Tài liệu MERGERS AND ACQUISITIONS IN BANKING AND FINANCE PART 3 pptx

129

5

The Special Problem

of IT Integration

Information technology (IT) systems form the core of today’s financial

institutions and underpin their ability to compete in a rapidly changing

environment. Consequently, integration of information technology has

become a focal point of the mergers and acquisitions process in the finan￾cial services sector. Sometimes considered largely a “technical” issue, IT

integration has proved to be a double-edged sword. IT is often a key

source of synergies that can add to the credibility of an M&A transaction.

But IT integration can also be an exceedingly frustrating and time￾consuming process that can not only endanger anticipated cost advan￾tages but also erode the trust of shareholders, customers, employees and

other stakeholders.

KEY ISSUES

IT spending is the largest non-interest-related expense item (second only

to human resources) for most financial service organizations (see Figure

5-1 for representative IT spend-levels). Banks must provide a consistent

customer experience across multiple distribution channels under de￾manding time-to-market, data distribution, and product quality condi￾tions. There is persistent pressure to integrate proprietary and alliance￾based networks with public and shared networks to improve efficiency

and service quality. None of this comes cheap. For example, J.P. Morgan

was one of the most intensive private-sector user of IT for many years.

Before its acquisition by Chase Manhattan, Morgan was spending more

than $75,000 on IT per employee annually, or almost 40% of its compen￾sation budget (Strassmann 2001). Other banks spent less on IT but still

around 15–20% of total operating costs. Moreover, IT spend-levels in

many firms have tended to grow at or above general operating cost in-

130 Mergers and Acquisitions in Banking and Finance

First Chicago

Banc One

Credit Suisse

Wells Fargo

Societe Generale

SBC

ABN Amro

Bankers Trust

Nations Bank

Credit Agricole

UBS

JP Morgan

NatWest

Bank of America

Barclays

Credit Lyonnais

Deutsche Bank

Chase

Citicorp

0 0.5 1 1 .5 2

Figure 5-1. Estimated Major Bank IT Spend-Levels ($ billions).

Source: The Tower Group, 1996.

creases, as legacy systems need to be updated and new IT-intensive prod￾ucts and distribution channels are developed.

As a consequence, bank mergers can result in significant IT cost sav￾ings, with the potential of contributing more than 25% of the synergies in

a financial industry merger. McKinsey has estimated that 30–50% of all

bank merger synergies depend directly on IT (Davis 2000), and The Tower

Group estimated that a large bank with an annual IT budget of $1.3 billion

could free up an extra $600 million to reinvest in new technology if it

merged, as a consequence of electronic channel savings, pressure on sup￾pliers, mega-data centers, and best-of-breed common applications.1 How￾ever, many IT savings targets can be off by at least 50% (Bank Director

2002). Lax and undisciplined systems analysis during due diligence, to￾gether with the retention of multiple IT infrastructures, is a frequent cause

of significant cost overruns.

Such evidence suggests that finding the right IT integration strategy is

one of the more complex subjects in a financial industry merger. What

makes it so difficult are the legacy systems and their links to a myriad

applications. Banks and other financial services firms were among the

first businesses to adopt firmwide computer systems. Many continue to

use technologies that made their debut in the 1970s. Differing IT system

platforms and software packages have proven to be important constraints

on consolidation. Which IT systems are to be retained? Which are to be

abandoned? Would it be better to take an M&A opportunity to build a

1. “Merger Mania Catapults Tech Spending,” Bank Technology News, December 6, 1998.

The Special Problem of IT Integration 131

completely new, state-of-the-art IT infrastructure instead? What options

are feasible in terms of financial and human resources? How can the best

legacy systems be retained without losing the benefits of a standardized

IT infrastructure?

To further complicate matters, IT staff as well as end users tend to

become very “exercised” about the decision process. The elimination of

an IT system can mean to laying off entire IT departments. In-house end

users must get used to new applications programs, and perhaps change

work-flow practices. IT people tend to take a proprietary interest in “their”

systems created over the years—they tend to be emotionally as well in￾tellectually attached to their past achievements. So important IT staff

might defect due to frustrations about “wrong” decisions made by the

“new” management. Even down the road, culture clashes can complicate

the integration process. “Us” versus “them” attitudes can easily develop

and fester.

Efforts are often channeled into demonstrating that one merging firm’s

systems and procedures is superior to those of the other and therefore

should be retained or extended to the entire organization. Such pressures

can lead to compromises that might turn out to be only a quick fix for an

unpleasant integration dispute. Such IT-based power struggles during the

integration process are estimated to consume up to 40% more staff re￾sources than in the case of straightforward harmonization of IT platforms.

