Kpmg The Architecture Of Integration 2011 11

FINANCIAL SERVICES

The Architecture of Integration

An essential guide to successful mergers and acquisitions in Financial Services

kpmg.com

KPMG INTERNATIONAL

www.kpmg.com

Americas

Ricardo Anhesini SouzaHead of Financial Services Latin America and BrazilKPMG in BrazilT: +55 11 2183 3141E: [email protected]

Tim PrinceDirector Canadian Head of Integration and Separation KPMG in CanadaT: +1 416 777 8883E: [email protected]

Carl CarandeNational Account Leader Banking and Finance KPMG in the UST: +1 704 335 5565E: [email protected]

Thomas FeketeManagerIntegration and Separation, Transactions and Restrucutring KPMG in the UST: +1 212 954 2182E: [email protected]

Miguel SagarnaNational Sector Leader Transactions and Restructuring, Financial Services KPMG in the UST: +1 212 872 5543E: [email protected]

Tiberius VadanSenior Director Integration and Separation, Transactions and Restrucutring KPMG in the UST: +1 212 954 2107E: [email protected]

ASPAC

Bernie CroweDirector Financial Services KPMG in AustraliaT: +61 2 9335 7667E: [email protected]

KPMG specialists and contributors

Sam EvansPartner Transactions and Restructuring, Financial Services KPMG in ChinaT: +85221402879E: [email protected]

EMA

Nicholas GriffinPartner Head of Financial Services, Transactions & Restructuring KPMG Europe LLP T: +44 20 73115924E: [email protected]

Stuart M. Robertson Partner Global Banking Transactions and Restructuring Sector Lead KPMG in Switzerland T: +41 44 249 33 45 E: [email protected]

Mohammed SheikhPartner Head of Integration and SeparationTransactions & RestructuringFinancial ServicesKPMG in the UKT: +44 20 78964992E: [email protected]

Francesca ShortPartner Global Insurance Transactions and Restructuring Sector Lead KPMG in the UKT: +44 20 73115056E: [email protected]

Ian SmithDirector Financial Services Strategy Group, Transactions and Restructuring KPMG in the UKT: +44 20 73111496E: [email protected]

Written by Jeff Wagland

© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

ContentsIntroduction – It is not necessary to change: Survival is not mandatory 2

Executive summary – Key findings and five recurring issues 3

Global M&A – How financial services deals compare to other industries 5

Deal drivers – The changing characteristics of financial services M&A since 2007 10

Key geographical differences – A look at how regions and countries are reacting to the new environment 12

Key factors in managing M&A deals across FS sectors 16

Lessons learned 18

1 Take your time on the due diligence, but integrate fast 18

2 Revenue versus cost synergies 20

3 Communicate carefully with the market 22

4 Track progress 24

5 Cultural integration 25

Is the deal going to go well? Six key questions to ask 28

A wave of deals to come – KPMG professionals give their view on what to expect 30

The value of using an advisor 32


Introduction

Jeremy Anderson Global Chairman, Financial Services

John Kelly Global Head of Integration & EMA Head of Transaction Services

Above the desk of one senior financial services executive in New York is a framed quotation from the 20th century academic and business consultant Dr William Edwards Deming. It says, “It is not necessary to change. Survival is not mandatory”.

The truth of this lesson has been demonstrated in the clearest possible fashion as financial services (FS) companies throughout the world have struggled with the consequences of a spectacular recession. The old conventional wisdom on how to run a successful business has disappeared under a mountain of new regulation and radically changed market dynamics. Organizations wanting to continue in this sector have had to think very hard about how and where they want to operate in the new market environment.

To help anyone contemplating a merger in the FS sector, we have taken the conclusions developed in KPMG

International’s latest global survey of M&A activity, published as “A New Dawn: good deals in challenging times”, and have asked financial services partners around the world to compare and contrast these with what they see in the FS markets they know best. The result is this report, which offers a view on the drivers of FS M&A activity yesterday, today and tomorrow, along with professional guidance on how to help ensure that a complex deal will deliver the value it promises.

