Are banks seriously ready for M&A to be their new battlefield?
After 16 months of the world staggering through a pandemic, are banks now seeking a new differentiator to become market leaders???
Mergers and Acquisitions generally indicate something is about to “kick off”. After so many false dawns some nervousness would be expected, but it seems markets believe we have nearly hit the precipice of finally moving on to a “new normal”. Growth and expansion is once again a talking point!
In banking we have seen targeted M&A beginning to happen and, in some cases, taking them into areas not usually part of large bank activities.
The most interesting of these is JP Morgan buying the digital bank, Nutmeg*?
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Joe Hodgins is a highly respected Credit and Lending specialist, recognised for protecting corporate and client investments, growing and retaining profitable UK / International business, leading high performing units & divisions, and in developing innovative commercial strategies. Proven in the particularly sensitive areas of Private, Commercial Banking and Alternative Finance.
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Previously, banks like JP Morgan would have kept clear of retail banking. Don’t forget that the credit crisis was built on subprime mortgages targeted at retail clients and whilst when these were brokered that were seen a high yield, they became distressed debt when many of these borrowers could not repay the loans.?
This led to regulators stepping in and ensuring onboarding and underwriting of all clients was far more robust, but it led to the knock-on effect of added costs for banks and many decided it was a sector to stay away from.
But a combination of better automated technology to underwrite clients and a need to enhance yield after the pandemic has meant retail clients are back in the target lines of the big banks.
The JP Morgan transaction though, shows even further segmentation beyond just calling the client “retail”. Not wanting to make the same mistakes as in the early 2000s banks are looking at retail clients but especially the mass affluent.?
They do not want to succumb to the reputational risk of making retail clients bankrupt or suffer, but they instead are looking to target those with excess cash where, if things did go wrong, they would have enough financial sustainability to survive any financial headwinds.
A clever plan you would say? Yes, it would seem so, but when M&A occurs it is not as simple as buying out a business and looking for them to become your new cash cow. Successful M&A organisations, recognise the need for new strategic direction, innovative opportunistic growth potential, cost cutting efficiencies, and revised systems and procedures. This in turn demands new thinking and the talented individuals who can make this happen.
When an institution looks at itself and further growth, there are normally only two ways ahead; organic growth and / or some form of takeover. Usually organic growth comes first especially when certain KPIs need to be hit but even then, you never can fully calculate when a takeover target becomes available, the option of a hostile takeover has real consequences too.
For M&A to move forward there are probably around 3,000 ticks that need to be executed for the transaction to go through, though the first 1,000 of these are the most important and key to whether the transaction gets to indicative offer stage.
However, there is normally a few ticks missing from the spreadsheet, and these are mainly linked to:
·??????What expertise do we need to get this transaction through?
·??????What skills and experience do we need to lead the transition process?
·??????How do we smoothly integrate the organisations and its people?
What tends to happen is the company looking to takeover will rely on two paths:?
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·??????Their current staff?
·??????Consultants, usually from the Big 4
In some respects, there is nothing wrong with this, but there are areas that will be missed going down this route.
Existing staff understand the infrastructure of the group in its current guise which helps to dovetail the new organisation into what is already there; but is that the right platform to base integration on?
The majority of mindsets need to be committee, despite their differing viewpoints and you are never going to please everybody, especially during a transition period.?
It is also best to be honest, as during M&A, there is a good chance that there will be cost cuts in personnel, but those same people are needed to manage the initial transition and integration period.?
I have seen first-hand how employee motivation and job satisfaction nose dive when staff know something is about to happen but don’t know what, don’t know when, and don’t know how it will affect them personally. It is very hard to turn around a dour office feeling if this is allowed to start.
During transitions, most of the people hired are consultants and so there is no one any of the onboarded people can approach. Companies need to think what people they need for each stage of the integration.?
The other area, often forgotten, is post integration; does the company have the right talent to achieve its intended objectives on integration; does its combined platforms have the right offering; what changes need to be made – by whom, by when?
Having been through two takeovers, one forced takeover due to the credit crisis and one opportunistic, theses questions are the one that get missed.?
Often newly merged companies just make do with the people and the platforms they have inherited and apply a bulldozed determination to use what they have. This is partly due to dogma but also the new company has spent a lot of time and money on what they have purchased and what to stop the bank account from bleeding.
Sometimes this doesn’t work and it needs to be recognised earlier.
Private Equity, especially Venture Capitalists pride themselves on foresight. This is something the more traditional institutions are poor at and end up sticking to their own platforms and people who, whilst great for the current set up, can struggle when it comes to foresight and innovation.
Additionally, trying to show shareholders quick gains, means that results may look good in the short to medium term, but there is a risk that without the right people and platforms there might be Net Book Value degradation, which can mean an eventual loss in shareholder value and confidence.
So, as M&A is seemingly back on the table, it is important groups think not only for the takeover but for the longer term - and having the right people and platforms in place.
Joe Hodgins has 20 years' Wealth Management Credit and Lending experience. He was the Lead for Structured and Illiquid financing within the Family Office Group at Bank Julius Baer. Previously at Merrill Lynch International Wealth Management, he was Head of the Credit and Banking for Europe, where he was responsible for the book and ensured only US$ 7,000 write offs during the 2008-2009 period. He was instrumental for originating, structuring and managing several large and complex Private Banking credit transactions. In addition, he’s overseen many new products, audit and operational projects both within banks and alternative financiers via various banking, fund & debt vehicles. He started his career at Coutts Private Banking. He?has a Bachelor of Arts (Hons) 2.1 degree in Business Studies from the University of Portsmouth, UK.
Contact: Email -??[email protected]; Mob - +44 (0) 7811 201 222