STRATEGIC M&A IN US BANKING: A SIGN OF CHANGE FOR GLOBAL BANKING

STRATEGIC M&A IN US BANKING: A SIGN OF CHANGE FOR GLOBAL BANKING?

INTRODUCTION

?Like other industries, banking is an industry too. So what is relevant to any industry, the same applies to banks also. Based on the empirical data, we have observed in difficult times emerges a chance for companies to explore seeking mergers and acquisitions, but it requires the skill of precise prospect which is prime to successfully optimize the benefits of their M&A. Though in US banking M&A has been at a historic level if we measure by the volume of deals, conditions changed in 2022 remained a better year relative to previous years, deal-making is not quick in the wake of unstable economic threats, potential downturn, and geopolitical uncertainty. Banking M&A deal in size term was down 37 percent for the first nine months of 2022 compared with the first nine months of 2021.

?But if we go through economic upheaval from time to time as a beacon, the present environment may present an immense perspective. Deal makers who have strong faith if moving positively during uncertain times have been the best suited to realize huge total shareholder returns (TSR) than those who stick their deal-making to boom periods. Besides, M&A professionals in US banking proclaim a very bullish view of current chances in banking deals providing more possibilities in near future. A recent survey proves the above that within one to two years offer banks value creation occasion that is better than those of the last two years.?

Theme to play a key role in pursuing banks' M&A

?The agenda for banks pursuing M&A, two broad themes are possibly the main factors of the agenda: the expectation to observe sustaining consolidation and scaling of the banking business, in addition to fintech acquisitions to enhance banks’ product propositions, access new customers and enlarge technology capabilities. The views of M&A financial advisers and banks identified four actions to aid banks to enable them to optimize the value they squeeze from M&A in the next 18 to 24 months comparing the last 15 years of deal-making. In the past 15 years, M&A activity in the US banking industry was nominal though several banks were combating challenging integrations and “shotgun” assemblage from the financial crisis era and also the regulatory constraints from Dodd-Frank. Initiating in 2018, the pace of deals started to upsurge in both value and number. By 2021, the value of deals was six times greater than in 2017. This increase in deal activity happened for numerous reasons: a partial easing of regulatory limits for banking M&A, lower interest rates, strong balance sheets, and income statements, and ample liquidity among prospective bidder gains after years of conventional lending and focused capital accretion.

The deals completed during economic turmoil have had a more possibility of generating value. More than 50 percent of deals announced during the zenith of the financial crisis (from September 2007 to 2009) led to optimistic TSR two years later, related to about 33 percent of deals done from 2010 to the first nine months of 2022. The reason for a better yield for deals completed during down markets is that first it is usually more assets presented to pick during downturns, and lower valuations, giving more headway for positive returns. Second, with no clarity and lack of regulatory interferences to “save” an institution, almost full latent deals appear at a pointedly higher level of internal scrutiny, and thus the contract is approved and completed proclaiming an added business justification. If we look pick-up of deal activity in 2018, the tactical resolution of those deals began to vary. Above half of the deals still track scale, the wish to size capabilities accounts for a growing number of deals, as banks seek to augment or enlarge their digital services and the product helps. By the 2019–22 period, deals to acquire capabilities accounted for 28 percent of transactions, up from 11 percent in 2010–12; 71 percent of these deals were fruitful, linked to the average of 28 percent for all deals.

The viewpoint for banking M&A

Diverse factors will fix how banking M&A will advance in the ensuing two to three years. Factors leading to a rise in deal numbers and scale include current subdued valuations (mainly in the fintech space), strict capital markets that lessen offered funding critical for growth FinTech’s, and margin constraints on under-performing banking institutions caused by inflation and higher reserve needs before of a likely recession look more willing for deal talks. Among the forces primarily overpowering deal activity is rising interest rates, geopolitical tensions, and the reality that in the current conditions, fewer bank executives may believe they have enough free capital to chase M&A. In this context, we believe that for well-capitalized banks, the moment may be right to act on two broad strategic M&A opportunities: further inorganic scaling of the business and leapfrogging on capabilities and talent by buying fintech’s. Concurrently, acting will require an analytical view and courage.

?Consolidating and scaling the business

As above conditions play a vital role?in advising the merging of the banking market in the US, considering its still-high level of shattering. Recently, the stride of the alliance has lessened as only 160 banking institutions being acquired or exiting the industry from 2019 to 2021, versus an average of 240 banking institutions acquired or exiting the industry between 2013 and 2015—above 4,000 banks stay to operate in the US. An important condition that favors alliance because that banking is fitting growing fixed-cost business, because of the need for investments in technology to satisfy novel customer outlooks, and marketing to lure clients who are becoming more open to fragmenting their banking affairs. Larger institutions can afford to invest sufficiently more. For example, banks with more than $250 billion in assets in 2021 spent, on average, $1 billion on marketing; banks with $100 billion to $250 billion spent just $25 million, and banks with less than $100 billion in assets spent only $2 million. The top banks are also able to gain importantly better results in digital. It proves smaller banks (based on data from Finalta), enjoy more than twice the share of sales through digital channels.