We want to thank all those who took part in the original global survey and the KPMG professionals whose insight has allowed us to focus on what this activity means for the financial services sector. At a time of huge turbulence and uncertainty, their contributions provide a framework to help make sense of the deals being done today, and give a clear steer on the drivers of the deals that will shape the global financial services market for the next decade and more.

2 | Introduct ion


Executive summary

This report examines the main themes of the global FS M&A market over the last three years and looks forward to what the FS sector might expect in the short to medium term. It focuses on the strategic priorities that have been driving FS companies to dispose and acquire in this period, in an attempt to pin down the key factors that can distinguish successful transactions from potential failures.

The source for much of the analysis in this study is the latest in KPMG International’s long-running series of surveys of the global M&A market, published under the title “A New Dawn: good deals in challenging times”, plus detailed interviews with KPMG financial services specialists around the world.

The key findings are:

• Thewaveofdealsfollowingtherecessionisnowatanend;thereisanewwave coming, the only question is when it will break

• CompetitionwillcomefromAsia-PacificbuyersandfromaresurgentPrivateEquity sector

• Costcuttinghasgivenwaytorevenuegrowthasaprimarydealdriver;growing through acquisition is the new normal

• Marketsarestillskepticalofvaluesbasedonrevenuesynergies,buttheycanbepersuaded by a well-supported argument

• Oldissueswithpoorplanning,poorcommunicationsandlackofattentiontoculturaldifferencesstillpersist;thereisrealvaluetobegainedfromsolvingthese problems.

The architecture of integrat ion | 3


This last point will be familiar to people who have read any of the numerous KPMG reports on the M&A market published in the last decade. These are endemic problems, and a great deal of thought and energy has been poured into finding ways to improve the management of major deals. We have seen a distinct improvement in the levels of professionalism as a result, but for the FS sector in particular, there remain five main lessons for a successful deal:

1. The need for speed. Successful deals are almost always those that are completed fast. Long, drawn-out merger processes tend to lose sight of the original goal of the deal, and energy dissipates, leaving integrations only partially complete. Clarity of thought and rapid action are very important.

2. Serious attention to revenue synergies. Markets are naturally skeptical of revenue synergies, but if they are an important part of the deal, they need to be included in the rationale. Work on developing strong, persuasive arguments on revenue synergies is rarely wasted.

3. Communicate carefully with the market. Investors today want to hear bottom-up explanations of all the value drivers within a deal, delivered with confidence by the CEO.

4. Track progress. One of the most valuable things a company can do is to develop a reputation for carefully-tracked progress in delivering the promised benefits from its deals. Integration plans need to have tough metrics built-in.

5. Cultural integration. Deals can and do fail because not enough attention was paid to the cultural differences between the two sets of people being brought together. Losing good people is a hidden cost of poor planning that markets are looking out for.

We have distilled these lessons into six key questions that will give a good indication of whether or not a deal will be successful. They are:

Is there a clear plan in place for the whole of the deal, including integration, with agreed metrics to define and measure success?

Can the plan be carried out quickly?

Do we know in detail what we are going to do the day after the deal is completed?

How long is it taking to get answers to our questions from the target company?

Are we thinking hard enough about how we will integrate customers and employees into our new, enlarged company?

If this deal goes wrong, do we have the resources and energy to do it all over again and get it right?

4 | Execut ive summar y


Global M&A – how financial services compares

This study of the financial services M&A market is based, in part, on a wider study of the global M&A market between 2007 and 20091. So before looking in detail at M&A in the FS sector, we should look briefly at the dominant trends at a global level across all sectors, and at how FS deals as a whole compared with what was happening elsewhere.

Perhaps the most surprising finding from the main report was that despite the impact of the recession on global economic activity during these years, the proportion of deals that actually created value (as measured by the movements in the acquirer’s share price relative to their sector) rose from 27 percent in 2005–2006 to 31 percent in 2007–2009.

