of slow integration is managers getting distracted from their day-jobs, and the
underlying performance of the business declining as a result. A measure of distraction is almost inevitable, but the problem is amplified if managers are co-opted onto workgroups to implement the integration of their parts of the business, without adequate external support and with no clear idea of their own future with the organization. Bernie Crowe, of KPMGs Australian member firm, points to one recent example where the work streams ... that had support from advisers worked well. But those that didnt suffered from a lack of focus and were less able to define a target future state and execute a plan to implement it.
The most difficult problem caused by slow integrations is the one mentioned by Ian Smith dissipation of energy leading to the acceptance of integration issues that should be solved. An integration that is only part completed can create an organization that is a jigsaw of different IT systems, management systems and cultures. KPMGs past investigations into M&A management and value creation have shown that it is very challenging for partly-integrated organizations to deliver the value that their shareholders expect. It is even more difficult for them to do the next merger or acquisition, because they are often still struggling with the legacy problems of the last.
Case study
Integration management
management tools, templates and collaboration processes that would improve the running of the project. The assessment phase of the project was completed with the assistance of the KPMG team, leading to an integration program involving 21 different work streams, with separate integration teams covering areas including retail and sales management, operations, finance, HR, training, and consumer and corporate credit. Coordinating these streams was a major task, but it was very important that there was effective cross-functional monitoring and regular reviews to ensure that the integration plan would deliver the promised business benefits, cost and revenue synergies. KPMG advisers worked closely with the IMO team on this task, resulting in a seamless deal closure and the development of a highly effective target operating model for post-deal conversion. A KPMG adviser who worked on the deal comments, I think we identified two main issues from this project. First, the need for a strong, well resourced IMO team very early in the deal, able to begin the integration planning well before completion. Second, the importance of keeping close track of dependencies and interconnected risks in the management of the integration teams. This was vital to allow the IMO to maintain an accurate picture of the critical program path, while allowing the integration teams to understand how their work affected the realization of the deal goals.
One example of successful integration management planning involved a large US bank which was acquiring a smaller but strategically important rival. The acquirer had not done a major deal for 10 years, so it brought in a team from KPMGs US member firm to support the in-house Integration Management Office (IMO) in its planning for deal closure and post-deal integration. The KPMG teams first task was to evaluate the IMO team itself and suggest any necessary changes to the structure of the team and the program of work it had planned. With no recent experience of a merger, the IMO team was not familiar with the progress in management techniques that had been made in the past decade, so KPMG advisers were able to suggest a range of project
2. Revenue versus cost synergies

For most of the FS companies covered in the study, and also for the clients of the KPMG teams that have contributed to this report, the phase of focusing heavily on cost cutting is over and the emphasis now is on finding opportunities for growth. That means looking for opportunities to build revenues, often through expanding distribution, developing new product lines, or entering new markets. But, compelling though these opportunities might seem when the deal is being negotiated, revenue synergies are rarely given much weight by the equity markets when they are valuing a deal. This undervaluing of growth opportunities has caused substantial problems for acquirers; deals have collapsed because of it. Financial service companies generally target more revenue synergies than the average especially in cross selling products and services.
Which of the following revenue synergies were targeted in the deal?

Growth of market share in existing markets 62%
56% 53%
Expansion into new geography
46%
Cross selling products and services 32% 30% 9%
37%
53%
Expansion into a new sector
Leverage of intellectual property and technologies 3% 2% 3%
20%
Other
None/refused 0%
7% 10% 20% 30% 40% 50% 60% 70%

