M&A activity in Asia's banking sector is on the rise, but no matter how hard the investment banking M&A advisory teams might tell you they work, most of the difficult processes continue far beyond the initial agreement.
A courtship analogy is particularly apt here. When banks start talking about a merger and negotiating swap ratios it’s like the first couple of dates where they size up the value of a potential partner. Getting regulatory approval for the bank merger is like the first meetings with each other’s parents. This might not sound like much fun, but things get a lot harder when the two partners move in together and the business of day-to-day coexistence needs to be figured out.
Most mergers are presented as being just that - a merger of two equals, but the reality is usually never as romantic. One bank assumes the role of acquirer, and depending on how much bigger it is than the acquired it will usually call most of the shots when it comes to IT and management restructuring. Sometimes, when opposites attract, there is enough difference in areas of expertise that two banks can attain that exalted state - and favourite buzzword - synergy. But regardless of the partners, like most good relationships the best solution is a bit of give and take.
These days third party consultants are often bought in to assist in the decision making and implementation, and dealing with technology issues is given priority. It wasn't always this way, however.
"If we go back a few years there were two areas consistently overlooked during an acquisition," says Mark Powell, associate director, Business Consulting at Andersen. "They are the effect on people - how they react to the merger situation - and IT. The IT manager was often hit with 'We've just merged with someone, go ahead and integrate us. Shouldn’t be too hard, right?' The poor old IT guy is sitting there with restricted budgets anyway, and restricted resources and more often than not has no experience of going through an integration."
That this situation has changed is largely because of the emergence of internet strategies and a stronger focus on technology generally. A merger is now seen as a chance to get rid of legacy systems, consolidate, outsource areas that aren’t core anymore and get back to strategic banking. It is one of the rare opportunities for the IT department to change things radically and get strong support from senior management.
Recent mergers in many markets are being driven in part by IT budget considerations and the desire to acquire expertise in certain areas. Officials at Development Bank of Singapore (DBS) said after announcing the acquisition of Dao Heng Bank that its customer relationship management (CRM) expertise was key to finalising the deal. A DBS spokesperson said that Dao Heng was indeed ahead of DBS in terms of CRM implementation, thanks to heavy investment in technology, and that DBS expected to learn a great deal from Dao Heng’s experience.
In Korea the merger between Kookmin and H&CB, has been driven in part because management recognize that large IT investments are required to be internationally competitive. The two banks last year spent $250 million between them on IT and have said they plan to increase this once the merger is complete.
The original timeline for that merger has been extended because of delays in naming a CEO for the new bank. Bank representatives said they expect the position to be filled by the end of July and within one week of the CEO being named they would release a detailed final IT blueprint. That authorising the IT plans will be one of the new CEO's first tasks indicates the importance attached to getting this part of the merger process done well.
"We get bought in as the independent middleman to apply our methodology and project management expertise," says Powell, who has worked on a number of integration projects, including the merger between Deutsche Bank and Bankers Trust. "We'll also bring in people from the vendor side to work along side the people that run and maintain the systems.
But consultants aren't always deemed necessary and sometimes, particularly with smaller banks, management will rely on their own in-house IT experts and support from their vendors. Consultants are considered by some to just add to the time and money it takes to get the job done - paralysis through analysis is a common description. Powell agrees that some consultants might have earned the bad rap. "But in reality of course, we can often add those resources that are lacking."
One of those resources is an independent eye to appraise the IT systems already in place in each bank. Bringing in some objectivity can help resolve conflicts that might arise as IT professionals in banks are notoriously possessive and proud about the domains they have built.
"You tend to find that IT managers have a very rosy view of their own IT systems and are looking intently for faults in the opposing sides," says Guy Warren, European practice director at Unisys.
"For the first few days and weeks there definitely is an 'ours is better than yours' feeling, whether its comparing operating systems, databases and so on," agrees Powell. "You do have the technologists puffing up about their preferences, but that gets leveled out as things start being integrated."