Many of the deals done in the FS sector during this period were completed by privately owned acquirers, so for these deals there is no publicly available information on subsequent share price movements. But where this information was available, just under 70 percent of deals were followed by share price changes that suggested an increase in corporate value, or at least a decline in value that was less than that experienced by the rest of the sector.

Financialservices (34)

Strongly agree

Tend to agree

Tend to disagree

Strongly disagree

Not sure

Globalaverage (162) 56% 52%

15%

12%

4%6%

23%

21%

5% 6%

By the time your plan for target company is complete, this deal will have createdvalue for your organization

Source: KPMG International, A new dawn: good deals in challenging times, July 2011.

73% of companies in the FS sector agreed

that by the time the deal was complete, it will have created value for the organization.

1“A New Dawn: good deals in challenging times” KPMG International, 2011. This is the sixth in a series of KPMG reports on the global M&A market. The series began in 2000 with a review of M&A in 1997 – 1998.



The general improvement in performance is explained by three main factors:

• Areductionintargetprices,predominantly in the Atlantic markets, caused by the gradual withdrawal of private equity houses from the market as the recession took hold

• Thegreaterscrutinythatcompaniesfound themselves under from recession-hit shareholders wanting to be sure that a proposed deal really would create value

• Aclearswitchinfocusfromdealsthatwere designed to cut costs, to deals that generated growth in revenues.

This last point seems to have particular significance for the FS sector. Asked about the initial rationale for the deal, FS companies were much more likely than others to cite increasing market share, geographic growth, or expanding into a growing sector as major factors. All of these are measures associated with increasing revenues rather than consolidation or reducing costs. Cost

synergies were chosen as a rationale by only 15 percent of FS companies, compared with 19 percent of all the companies surveyed.

Top 3 reasons behind a FS deal

›› Increase market share

›› Geographic growth

›› Expand into a growing sector

6 | Global M&A – how FS companies compare


62%48%

44%

29%27%

15%19%

9%18%

15%

15%

15%10%

6%8%

6%

6%6%

8%

4%

3%1%

1%

13%

17%

35%

Source: KPMG International, A new dawn: good deals in challenging times, July 2011

0% 10% 20% 30% 40% 50% 60% 70%

Increase market share/presence

Geographic growth

Expanding into a growing sector

Cost synergies

Investment opportunity

Enter a new market

Acquire brand/additional services

Diversify

Acquire intellectual property ornew technology

Transformation strategy

Expansion/increasing assets

Strengthing of Capital Base

Other

Refused

Financial services (34) Global average (162)

What was the initial rationale behind the acquisition of the target company?



Pricing factors

This need for revenues appears again in the reasoning behind the pricing of the target company. Here, 68 percent of FS companies chose revenue enhancement as their largest single factor in determining price. Cost savings were chosen as a factor by only 41 percent.

There are clues to this focus on revenues in two questions touching on the market conditions surrounding the deals. FS companies were more likely than other companies to agree strongly that their acquisition had allowed them to deal better with market or competitive conditions (55 percent versus 46 percent). They were much more likely to agree that the economic climate has led acquirers to focus on

revenue rather than cost synergies (65 percent versus 45 percent).

These responses show that the effect of recession on the revenues of FS companies has been relatively greater than for other companies, and that the need to rebuild revenue flows played a greater part in FS decisions to acquire than it did elsewhere.

Turning to the management and planning that went into integration of the target company, FS companies were reasonably quick to get fully working management teams in to their acquisitions, with 44 percent saying their management team was in place and working within a month of completion compared with a global average of 48 percent.

What was the largest single factor in determining price?

41% 68%Revenue

enhancementCost savings

8 | Global M&A – how FS companies compare


Planning ahead

But FS companies were ahead in the amount of planning that they carried out prior to completion. A third of respondents in the sector said that they began their planning for post-deal management more than five months before completion, compared with only 25 percent of the wider sample. A large proportion of the companies polled in all sectors (27 percent) did not begin planning for post-deal integration until around 8 weeks to completion.