The underlying logic for this skepticism is clear. Cost reductions are directly under the control of the acquirer, who can, for example close redundant departments or reduce a labor force virtually at will. Revenue synergies, however, are often in the hands of clients and customers, who may or may not choose to do business in the way that the architects of the deal are predicting. It is the extra level of uncertainty that leads markets to be skeptical of deal values based on anticipated revenue growth. Despite this, it is possible to persuade markets of the value of revenue predictions, provided the arguments are strong enough. Francesca Short
of KPMGs UK member firm says that acquirers need to be able to answer some pretty fundamental questions. If businesses can absolutely prove that they wouldnt get the growth without acquiring a particular business, then the revenue argument might have some value, she says. But there is always the question, Why cant you do that anyway? Why do you have to do the deal to get this growth? This is especially true in bancassurance, for example, where businesses may well have done several similar deals in the past and may be challenged on whether they are making good use of the distribution they already have.
I have a database of 3400 deals which shows that while cost synergies are often announced, revenue synergies are talked about, but thats all. More robust analysis of revenue synergies will definitely help.
Tim Prince, Director, Canadian Head of Integration and Separation
3. Communicate carefully with the market

Markets are generally easier to persuade of the value of revenue synergies if the CEO is able to speak confidently and convincingly about them. Its common to hear business leaders telling their audiences that there is a strategic rationale for the deal, they are going to pay a certain amount for the acquisition, there will be these cost savings and, if all goes well, the deal team thinks that this combination of businesses will produce revenue synergies of X. This may seem to be a prudent and careful line to take with skeptical markets, but if revenue growth assumptions are built into the price (and vendors will do their best to make sure that they are) then the markets will need to hear a good explanation of how these assumptions will be realized. In some countries, like the UK for example, there are requirements built into the rules governing takeovers to ensure that the acquirer does report on all the synergies cited during price negotiations. This might make a
The story needs to be complete, clear, compelling and convincing for all the audiences that will need to hear it.
Case study
Separation and transitional service agreements