(Hoffmann 1999).

At the same time, it is crucial that IT conversions remain on schedule.

Retarded IT integration has the obvious potential to delay many of the

non-IT integration efforts discussed in the previous chapter. Redundant

branches cannot be closed on time, cross-selling initiatives most be post￾poned, and back-office consolidations cannot be completed as long as the

IT infrastructure is not up to speed. In turn, this can have important

implications for the services offered by the firm and strain the relationship

to the newly combined client base.

An Accenture study, conducted in summer 2001, polled 2,000 U.S.

clients on their attitude toward bank mergers. It found, among other

things, that the respondents consider existing personal relationships and

product quality to be the most important factors in their choice of a

financial institution. When a merger is announced, 62% of the respondents

said they were “concerned” about its implications and 63% expected no

improvement. Following the merger, 70% said that their experience was

worse than before the deal, with assessments of relationship and product

cost registering the biggest declines. Such bleak results can be even worse

when failures in IT intensify client distrust. The results are inevitably

reflected in client defections and in the ability to attract new ones, in

market share, and in profitability.

But successful IT integration can generate a wide range of positive

outcomes that support the underlying merger rationale. For instance, it

can enhance the organization’s competitive position and help shape or

132 Mergers and Acquisitions in Banking and Finance

enable critical strategies (Rentch 1990; Gutek 1978). It can assure good

quality, accurate, useful, and timely information and an operating plat￾form that combines system availability, reliability, and responsiveness. It

can enable identification and assimilation of new technologies, and it can

help recruit and retain a technically and managerially competent IT staff

(Caldwell and Medina 1990; Enz 1988) Indeed, the integration process can

be an opportunity to integrate IT planning with organizational planning

and the ability to provide firmwide, state-of-the-art information accessi￾bility and business support.

KEY IT INTEGRATION ISSUES

As noted, information technology can be either a stumbling block or an

important success factor in a bank merger. This discussion focuses on

some general factors that are believed to be critical for the success of IT

integration in the financial services industry M&A context. Unfortunately,

much of the available evidence so far is case-specific and anecdotal, and

concerns mainly the technical aspects treated in isolation from the under￾lying organizational and strategic M&A context.

Whether an IT integration process is likely to be completed on time

and create significant cost savings or maintain and improve service qual￾ity often depends in part on the acquirer’s pre-merger IT setup (see Figure

5-2). The overall fit between business strategies and IT developments

focuses on several questions: is the existing IT configuration sufficiently

aligned to support the firm’s business strategy going forward? If not, is

the IT system robust enough to digest a new transformation process re￾sulting from the contemplated merger? Given the existing state of the IT

infrastructure and its alignment with the overall business goals, which

merger objectives and integration strategies can realistically be pursued?

The answers usually center on the interdependencies between business

strategy, IT strategy, and merger strategy (Johnston and Zetton 1996).

Once an acquirer is sufficiently confident about its own IT setup and

has identified an acquisition target, management needs to make one of

Figure 5-2. Alignment of Business

Strategy, IT Strategy, and Merger

Strategy.

Acquirer needs to align

Business

Strategy

IT

Strategy

Merger

Strategy

The Special Problem of IT Integration 133

the most critical decisions: to what extend should the IT systems of the

target be integrated into the acquirer’s existing infrastructure? On the one

hand, the integration decision is very much linked to the merger goals—

for example, exploit cost reductions or new revenue streams. On the other

hand, the acquirer needs to focus on the fit between the two IT platforms.

In a merger, the technical as well as organizational IT configurations of

the two firms must be carefully assessed. Nor can the organizational and

staffing issues be underestimated. Several tactical options need to be con￾sidered as well: should all systems be converted at one specific and pre￾determined date or can the implementation occur in steps? Each approach

has its advantages and disadvantages, including the issues of user￾friendliness, system reliability, and operational risk.

ALIGNMENT OF BUSINESS STRATEGY, MERGER STRATEGY,

AND IT STRATEGY

Over the years, information technology has been transformed from a

process-driven necessity to a key strategic issue. Dramatic developments

in the underlying technologies plus deregulation and strategic reposition￾ing efforts of financial firms have all had their IT consequences, often

requiring enormous investments in infrastructure (see Figure 5-3). Meet￾ing new IT expectations leads to significant operational complexity due

to large numbers of new technology options affecting both front- and

back-office functions (The Banker 2001). This evolution is often welcomed

by the IT groups in acquirers who are newly in charge of much larger

and more expensive operations. At the same time, however, they also face

a very unpleasant and sometimes dormant structural problem—the leg￾acy systems.