Due diligence

Given the longer planning period, it is curious that FS companies generally appeared to do less due diligence than other types of companies. FS companies focused on financial, commercial, legal and operational due diligence, but in each of these areas, the proportion of acquirers carrying out due diligence was less than the global average.

FS companies were more active than the average in carrying out due diligence on IT systems and strategic matters, but they shared the general trend of putting HR due diligence at the bottom of the list.

62%

71%

47%

81%

56%

56%

47%45%

42%

35%38%

44%

50%

62%


Financial (including tax and pensions)

Commercial

Legal

Operational

Strategic

IT

Human resources

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%


What types of due diligence did you do?

Financial service companies did less due diligence than the global average. The most common types they did were financial, commercial and operational.



Deal drivers – the changing characteristics of financial services M&AIn this section we will look more closely at the main drivers for FS deals since 2007, and especially how they have changed from year to year. The four years since 2007 have clearly been a transition from the end of an M&A boom, through deep recession and into a tentative recovery.

At the beginning of 2007 there was still enough momentum in the market for the last big deals to go through at pre-recession prices.

That gave way in the later part of the year and into 2008 to a slack period, as companies came to terms with the idea that a recession was upon them and waited to see how bad it would be.

Later in 2008 and into 2009, deal activity picked up, driven on the sell side by banks and insurers needing to raise capital to shore up poorly performing

businesses, and on the buy side by those relatively few organizations able to take advantage of the opportunity to pick up good quality assets at low prices.

In many cases, these were not assets that would, in more normal times, have found their way onto the market. FS companies, particularly in the US and parts of Europe, were being forced to ‘cash in their chips’ selling highly valued assets that they would have preferred to keep, simply in order to raise the capital necessary to stay in business.

2008-09 2009-102007

10 | Deal dr ivers – the changing character ist ics of FS M&A


In the US, legislative changes and the financial crisis drove a multitude of deals that may or may not have added up to much

of an increase in value. It can take two or three years to work out whether a deal has been successful.

Tiberius Vadan, Senior Director, KPMG in the US, Integration and Separation, Transactions and Restructuring

Growth through acquisition is

the new normal. Those that can’t or won’t accept this will be snapped up

Miguel Sagarna, National Sector Leader, KPMG in the US, Transactions and Restructuring, Financial Services

In Asia, the challenge for many organizations is how to overcome regulatory and valuation issues to access

markets that are growing at 25–30 percent a year. If you get in at the right time, you are growing the market by entering. The trick in the current environment is to find the right partner or opportunity in an increasingly competitive arena.

Sam Evans, Partner, KPMG in China, Transactions and Restructuring, Financial Services

In 2009 and 2010, capital was still king, but rather than driving the market forward it acted as a brake. Deals that might normally make perfect sense from a business perspective were not being completed because they would absorb too much of this precious resource.

This was not just a reaction to the emerging problems of business done in the past. It was nervousness of the new and significantly tougher capital requirements that banks and insurers expected to be imposed on them by new regulations.

For some of the bolder and better capitalized companies, however, this phase of retrenchment has presented opportunities to do deals that might not have seemed feasible during the boom. The Bank of America/Merrill Lynch merger, for example, was a surprise to those who felt that the cultures of the two organizations were so different as to be entirely incompatible. But Bank of America was able to pick up a distribution channel for its investment banking division which gave them a clear benefit which might not have been available at any other time. Similarly, the wave of acquisitions in Europe and the US made by the big Spanish banks, Banco Santander and Banco de Bilbao, were felt by many to be an opportunistic reaction to a unique and possibly unrepeatable set of circumstances.

Tiberius Vadan, from KPMG’s US member firm says that the upheaval in the FS market has had a liberating effect on thinking about how businesses should be organized. “Right now, people are listening to creativity.” he said. “A lot of strategic new thinking and value is being created by unlocking assets that were stuck in environments where they were not allowed to flourish.”