Besides, in many merged and mature markets like Australia and Germany, the largest banks relish efficiency levels almost thrice better than those of the smallest banks.?In the US, this dynamic is not as prominent, possibly because smaller US banks still achieve significant scale compared with banks in other markets. Another reason may be that the market structure historically enables a smaller bank to produce solid margins through the low cost of funding secured by their granular deposit base. ?In the long term, the merger forces to be more projects in the US too, in response to the adoption of digital and the growing mobility of customers who rely less on physical channels. Along with these pressures, overall bank worth has fallen as the S&P Composite 1500 Banks (Industry) took a cut of 22 percent in price-to-book ratio and 25 percent in market cap from January 1 to June 30, 2022—which also should drive ongoing M&A

Acquiring fintech expertise, customers, and talent

FIs now focused on raising digital competencies for above a decade now, both organically and through M&A. As Fintechs fight to raise capital and face valuation reduces, near-term chances for such types of acquisitions will likely thrive. Indeed, in our recent survey of US banking corporate-development professionals, some 75 percent want banks normally to acquire more Fintechs in the near future than in the last two years. Is it also likely that in the coming 18 to 24 months more Fintechs will become open to acquisition by banks? Based on observations that listed stock exchange Fintechs lost on average almost 60 percent in valuation from December 21, 2021, to August 22, 2022, with the change in individual subsectors varying from -32 to -88 percent. But it is the opposite in public-funded Fintechs: companies that could raise funding gained in valuation, but the total number of rounds of funding and their value have dropped theatrically for all types of Fintechs except players focused on cryptocurrency and decentralized finance. Despite recent hardest times, Fintechs are on track to raise the second-highest amount of capital ever in 2022, and VCs have plenty of dry powder, so investing might come back soon. If this proves to be the case, the window of opportunity for banks to acquire capabilities may be narrowing quickly. Simply put, we’ve realized that acquisitions are the only way to compete effectively with disruptors and big banks; now we intend to become a programmatic acquirer.”

Creating value through M&A in times of uncertainty

Considering deals executed during times of economic challenge have had a higher possibility of creating value, it is incumbent on banking leaders in the current environment to carefully examine M&A opportunities, and responsibly consider those they believe can efficiently generate positive returns for shareholders. Based on a survey of US banking corporate-development professionals, three clear main challenges to successful bank-led M&A in the current context: finding the targets to support programmatic M&A, integrating acquired technology, and integrating acquired talent. These actions are apt for banks of all sizes, but especially so for regional banks with less M&A experience, as the deal involves complex tech integrations.

?To find targets, revisit your M&A blueprint—now

Times of uncertainty can be opportunities for a bank to greatly step up its M&A roadmap to directly define M&A’s role in gaining its corporate strategy. It is now a reality, given that the current cycle is powerfully driven by inflation and interest rate changes which have a lopsided impact on financial-sector valuations. The more sophisticated banks ensure that each business unit continuously reevaluates options to make, buy, or partner with to deliver on its strategy and constantly identifies and fosters potential target candidates. The best bank acquirers leverage challenging times to refresh and greatly expand their M&A target list by choosing hundreds of potential candidates; they challenge themselves to bring in two or three times more new names than the number of usual suspects reviewed in the past. The recent market advances, such as higher volatility, lower valuations, less venture capital funding, and fewer IPOs, now are an opportune moment for potential acquirers to broaden their M&A thinking and spread the net widely. They should exceedingly expand at cultivation such as get-acquainted meetings. Not only are doors open much more in these times, but even if this cultivation does not end in an M&A transaction, it often can lead to partnerships that enhance the bank’s consideration of growth sectors and put stakes in the ground, in the form of equity investments initially, that may raise the probability of deals later on. To acquire and integrate technology, underscore it during due diligence.

Before any due diligence on a target can begin, it is beneficial for a bank to know its own ambitions and target state in technology. Multiple players dive into M&A without knowing where they are heading and their importance. This makes it harder to perform good diligence and test whether the acquisition candidate is the right fit and whether the combination of IT integration costs and the appeal of technological assets rationalize doing the deal. A good process for due diligence should empower a high-level view of the path to integration. That path typically can take one of three directions: Merge fully to one bank stack. This is the fastest and least risky option. Create a “best of breed” blend of technology—for example, joining the wealth management platform of the target with the acquirer's existing tech platform. Use the merger as a trigger for a more profound tech transformation. Due diligence often overlooks technical issues that can cost many millions of dollars and take years to fix.

?It is often the case that this high-level view of the path to integration is unduly focused on finance, risk, and legal issues, supervising technical issues that can cost many millions of dollars and take years to solve. Diligence needs to aid know the target’s current architecture, infrastructure, talent, data assets, and technical debt.?Achieving it needs the connection of the CIO from the buyer’s side and one or two key IT experts early in the due-diligence process. This can ensure that their input is taken into account when quantifying the potential deal impact in terms of both synergies and integration cost and more importantly, can help the bank understand what it would take to achieve the deal rationale integrating enterprise resource planning systems, given the need to operate as a single entity. Involving the technology team early on and including their input when assessing the impact of tech value creation (either positive or negative) also allows for culpability across the technology organization. That will be the key to ensuring minimal incongruities between the due-diligence estimates and the actuals.