Most European financial firms and some U.S. firms continue to run a

patchwork of systems that were generally developed in-house over sev￾eral decades. The integration of new technologies has added further to

the complexity and inflexibility of IT infrastructures. What once was con￾sidered decentralized, flexible, multi-product solutions became viewed as

a high-maintenance, functionally inadequate, and incompatible cost item.

The heterogeneity of IT systems became a barrier rather than an enabler

for new business developments. Business strategy and IT strategy were

no longer in balance.

This dynamic tended to deteriorate further in an M&A context. Being

a major source of purported synergy, the two existing IT systems usually

require rapid integration. For IT staff this can be a Herculean task. Bound

by tight time schedules, combined with even tighter budget constraints

and an overriding mandate not to interrupt business activities, IT staff

has to take on two challenges—the legacy systems and the integration

process. Under such high-pressure conditions, anticipated merger syner￾gies are difficult to achieve in the short term. And reconfiguring the entire

134 Mergers and Acquisitions in Banking and Finance

IT infrastructure to effectively and efficiently support new business strat￾egies does not get any easier.

The misalignment of business strategy and IT strategy has been rec￾ognized as a major hindrance to the successful exploitation of competitive

advantage in the financial services sector. (Watkins, 1992). Pressure on

management to focus on both sides of the cost-income equation has be￾come a priority item on the agenda for most CEOs and CIOs (The Banker

2001). Some observers have argued that business strategy has both an

external view that determines the firm’s position in the market and an

internal view that determines how processes, people, and structures will

perform. In this conceptualization, IT strategy should have the same ex￾ternal and internal components, although it has traditionally focused only

on the internal IT infrastructure—the processes, the applications, the hard￾ware, the people, and the internal capabilities (see Figure 5-3). But external

IT strategy has become increasingly indispensable.

For example, if a retail bank’s IT strategy is to move aggressively in

the area of Web-based distribution and marketing channels, the manage￾ment must decide whether it wants to enter a strategic alliance with a

technology firm or whether all those competencies should be kept inter￾nal. If a strategic alliance is the best option, management needs to decide

with whom: a small company, a startup, a consulting firm, or perhaps

one of the big software firms? These choices do not change the business

strategy, but they can have a major impact on how that business strategy

unfolds over time. In short, organizations need to assure that IT goals and

business goals are synchronized (Henderson and Venkatraman 1992).

Once the degree of alignment between business strategy and IT strategy

has been assessed, it becomes apparent whether the existing IT infrastruc￾ture can support a potential IT merger integration. At this point, align￾ment with merger strategy comes into play. As noted in Figure 5-4, much

depends on whether the M&A deal involves horizontal integration (the

transaction is intended to increase the dimensions in the market), vertical

integration (the objective is to add new products to the existing production

chain), diversification (if there is a search for a broader portfolio of indi￾vidual activities to generate cross-selling or reduce risk), or consolidation

(if the objective is to achieve economies of scale and operating cost re￾duction) (Trautwein 1990). Each of these merger objectives requires a

different degree of IT integration. Cost-driven M&A deals usually lead to

a full, in-depth IT integration.

Given the alignment of IT and business strategies, management of the

merging firms can assess whether their IT organizations are ready for the

deal. Even such a straightforward logic can become problematic for an

aggressive acquirer; while the IT integration of a previous acquisition is

still in progress, a further IT merger will add new complexity. Can the

organization handle two or more IT integrations at the same time? Share￾holders and customers are critical observers of the process and may not

135

Business

Scope

Distinctive

Competencies

Business

Governance

Business Strategy

Technology

Scope

Systemic

Competencies

IT

Governance

IT Strategy

Administrative

Infrastructure

Processes Skills

Business Infrastructure and Processes

IT

Infrastructure

Processes Skills

IT Infrastructure and Processes

External Internal

Business IT

Strategic Fit

Functional Integration

Cross-Dimension Alignments

Figure 5-3. Information Technology Integration Schematic. Source: J. Henderson and N. Venkatraman,

“Strategic Alignment: A Model for Organizational Transformation through Information Technology,” in T.

Kochon and M. Unseem, eds., Transformation Organisations (New York: Oxford University Press, 1992).