But this is not an entirely comfortable experience, especially for the old guard of FS managers, many of whom have found their fundamental beliefs about their business either challenged or completely shattered. Miguel Sagarna, also from KPMG in the US, says that FS organizations have gone through a painful period of self-examination. The market is demanding growth, and those that have realized that the prospects for organic growth in their existing businesses are poor, have had to take the stark decision of whether to be an acquirer or a target.

“The sector is still trying to sort itself out,” says Miguel Sagarna, “but it’s clear that the new normal is that growth through acquisition is going to be part of any organization’s strategy going forward. Those that can’t or won’t accept this will be snapped up.”

2008-09 2009-102007



Key geographical differences

Asia-Pacific region

In the Asia-Pacific region (ASPAC), the very active M&A markets of 2007 and 2008 have cooled as the delayed impact of global recession has had its effect.

By contrast with some of the Atlantic markets, ASPAC FS companies have not had significant capital pressure or a need to implement a very heavy round of cost-cutting. Increasingly FS companies are focused on controlling costs and improving cost/income ratios, but there has also been, and continues to be, an emphasis on delivering growth and expansion into new markets.

The last 12 to 18 months have seen a significant amount of transaction related activity in the bancassurance sector, as banks and insurance companies look to secure potentially lucrative distribution opportunities. Many regional players have used bancassurance opportunities to gain access to high growth developing markets.

But governments in the region also recognize the value that their economies have to offer foreign acquirers, so it is common to find legal restrictions on the percentage of a domestic FS company that can be owned by a foreign partner.

“Ownership restrictions typically prevent foreign companies gaining control,” says Sam Evans from KPMG’s member firm in Hong Kong, “so there tend to be a lot of joint ventures and strategic investments, combined with capability transfer programs where big banks and insurers focus on helping their local partner develop their businesses.”

Australia

In Australia the FS sector has remained relatively untouched by recession, leaving the large banks well capitalized and looking for opportunities to consolidate their position.

12 | Key geographical d i fferences


Deal rationale and motivation in Asia

is quite different, and this has implications for the way you approach the post-deal environment. Often, you are not looking at a formal integration.

Sam Evans, Partner, KPMG in China, Transactions and Restructuring, Financial Services

China

In China, banks and insurers have been focusing on opportunities in their domestic market. But there is evidence of a gradual shift in focus towards overseas markets, with some Chinese banks pursuing opportunities in the US and South America. Going forward we expect to see a significant increase in activity, as the major banks and insurers turn their attention to overseas acquisitions.

There is also evidence among foreign investors of a more fundamental review of ASPAC strategies and how best to

leverage the significant opportunities across the different markets.

“In the initial phase, everyone jumped in, thinking that they really need to have a business in China.” says Sam Evans of KPMG’s member firm in Hong Kong. “But now, in the second phase, people are asking themselves whether they are really making money here. There is a much greater awareness of what is strategically important, who is the right partner, and what parts of the market should be focused on. Some companies have pulled out entirely, while others have sold non-core assets to focus on their main business.”



14 | Key geographical d i fferences


The Atlantic markets

There is a view emerging from the global M&A survey that deals done recently in the US markets have generally been more successful at creating value than those done in Europe. It is not clear that this can be said of deals done in the FS sector.

It has been argued that the sheer size of the US market for financial services will tend to make deals more successful, with relatively fewer regulations and restrictions than the more complex European markets, combined with labor legislation which makes downsizing easier to accomplish.

But successful deals in the Atlantic markets have generally been those that have been done quickly and with a clear, achievable rationale in mind. Speed of integration is a major factor in the success or failure of a deal, and deals where cultural or organizational issues have not been thought through and resolved in advance, tend to run a high risk of being seen by the markets as unsuccessful.

US

There has been a brisk market in failed or troubled US banks and insurers, but most of the big deals have now been done. Whether they were successful

ornotremainstobeseen;alotofdeals were done at high prices, and the market is watching to see how well the integration plans and synergies work before coming to a judgment.