In the context of technology is chiefly chief to the deal thesis, organizations set up a clean team early in the process. The core outcome of such a team’s work should be target architecture, integration/run costs, and estimated timeline. Development of the timeline should consider the upgrade path of both the target and the acquirer; in at least one merger, both companies had outdated core banking systems, so integration could not proceed until after one had completed an upgrade. Achieving these elements of the core outcome requires close collaboration between business and tech experts in the process of due diligence. This level of technology due diligence is a prerequisite to an effective integration and value capture. Typically, the IT roadmap determines a large part of the synergies achieved.

Further support technology integration by rewriting the integration playbook

It is noticed, 40 to 50 percent of M&A value capture is enabled through technology integration—and for fintech acquisitions, the percentage is even higher. Yet several of our interviewees said banks are often slow to start integration planning for technology. As such, they slip the opportunity to get an early start on labeling key processes and systems to support cost and revenue synergies, identifying and responding to change management needs when they are most impactful (for example, during the first 100 days after the close), and establishing a plan to tackle divergence issues.

Involving the CIO and technology teams early in the diligence phase allows for smoother technology integration planning. During due diligence, the business will have already been aligned with the technology team, and they will have established a high-level understanding of which tech migration and integrations are required, the financial benefits, and the cost and timing required for the integration. These conditions allow for better prioritization and sequencing of tasks. In our experience, tech integration costs are always material but often underestimated; they can amount to as much as 5 percent of the target’s revenue. Another significant challenge that banks face during technology integration planning is that they overestimate their capacity to achieve the change needed across three fronts. First is integration delivery capacity, because, during technology-heavy integrations, banks have more tech projects than ever before. Second, the target might have critical technology knowledge that will be difficult to replace if the talent decides to leave. Finally, acquiring banks may discover a lack of integration capabilities. Overvaluing the bank’s capacity makes any kind of change management difficult at a systemic level.

These drawbacks threaten the bank’s ability to realize the benefits of the acquisition in both the short and long term. We have seen banks that continued operating on multiple core banking systems above five years after a deal closed. This can hamper data access, hurt customer service, and create larger technical debt. Banks can improve many of these challenges by deploying a comprehensive integration-planning framework early. Such a framework would take parallel paths: a future-state blueprint and a road map to reach it, along with the integration of the IT function itself. To proceed quickly, players in other industries adopt agile practices by running planning as a series of intense multiday sessions, during which experts from both sides detail the future tech architecture, the new product roadmap, and the true cost of integration.

To integrate and retain talent, use science to define decisive action

Even having the best expertise fight to integrate talent and combine cultures during an acquisition, and this is particularly true for fintech integrations. Banks’ siloed environments and more hierarchical decision-making processes can frustrate acquirees and cause serious cultural shock—especially for smaller Fintechs that are used to a more risk-taking setting. The consequence is a high rate of talent attrition. Banks should streamline decision-making and provide greater operational freedom. Before the COVID-19 pandemic, many banks didn’t let engineers work remotely, for example. It is seen the following practical solutions to this problem. Dealmakers who act during uncertain times are more likely to deliver strong TSR. Be data-driven in identifying key talent and diagnosing gaps in culture (including decision-making approaches, communication style, and norms for collaboration and knowledge. sharing. Decide on the truly essential degree of integration to forget hugging the acquiree to death. For example, to what extent must a bank’s risk, compliance, financial, and other controls be extended to the acquiree’s teams? Translate that decision into considerations on how and to what extent the ways of working (such as the use of tools and the product development process) need to be unified. Give the acquiree’s leaders a meaningful role in the new organization and secure their commitment to retain talent and engagement. In one case, the CEO of an acquiree became the permanent head of a massive product line, bringing his product development and commercial expertise. As soon as possible before the close, parachute in full-time leaders for critical roles as ambassadors and sources of information for integration planning. For example, select a finance partner for a secondment to align financial controls and compliance. Align quickly on top-management practices, including decision-making and accountability norms, performance management and application of key performance indicators, and talent development Double down on communication. Dispense a full-time infrastructure leader to cover all groups of internal stakeholders.

Deal makers who act during undefined times are much similar to offer strong TSR than those who confine their deal-making to bullish periods. The next 18 to 24 months should offer ample opportunity for value-creating deals. Success, however, will depend not just on confident action but also on robust due diligence and planning.

?CONCLUSION

?The present environment of business is very fruitful to think about M&A if anyone learns from empirical examples. We need to see if the trend is seen in the US will spread across other countries. But it is quite clear that FIs and Fintechs something more than to happen some extraordinary deals. As both can not survive as both are slicing the same bread.

?

?

?

?

?

?

?

Bottom of Form

Top of Form