clear that if both businesses were to remain operational during the transition period, some form of TSA would be needed. As Mohammed Sheikh from KPMGs UK member firm says, the vendor is rarely a specialist in providing services to external clients, which means that the operation of the TSA may not be as efficient as it could be from a specialist provider. A further issue is that the acquirer does not have full control of the business they have bought until the full process of transition is complete, meaning that the integration process takes longer and can cost more. In this case, the KPMG team focused on effective communications to all stakeholders throughout the process, and developed a governance model consisting of senior finance executives to ensure that issues were identified and reported promptly, and executive decisions made in good time. When it emerged early on that TSAs would be needed, the KPMG team worked with the client and the acquirer to identify precisely where support was necessary, and to iron out the details. A KPMG adviser who worked on the deal says, The deal was completed seamlessly, and we were glad that we had been able to start shaping the TSAs early in the process, because they were key to the successful operation of the post-close interim and long term business model. But a key lesson we took from the deal was that there are significant benefits to be had from changing finance arrangements as early as possible to avoid the need for TSAs in future. Partnering with the buying entity is vital to help ensure the smooth running of the deal, but once the process is completed, the cleaner the break can be, the better for all concerned.
In the complex group structures that are common in todays FS companies, it can be very difficult to separate out businesses earmarked for sale if a significant part of their operational support, in the form of IT processing, finance or HR, is provided centrally by the group. In these cases, a solution may be to agree Transitional Service Agreements (TSAs), so that the support services continue to be provided by the seller for an agreed period post-separation. This was the case with a US-based international financial services organization which KPMGs US member firm helped in the disposal of its retail asset management business. A key rationale for the deal was to allow the KPMG client to focus on developing its institutional client base, but in the course of the disposal to an independent investment management company, it became
difference to the amount of information that an acquirer will want to make available to the market at the point where they are gathering support for the deal. But it does not change the principle that the better the explanation for the price being paid, the more likely it is that the markets will accept it. Miguel Sagarna cites cases where the synergies predicted for a deal have relied partly on media announcements of synergies for similar deals in the recent past. This might have been an acceptable method of benchmarking in the past, but it isnt any longer. Even though it may be difficult to arrive at detailed numbers, people are getting more and more interested in seeing the results of a bottom-up approach to
synergies. The premiums the market is prepared to tolerate now are much lower than those they were prepared to accept in the past. Tiberius Vadan agrees on the need to define and justify synergy assumptions very clearly, but he goes on to recommend an equally clear set of priorities which need to be communicated both externally and internally. It needs to be clear to your internal team, and to the market, that your first priority is not to lose any customers. he says. If CEOs shy away from talking about their plans in detail, or its not clear what they plan to do, then that in itself runs the risk of leading customers to go elsewhere.
You need to break the price down into components and be able to explain your thinking to the market. If you are not convincing, the market may conclude that you are overpaying. And, in fact, they may be right.
Did pre-completion synergy assessment involve a top down high level approach or a detailed bottom up process
Detailed bottom up process 24%
Top down high level approach 76%
4. Track progress
In a sector where doing deals is the life blood and primary purpose of so many participants, we should probably not be surprised that tracking revenue and cost synergies once the deal has been completed tends not to receive much attention. In the banking sector in particular, there is a curious reluctance to check on the promises and assumptions that formed a key part of the negotiations, to see if they were delivered. Tim Prince, of KPMGs Canadian member firm, sees this as a function of the separation of the deal-making teams from the operational teams. The deal makers accountability stops once the deal has been done, so there is no motivation on them to see the process through to completion. he says. I have clients telling me that it is not their job to track synergies, so they dont really care whether they are delivered or not. This is a significant problem, and one which seems increasingly to be concerning shareholders. Mohammed Sheikh of KPMGs UK member firm reports an increasing view that the quality of the tracking of deal synergies should be a measure of the success and skill of the acquiring company in completing the deal. Tracking can mean tracing deal-specific cost savings for 18 months or two years after a deal is done, when the temptation may be to simplify matters by including them in a larger pool of costs to be reduced over time. This can seem a more sensible use of scarce accounting resources, but it is an essentially short term view. One of the most valuable things an acquisitive company can do is to build up a reputation for carefully tracked progress in previous deals, which will add credibility to the predictions made for future acquisitions. Tracking benefits can, however, be complicated, and in an ever-changing and growing business establishing reliable metrics can really help. Bernie Crowe says that in one business the projected headcount reduction benefits were not captured, because the people were re-absorbed back into the business to support an unexpectedly high level of growth. This doesnt mean that the synergies were lost. Efficiency metrics showed that, although headcount did not reduce, efficiency improved.
You may be a serial acquirer, but unless you are tracking, how do you know whether you are successful or not? People are waking up to this, and are looking for improvements in tracking performance.
Mohammed Sheikh, Partner, KPMG in the UK, Head of Integration and Separation Transactions & Restructuring, Financial Services
5. Cultural integration
FS companies are not alone in relegating cultural and HR issues to the bottom of the list of due diligence items; in the general survey only 38 percent said they had carried out any HR due diligence, well behind all other matters. But with the exception of those in the asset management sector, virtually all the FS companies polled conceded that their management of people and cultural issues was not good. Illustrating one approach to this problem, an investment management CEO from the UK said, It was pretty straightforward. We understood that the new employees were different and we just took that into account. We created the best of both worlds. A different, more directive approach was revealed in a comment from a Korean insurance executive who said We used training and workshops to educate the new employees By contrast, a retail . banker from Germany said, I think we just ignored the issues that arose. There is a business logic in spending relatively little time on cultural issues in the case of, say, two large retail banks where much of the benefit of
Cultural realignment is a major issue, especially when it comes to mergers of equals. The big banks have built up distinctive cultures over many, many years, so when there is a merger it is a really big event. People freak out.
What were the top three people lssues?

Retention Culture Redundancy processes Operating model Appointments Terms & conditions Communications Recruitment Harmonizing/integration Remuneration Packages Pensions Restructuring Other None/refused 0% 5% 6% 3% 6% 9% 12%
22% 20%
32%
7% 6% 5% 12%
18%
3% 4% 2% 2% 1% 1% 1% 9% 9% 10% 10% 15% 20% 25% 30% 35%