There is a clear appetite now for deals that will generate growth. Potential acquirers feel they have come through the worst of the cost cutting and want to move into an expansionary phase. What is holding this back is uncertainty over imminent regulatory changes combined with a determination not to overpay.

Brazil

Economic problems in the developed economies have highlighted strong growth in other parts of the world, particularly in Brazil. Reuters puts Brazil’s average annual economic growth rate since 2004 at 4.4 percent, peaking last year at 7.5 percent, its fastest pace in 24 years.

This prosperity has stimulated demand for financial services, so it is little surprise that the past four years has seen a vigorous round of consolidation among the large retail institutions, with Santander and Banco do Brasil especially acquisitive. In the first six months of 2011 there were 22 major deals, compared with 28 for the whole

of 2010. Activity is expected to remain high, for the rest of this year at least.

Canada

Canadian financial services companies have a rare opportunity to make some major acquisitions in other countries on favorable terms. Canadian banks have come through the global financial crisis relatively unscathed, and they are now very well capitalized with few opportunities for acquisitions or organic growth at home.

Their primary area of interest is, naturally, the huge US market south of the border. There is already a lot of interest in selecting suitable acquisitions, especially banks that are strong at the state level which can serve as a base for further expansion. But some institutions are venturing further afield, assessing possible acquisitions in South America, particularly Brazil, and in the Asia Pacific states.

Canadian financial services people are generally cautious and conservative, and there is a history of failed foreign acquisitions whose lessons they are keen to learn. There will be activity in this market, but it will be careful, deliberate, and done on the right terms.

European Union

For those countries hit hardest by debt crises, particularly Ireland, Greece, Spain and Portugal, financial services sectors problems have swiftly become sovereign debt problems as banks have turned to governments for support. Widespread exposure to the weaker economies has damped down M&A activity across the continent, but well capitalized FS companies, particularly those based in Switzerland and, paradoxically, the large Spanish banks, have taken the opportunity to strengthen their market positions.

There is some pent-up demand in the sector, which is being held back (as in the US) by uncertainty over the detail of forthcoming legislation and changes in capital adequacy requirements. There are also signs of interest in the sector from acquisitive Russian interests, who may play a significant role in the next few years.

UK

The aftermath of the financial crisis is still working its way through the UK financial services sector, with several major banks still effectively under State control and being required to divest non-core businesses. At the same time, and in addition to the anticipated impact of new European legislation, the UK Finance Minister has announced plans for a major overhaul of financial sector regulation, which will include proposals to require banks to separate their retail operations from their investment banking arms.

This is fertile ground for a lively M&A market, and a substantial number of UK FS companies are undertaking internal reviews which will almost certainly result in new assets coming on to the market in the next two to three years. Shrewd acquirers will be active, and commentators are expecting a re-emergence of the PE houses in this market, as well as trade buyers from the UK and elsewhere.

European banks generally think

they can easily integrate the US arm into the bank’s European operating model. But they soon realize that significant differences in products, services and customer/employee culture exist. Addressing those differences can lead to extended integration timelines, incomplete integration and synergy leakage which could ultimately undermine the success of the deal.

Thomas Fekete, Manager, KPMG in the US, Integration and Separation, Transactions and Restructuring



Key factors in managing M&A deals across FS sectors

In this section we have summarized the main characteristics of the M&A deals carried out recently in each of the main FS sectors. This is not intended to be an exhaustive list of deal features. Rather, it is here to highlight the key differences in approach between the sectors, and to give some insight into those factors most likely to shape deal negotiations now and in the immediate future.

Banking

Common deal drivers

Common deal priorities

Deal team structure and management

Pre-deal planningPost-deal

integrationCultural fit

Distribution

Geographical/market growth

Capital requirements

Regulation

Technology

Cash management

Operations

Continuity

Deal teams often separate from implementation teams.

Small groups focusing on particular aspects of the deal with limited understanding of the whole.

Patchy communication.

Tendency to focus on cost savings – assumptions of 25–40 percent savings not uncommon.

Establishing core and non-core businesses.