Once the initial stages of due diligence are under way there is a whole slew of different IT systems that have to be considered, from the core banking system that ties everything together to retail systems such as the ATM network, commercial banking systems for foreign exchange and cash management trading systems, to back office accounting, and risk management. In each case there is more to consider than just functionality.
The selection process is always a tradeoff where you have to weigh up the benefits of different software and hardware, but also consider compatibility issues: how is it all going to fit together, and how are you going to move data between old and new systems?
"We're very careful to make recommendations that are flexible," says Powell. Banks may need to scale down as well as up in certain business areas, so systems can not be too customized to the point they can't be changed later. Different parts of the IT support infrastructure must be able to be decommissioned quickly and easily in case that part of the business is suddenly no longer profitable.
Increasingly in Asia, banks are taking the opportunity to internationalize and install software that is capable of handling the English language. This is something Powell says he is seeing a lot of in consulting jobs that Andersen is doing in the region.
"We're involved with two bank mergers in Korea right now and they are also using the opportunity as a springboard to implement enterprise application integration (EAI)," he explains. "They are suffering from a lot of decentralized applications and IT environments. We are putting in middleware to provide a corporate backbone so they don't necessarily need to have to replace all their applications if they can still get information flowing through to the relevant departments."
Usually banks can rely on the vendors to help migrate data from applications that are being phased out. Even though their product wasn't selected most vendors are happy to help phase out systems as part of the sales relationship. They want to be in with a chance the next time the bank goes shopping for new products.
A horror situation that might arise, warns Warren, is that although due diligence has been conducted on the IT infrastructure, the newly merged entity has taken on huge IT risk or huge business risk by not being aware of certain facts. The lesson here is to make sure you ask all the right questions.
"The bank that's being acquired is hurting, and while they're not exactly obstructing the process they might not necessarily volunteer all of the relevant information. If you don’t ask, you don't get. It's not a common situation these days, but it can happen."
Another area where dangers lurk is human resources and management restructuring. Problems can arise when and communication channels are weak and clear structures aren't put in place. "If a merger isn't managed effectively from the start you can end up with two IT infrastructures and two management systems. As soon as possible you have to say - There is one bank, one IT infrastructure and also handle the management transition, " says Warren.
"If you can bring Human Resources in right at the start you can cut out a lot of headaches," he adds. "The worst situation I've seen was in Europe a few years ago where the merger just didn't take place at all on the IT side. After two years there were still two IT infrastructures and management structures. Nothing was integrated and people still couldn't even do cross-branch transactions."
In that case it wasn't until the top IT manager was replaced and someone new was bought in to shake things up that the merger actually happened.
The issue of human capital is crucial in the first stages of a merger where people might start leaving because they get demoralized. "I have seen instances where key staff have left on the target side and no-one who is left has any idea what the legacy systems do, or how to support them," says Powell. But usually banks have already determined the key staff they need to keep on, and will offer loyalty bonuses for staying on until the integration is done.
Once the integration is on track a decision has to be made on what type of management structure to implement along with the new technology, a task made more difficult in a global institution. Solving this problem requires an understanding of the many different matrices that impact on IT professionals, such as regional and functional boundaries in a job description.
Banks that distribute responsibilities solely by region end up facing and solving the same set of problems in each area. But then if the structure is too centralized the regions feel like they're not in control of their own operation, and IT solutions aren't as responsive to their specific needs.
"It isn't easy," says Warren. "There are no simple answers. But you have to accept that, get on and work in the matrix."
The best way, adds Powell, is to take from both approaches. Global heads of certain units, desktop services for example, might also be given regional responsibilities. The trend of creating global centres of excellence rather than duplicating each department within each region makes the management process simpler. Concentrating all responsibility for technology issues in the single executive level position of chief technology officer (CTO) is also considered best practice.
There are many things to be considered before two banks plan their lives together, and those that think carefully about the details – technology issues included - will fare better than those that take the Las Vegas shotgun wedding approach.