the deal comes from bringing together and reducing the size of two branch networks. The logic begins to break down when lack of attention to people issues results in the loss of important IT or fund management staff. It breaks down completely if cultural problems result in the failure of the deal. Francesca Short is very clear that lack of attention to cultural differences can destroy value in a deal very quickly. I have seen a recent case where a global insurer bought a local player without taking the time to ensure that key people in the local company realized they were going to be part of a global organization and were willing to make the necessary adjustments. The deal is failing because of this, and the acquirer realizes it. Acquiring new customers These issues seem to arise most readily in those sectors where financial services is seen primarily as a numbers
business rather than one relying on social customs, preferences and habits of thought. It may be possible to overcome these issues within an organization by removing people whose views do not fit. But it becomes more difficult when the cultural differences are between a FS company and its newly acquired customers. This has proved a problem for some of the European banks who have moved into the US markets, where the time needed to integrate US acquisitions has been longer than they had anticipated because of the need to adjust European products and services to US regulations and customer expectations. It has also proved to be an issue for FS companies moving into China, where, despite a tendency to focus on financial matters in due diligence, personal relationships have a particularly strong influence over how and with whom
people do business. Building the required relationships can take more time than acquirers are initially prepared to allocate, and this may be one of the reasons for the reassessment of the value of Chinese tie-ups mentioned by Sam Evans earlier in this report. In China many capability transfer programs fail to deliver enhanced value because of relationship issues as opposed to problems with the content of the program. We are aware of organizations spending 1218 months building relationships with their partner, to create mutual trust and buy-in to a tailored program for local market conditions. There are effective diagnostic tools that can help to pinpoint and deal with potential cultural clashes. These are gaining increasing acceptance in the FS sector. If used more widely they could have a significant impact on the levels of success in post-deal integration.
Case study
Merging different salesforce cultures

This would involve finding a way for the two very different approaches to work together. The solution proposed by the KPMG team was to segregate the market into distinctly different audiences, and develop distribution channels and product offerings designed specifically for each channel. We needed to recognize where there was a sensitivity to independence and where there was not, says the partner who led the team. People wanting detailed investment advice generally needed a much higher level of service and a wider range of funds than those who were simply looking for a good deal on a mortgage or a safe home for their pension money. So we needed to develop a very flexible framework that allowed advisers to give the high service that some clients demanded, while encouraging them to channel suitable investments into the parent companys own managed funds, where security rather than independence was the priority. This is a short to medium term solution. It has meant leaving some parts of the target company unintegrated, but adapting the merged organizations support and management systems to cope with the different ways of doing business. In the longer term, the KPMG proposal is to focus on developing the skills, market knowledge and profitability of the adviser teams, so that distinctions between employed and independent advisers take second place to the quality of the service that any adviser provides to clients, and the profits they generate. Younger advisers are hungry to do business, says the partner, the issue is how you train them, support them, and make writing the right kind of business easy for them. This does mean letting go those advisers who are not profitable, and you have to have the metrics in place to determine who those people are. But if you can develop a properly motivated and incentivized salesforce with the right mix of skills, concerns about where they originated will fall away as they compete for new business.
There are many different subcultures in the financial services sector, but two very common primary cultures stand out; the outsourced, commission-based, independent salesforce, versus the in-house, employee-based version. Many of the large retail banking, insurance or bancassurance deals that KPMG member firms advise on involve bringing together these two cultures in a single organization. This can prove to be very difficult. In one recent case, a large insurer with a model based on in-house fund management and an employed salesforce had acquired an equally large competitor which did very little in-house fund management, preferring to direct clients to funds managed by others, and relied heavily on an independent, commission-only salesforce. The deal was presented to shareholders primarily as a method of removing a competitor, but it was clear from the start that the merged organization would also need to pursue revenue synergies if the deal was to be seen to be successful.
28 | I s the de al g oin g t o go well? Six key ques t ions t o a s k
Is the deal going to go well? Six key questions to ask