Cultural issues generally low on the list of priorities.

Day 1 continuity very important for customer confidence – means much attention paid to IT.

Not a strength for this sector, especially for big retail banks. Teams responsible for implementing the deal are often different from those who do pre-deal planning, so key targets are often lost or not tracked.

Integration takes 18–24 months, which is too long, energy fades and IT/cultural issues are often left unresolved.

Internal cultures are often strong, but relatively little attention is paid to how they might affect the success of a deal. A common view is that if a deal makes commercial sense, then the cultural aspects are not relevant.

Different customer cultures, e.g., US customer expectations versus those common in Europe, can also prove difficult to assimilate.

16 | Key factors in managing M&A deals across FS sectors


Insurance

Common deal drivers





Distribution

Scale benefits

Cross-selling/bancassurance

Capital requirements

Risk

Continuity

Talent retention

Large teams with many specialists.

Team management at a premium.

In-house M&A teams becoming more common, but matched by increased willingness to seek outside help.

Attention to due diligence generally improving, especially in ASPAC following past due diligence failures.

Focus on risk and actuarial analysis, distribution matters especially where bancassurance is a deal rationale and where different sales forces are involved.

Merging big insurers is still a developing field.

Shares many of the problems of the banking sector.

Rare to see convincing stretch targets being developed and introduced centrally. Integration plans often devolved too far down the organization, and left to the wrong people.

Merging different sales forces with well-developed cultures is a particularly difficult problem.

Becoming more important in deal planning, especially if sales forces are involved. But still not an area of strength.

Investment Management

Common deal drivers





Core business model relies on growth through acquisition

Product range enhancement

Distribution

Better asset growth through improved management

Retaining key personnel

Speed

Often M&A specialists with wide experience.

Well organized, focused, clear plan of action.

Where merger specialists are involved, can be a very well organized process. May be seen as inflexible, but generally very effective.

Clear idea of what parts of the target are valuable, what to do with them, and how to dispose of the rest.

Tends to be done quickly and well by the merger specialists, helped by strong expertise and a clear plan.

Generally a less complex task than merging a big retail bank or insurer, but close attention to the real value drivers in the business and to those with the customer relationships means a greater chance of measurable success.

A key driver of deal planning, and a focus of attention where individuals and teams are seen as having commercially important client relationships and fund performance track records.



Lessons learnedKPMG’s long-term analysis of the factors behind successful M&A deals, combined with the comments on recent activity from our specialists, has highlighted some common issues relating to the FS sector. We have summarized them here.

1. Take your time on the due diligence, but integrate fast.

Some of the very biggest recent deals in the FS sector have been completed after astonishingly short due diligence periods. There are undoubtedly some very talented analysts working in the sector who may indeed be able to assess a business in a matter of hours, but it stretches credibility if two large banks, for example, claim that they are ideal candidates for merger after only a few days’ work.

Carl Carande, who leads the FS integration practice of KPMG’s US member firm, says there is no way that proper due diligence can be completed over a weekend. “The pre- and post-completion work really need to be seen as one process,” he says, “and if the early work is not done well, the integration will be difficult. With one recent client, they thought they had finished the due diligence, but we then handed them a further set of around 90 questions covering important details about operating platforms, tenure of key people, product lines and operational capabilities that were vital for integration planning. They had to have this information if the integration was going to go smoothly.”

But with the due diligence complete, successful deals are generally completed fast. The FS sector leaders in this area are the asset managers, possibly because so much of the value in the deals they do is tied up in the individuals in the target company who may leave unless they feel secure and valued. Ian Smith, of KPMG’s UK member firm is very clear on what makes the asset managers successful.

“They create a very focused and clear model for growth through acquisition,” he says. “What makes it work is the clarity, the thinking and planning that

goes into creating a framework that they can drop organizations into. When they have a deal, they don’t prevaricate, they integrate very quickly, putting pressure into the system to get it finished fast.”

