“Having dealt with the consequences of a spectacular recession- and perhaps one in which we may yet experience a double-dip - the conventional wisdom on how to run a successful business has disappeared under a mountain of new regulation and radically changing market dynamics,” said Jeremy Anderson, global chairman, KPMG’s financial services practice and a partner in the UK firm. “Financial services organizations that want to continue in this sector have had to think very hard about how and where they want to operate in the new and strangely unpredictable market environment.”
The report, The Architecture of the Deal, examines M&A activity in the period from 2007 and 2010 and how various drivers may have contributed to the success or failure of transactions. The report is based on KPMG’s annual survey of M&A activity and this year published as A New Dawn: good deals in challenging times.
Based on data from the broader KPMG M&A report, 67 percent of respondents from the financial services sector strongly agree or tend to agree that M&A will be on the return beginning as early as this year in countries around the world. But exactly when and who the key players will be depends on a unique and varying combination of market factors currently in play, Mr. Anderson said.
“The next three years will be telling,” Mr. Anderson continued. “It will be a complex process of refocusing, re-shaping and transacting for financial services businesses all over the world. When this will begin is being driven by whether enough cost-cutting has restored organizations to a level of readiness to look for growth opportunities, whether an organization has adequately addressed the external challenges of new regulation and how they must manage an increasingly wary client base that demands more transparency.”
Factors that may foretell who the acquiring players will be in the expected wave of new deals point to well-funded Chinese and Russian companies, as well as private equity concerns looking for hot prospects.
“We are going to see a lot more cross-border M&A, with interest from China and Russia,” said Tim Prince, Canadian Head of Integration and Separation, KPMG in Canada. “We will get back to the glory days but not for a while yet.”
Mr. Anderson added a cautionary point: “In light of the recent announcements of restructuring, consolidation and the reorganization of business models and mergers, the margin of error has become acute. Ensuring that restructuring brings value to the [financial services] sector depends largely on whether the key lessons of the past can be learned, absorbed and applied. The pressure is on for financial service business leaders to get these changes right and ensure they achieve their business objectives.”
Based on insights from KPMG member firm partners interviewed in The Architecture of the Deal, a keener focus on the top five recurring issues in the post-merger integration phase is critical for the successful completion of transactions.
- The need for speed with a strong dose of due diligence
According to the report, financial services companies did less due diligence than the global average. When due diligence is thorough, integration can be simple. With the proper framework put in place at the onset, integration can be relatively quick; without proper planning, integration can be slow and problematic.
“When are you integrating the business, you focus on three things: protecting the value in the deal, managing and mitigating risks and creating momentum,” said Ian Smith, Director, Financial Services Strategy Group, KPMG Europe LLP.
- Huge attention to revenue synergies
Financial services companies target more revenue synergies than the global average, especially in the area of cross-selling products and services, according to the report. However, the report also pointed out that attention is normally paid more to cost-cutting efforts and less on assessing revenue synergies which can lead to undervaluing a deal and a possible, eventual collapse of the transaction.
“If businesses can absolutely prove that they wouldn’t get the growth without acquiring a particular business, then the revenue argument might have some value,” said Francesca Short, Global Insurance Transactions and Restructuring sector leader, KPMG Europe LLP.
- Communicate confidently, openly and often with the market
An obvious but often neglected area is that of regular and effective communication with important stakeholders during the integration phase –especially if a deal is one based on revenue synergies.
“You need to be able to explain your thinking to the market,” said Miguel Sigarna, National Sector Leader, Transactions and Restructuring, KPMG in the US, “because if you are not convincing, the market may conclude that you are overpaying and in fact, they may be right.”
- Track and measure progress
Sorely lacking according to KPMG partners is tracking revenue and cost synergies once the deal has been completed.
“The quality of the tracking of deal synergies should be a measure of success and skill of the acquiring company in completing the deal,” said Mohammed Sheikh, Head of Integration and Separation Services, Transactions and Restructuring, FS, KPMG in the UK. “One of the most valuable things an acquisitive company can do is build up a reputation for carefully tracked progress in previous deals which adds credibility to predictions on future transactions. “
- Cultural integration can be the difference between success and failure
According to the larger KPMG M&A survey, retaining talent in financial services companies issue of greater concern (32 percent) than compared to the global average of 22 percent, however most respondents admitted that their management of cultural integration was poor.
“Cultural realignment is a major issue especially when it comes to a merger of equal,” said Tiberius Vadan, Senior Director, Transactions and Restructuring, KPMG in the US. “The big banks have built up distinctive cultures over many, many years so when there is a merger, it is a really big event.”
Note to Editors:
The source for much of the analysis in the report is based on the latest in a KPMG series of surveys of the global M&A market (published in July 2011 as A New Dawn: Good Deals in Challenging Times) – supplemented by recent and in-depth interviews with KPMG’s top financial services experts based around the world.
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