The combined experiences of KPMGs specialists around the world suggest that there are six key questions that need to be asked regularly in the planning of a deal. The answers to these questions will give some valuable indications of potential future problems. They are: 1. Is there a clear plan in place for the whole of the deal, including integration, with agreed metrics to define and measure success? 2. Can the plan be carried out quickly? 3. Do we know in detail what we are going to do the day after the deal is completed? 4. How long is it taking to get answers to our questions from the target company? 5. Are we thinking hard enough about how we will integrate customers and employees into our new, enlarged company? 6. If this deal goes wrong, do we have the energy and the resources to do it all over again and get it right? In ASPAC where control can be difficult to achieve, it is also important to ask How well do you understand the local market and your potential partner. Is there motivation on both sides for a true partnership? Where can your organization really add value?
Patchwork organizations reveal poorly executed previous integrations. Some can hit a button and tell you the information you need, others need to go to each different system and ask individually. It can take months.
What will you do differently in your next deal? Answers from FS executives
Perform better due diligence

I would denitely expand the due diligence in some areas. UK, Insurance, VP We would carry out far more detailed due diligence. US, Investment management, Managing director
Conduct faster implementation/integration

We would have a team that specialized in acquisitions to speed the proceedings up. Spain, Corporate & investment banking, CFO We would integrate the target business quicker." Korea, Insurance, Finance controller
Understand the different labor laws and cultures between countries

We must understand the culture and context of the country where the acquisitions are being made. Spain, Investment management, CFO
Understand the target companys market

I would say that I would do a more thorough survey of the market to have all the tools needed to acquire the companies that we want to acquire. Brazil, Corporate & investment banking, CFO
More focus on cost/nances

Be less aggressive in revenue projections from the acquired business. US, Retail banking, Finance director
HR planning
I would handle difcult managers better. US, Investment management, Director
Case study
Pre and post-deal planning

We found that there were still too many unknowns surrounding the operating models of the target company, says one KPMG adviser who worked on the deal, so we had to put off a lot of key decisions until after completion when we could see in detail what the target company looked like. The post-completion phase began with two weeks of intensive immersion in the businesses on each side. The whole process was split into several work-streams, with detailed presentations from each team intended to give the other side the in-depth knowledge of the business necessary for further planning. Next came a hypothesis generation/ joint design phase in which each work stream was asked to develop a plan for the parts of the business for which they were responsible. This was a very patchy process, says the KPMG adviser. Some of the work streams did very well, but they all suffered from the lack of an overall baseline from which to work. This should have been produced by the finance department, drawing on the pre-completion work, but the finance team was scarcely involved in these discussions. Each team was allowed to pick the data it wanted to illustrate its plans, which meant that it was very difficult to see whether the performance predictions being offered for each part of the business were stretching or not. It was very noticeable that those work streams that brought in external advisers, to analyze the data carefully and to help devise proper metrics and KPIs, produced better and more convincing plans than those who chose to do it by themselves. The integration process for this deal looks set to go on for at least another 18 months. It really should be done faster, says the KPMG adviser, but we are finding ourselves doing work now that should have been completed before the deal was signed.
Much of the discussion in this report has focused on the value of pre-deal planning and thorough due diligence. The problems that can arise when these processes are not carried out effectively were illustrated in one recent deal involving two large FS companies, on which a KPMG team advised. As is relatively common on large scale FS mergers, the negotiations and regulatory approval process took the best part of a year to complete. Possibly as a result of a desire to get the deal completed, the formal due diligence process was completed very quickly and, unusually for a deal of this size, was carried out by an in-house team without significant external support. Difficulties began to appear when the acquirer tried to run a reasonably extensive pre-completion planning phase, but found that many of the key questions that should have been answered in the due diligence process had been left unresolved.
Two organizations might say they are on the same system, but one could be using the original version, patched up, customized and no longer supported, while the other could be using the very latest release. You have to ask the right questions to find out things like this.
Carl Carande, National Account Leader, KPMG in the US, Banking and Finance
30 | A wave of d eals to c om e
A wave of deals to come
KPMGs specialists are unanimous in their view that there is a wave of FS M&A activity about to break. The next three years or so is expected to be a process of refocusing, re-shaping and transacting for FS businesses all over the world. The only question is when it will begin. These plans are being driven by a unique combination of factors. Internally, as we have already seen, many organizations have gone through a severe round of cost-cutting and are now lean and mean enough to be looking for growth opportunities as a matter of priority. But there is still a huge amount of internal reorganization under way, as businesses struggle with the implications of a new economic environment where clients no longer have the high levels of trust they once
enjoyed, and business practices that were once entirely acceptable are now viewed with suspicion and mistrust. These changes are leading big FS companies to look very hard at their operations, splitting out those that they think are non-core and running them separately, in preparation for a possible disposal once they have shown themselves to be viable stand-alone businesses. Some of this activity is being driven by legislation like the Dodd-Frank Act in the US, and by recovery and resolution plans which will require some large institutions to assess what actions they could take to recover from a range of stresses, and if necessary to achieve an orderly wind down.
People have gone to hell and back with the recession. They seem to think now that we are coming out of it. Clients are saying they want to concentrate on growth thats across all sectors.
of companies in the financial service sector agree that M&A will bounce back in their country next year.
67%
M&A will bounce back in my country next year (2011)
17% 26%
15% Strongly agree 32% Tend to agree Tend to disagree Strongly disagree Not sure 35% 15%
7% Global average (162) 12%
3%
38%
External factors driving change include the imminent appearance of large, wellcapitalized Chinese acquirers on the market, with strong government backing and an urge to take the Chinese economy to the next stage in its development. They will find themselves in competition with acquisitive Russian interests, and with a resurgent private equity sector keen to shed the assets that they have not been able to sell on while markets were low, and find new targets for their skills. Uncertainty over regulation What is holding these transactions back is uncertainty over the detailed effect of new regulations plus regulatory reform and associated opening up of markets in ASPAC. The full implications of the revised capital requirements contained in the Basel III rules, for example, are still being worked out, and banks will not want to take major action on disposals or acquisitions until they have a good idea of how their overall capital profile will look under the new regime. In Europe, the introduction of Solvency II, combined with wide ranging changes to regulation of distribution, will drive the insurance industry into some major realignments. says Francesca Short.
The increased sophistication in risk analysis required will force insurers to reassess their capital deployment. For example, the benefit of holding closed life funds within large groups may come into doubt as the capital they tie up will increase significantly over Solvency I requirements. The tension between reducing complexity to reduce need for capital, and increasing the attractiveness of products to entice customers to pay explicit sales charges is causing interesting shifts in the balance of power between manufacturers and distributors of retail insurance products, which will spark numerous transactions as distribution channels are realigned. Globally, insurers will likely increasingly look for growth in underdeveloped markets where often the acquisition of a local player is a safer option than starting up a completely new operation. The key to the success of these deals, as we have said earlier in the paper, is to stamp the mark of the global player on the new acquisition to achieve consistent operational methods and governance structures, while retaining and using the unique local knowledge acquired. These issues will be resolved in time, and our best estimate is that there is 57 years of large-scale restructuring ahead for financial services. Whether this restructuring will end up adding value to the sector or not, depends to a large extent on whether the key lessons of the recent past can be learned, absorbed and applied.
We are going to see a lot more cross-border M&A, with interest from China and Russia. Premiums will increase. We will get back to the glory days, but not for a while yet.
Tim Prince, Director, Canadian Head of Integration and Separation
It is key to factor in the impact and cost of regulation in your bid new capital and liquidity rules will have a profound impact on future profit and return on assets.
Stuart M. Robertson, Global Banking Transactions and Restructuring Sector Lead
32 | The value of u sin g a n a dv is or
The value of using an advisor

It might seem paradoxical, but experience shows that the more practised a business becomes at carrying out successful acquisitions, the more they tend to rely on external advisors to help them manage the process. Studies suggest that deals where there has been a good external advisory team will realize, on average, around 30 percent more value than those that are done entirely in-house. The key contributions that KPMG advisors can make to the success of a deal are: Experiences of past deals no two deals are the same, but the same problems and issues do appear regularly. A good advisor will have handled these matters before, and will know what works and what doesnt. A detailed program plan that will take a deal from initial due diligence right through to completion of integration, with all issues properly resolved. Specific, up-to-date knowledge of the relevant regulations, including labor laws, tax matters, and local ownership requirements. Specialist knowledge and experience on areas of due diligence that may be unfamiliar to the acquirer. Knowledge on how to shape the new entity, bring together a team specifically to manage the transition from two organizations to one, and drive the process from beginning to end. Resources to help get through the more difficult tasks, including present revenue synergies in a compelling way to the market. Perspective to help ensure that targets are stretching, but achievable, that opportunities are not missed, and that the rationale that made the deal attractive in the first place is delivered.
Related Publications
A new dawn: good deals in challenging times Bruised but not broken: The global banking growth agenda
Contact us Jeremy Anderson Global Chairman Financial Services KPMG in the UK T: +44 20 7311 5800 E: jeremy.anderson@kpmg.co.uk John Kelly Global Head of Integration & EMA Head of Transaction Services KPMG in the UK T: +44 20 7694 3528 E: john.kelly@kpmg.co.uk Michael J. Conover Global Sector Leader Capital Markets KPMG in the US T: +1 212 872 6402 E: mconover@kpmg.com
Frank Ellenbrger Global Sector Leader Insurance KPMG in Germany T: +49 89 9282 1867 E: fellenbuerger@kpmg.com
David Sayer Global Sector Leader Retail Banking KPMG in the UK T: +44 20 7311 5404 E: david.sayer@kpmg.co.uk
Wm. David Seymour Global Sector Leader Investment Management KPMG in the US T: +1 212 872 5988 E: dseymour@kpmg.com
kpmg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Designed by Evalueserve. Publication name: The architecture of integration Publication number: 110735 Publication date: September 2011

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FINANCIAL SERVICES

The Architecture of Integration

KPMG specialists and contributors

Written by Jeff Wagland

Global Head of Integration & EMA Head of Transaction Services

4 | E xec utive sum m ar y

Global M&A how financial services compares

Global average (162) 23%

6 | G lobal M&A how FS c om pa nies c om pa r e

18% 15% 17% 15% 13%

Financial services (34)

Global average (162)

8 | G lobal M&A how FS c om pa nies c om pa r e

What was the largest single factor in determining price?

What types of due diligence did you do?

Financial services (34)

Global average (162)

10 | D eal d rive rs the cha nging cha r a c t er is t ic s of FS M& A

Deal drivers the changing characteristics of financial services M&A

12 | Key ge og rap hical d iffer enc es

Key geographical differences

14 | Key ge og rap hical d iffer enc es

16 | Key factors in m ana ging M &A dea ls a c r os s FS s e c t o r s

Key factors in managing M&A deals across FS sectors

Distribution Geographical/ market growth Capital requirements Regulation

Technology Cash management Operations Continuity

Distribution Scale benefits Cross-selling/ bancassurance Capital requirements

Risk Continuity Talent retention

1. Take your time on the due diligence, but integrate fast.

2. Revenue versus cost synergies

Which of the following revenue synergies were targeted in the deal?

Expansion into new geography

Cross selling products and services 32% 30% 9%

Expansion into a new sector

Leverage of intellectual property and technologies 3% 2% 3%

7% 10% 20% 30% 40% 50% 60% 70%

Financial services (34)

Global average (162)

3. Communicate carefully with the market

Separation and transitional service agreements

Detailed bottom up process 24%

Top down high level approach 76%

What were the top three people lssues?

3% 4% 2% 2% 1% 1% 1% 9% 9% 10% 10% 15% 20% 25% 30% 35%

Financial services (34)

Global average (162)

Merging different salesforce cultures

28 | I s the de al g oin g t o go well? Six key ques t ions t o a s k

Is the deal going to go well? Six key questions to ask

Perform better due diligence

Conduct faster implementation/integration

Understand the different labor laws and cultures between countries

Understand the target companys market

More focus on cost/nances

Pre and post-deal planning

A wave of deals to come

M&A will bounce back in my country next year (2011)

7% Global average (162) 12%

Financial services (34)

32 | The value of u sin g a n a dv is or

The value of using an advisor

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