This focus on speed of implementation is relatively rare in financial services. It can be found in the insurance sector where the past two years have seen some very well executed deals. But among those deals that fail to live up to their promise in terms of revenue or cost synergies, it is common to find that the pace of integration has been slow.

In investment banking, a European bank faced the task of integrating a newly acquired trading team, chose to integrate fast. Age Lindenbergh, a Partner in KPMG’s Transactions and Restructuring Dutch practice recalls, “They had derivative traders that had been head-on competitors for most of their lives and we were concerned about their ability to work together. Bringing them together, to work on one floor immediately after closure of the transaction turned out to be a decisive factor in building a strong, new, joint culture and to reap the expected synergies.

Depending on the size of the organization, proper integration can’t really be completed in less than nine months. But KPMG specialists across the world cite deals where the integration process is still not finished two years later, often because the planning necessary to decide which parts of the business should be kept and which should be sold, or how different parts of the combined business will work together, does not even start until after the deal has been completed.

Deals done fast may look good

financially, but if you are planning to leave your underlying systems and operational integration until later, you are storing up trouble. The longer you leave it to complete your integration, the harder and more expensive it gets.

Carl Carande,National Account Leader, KPMG in the US, Banking and Finance

2. Revenue versus cost synergies

3. Communicate carefully with the market

1. Take your time on due diligence, but integrate fast

4. Track progress

5. Cultural integration

18 | Lessons learned


When you are integrating a business, you focus on three things, protecting the value

in the deal, managing and mitigating any risks, and creating momentum.

Ian Smith, Director, KPMG in the UK, Financial Services Strategy Group, Transactions and Restructuring

“Too often people do not have a clear idea of what to do once the deal has been done,” says Nicholas Griffin, Head of Financial Services, Transactions & Restructuring, KPMG Europe LLP. “On day one they start the conversations and so begins 6–12 months of discussions over the merits of the respective models and systems, trying to find common ground. Eventually, energy dissipates, everyone forgets what was driving the deal in the first place. They move on to other matters, often leaving legacy problems unresolved.”

The most immediate problem of slow integration is managers getting distracted from their day-jobs, and the

underlying performance of the business declining as a result. A measure of distraction is almost inevitable, but the problem is amplified if managers are co-opted onto workgroups to implement the integration of their parts of the business, without adequate external support and with no clear idea of their own future with the organization.

Bernie Crowe, of KPMG’s Australian member firm, points to one recent example where “... the work streams that had support from advisers worked well. But those that didn’t suffered from a lack of focus and were less able to define a target future state and execute a plan to implement it.”

The most difficult problem caused by slow integrations is the one mentioned by Ian Smith – dissipation of energy leading to the acceptance of integration issues that should be solved. An integration that is only part completed can create an organization that is a jigsaw of different IT systems, management systems and cultures. KPMG’s past investigations into M&A management and value creation have shown that it is very challenging for partly-integrated organizations to deliver the value that their shareholders expect. It is even more difficult for them to do the next merger or acquisition, because they are often still struggling with the legacy problems of the last.

One example of successful integration management planning involved a large US bank which was acquiring a smaller but strategically important rival.

The acquirer had not done a major deal for 10 years, so it brought in a team from KPMG’s US member firm to support the in-house Integration Management Office (IMO) in its planning for deal closure and post-deal integration.

The KPMG team’s first task was to evaluate the IMO team itself and suggest any necessary changes to the structure of the team and the program of work it had planned. With no recent experience of a merger, the IMO team was not familiar with the progress in management techniques that had been made in the past decade, so KPMG advisers were able to suggest a range of project

management tools, templates and collaboration processes that would improve the running of the project.

The assessment phase of the project was completed with the assistance of the KPMG team, leading to an integration program involving 21 different work streams, with separate integration teams covering areas including retail and sales management, operations, finance, HR, training, and consumer and corporate credit.

Coordinating these streams was a major task, but it was very important that there was effective cross-functional monitoring and regular reviews to ensure that the integration plan would deliver the promised business benefits, cost and revenue synergies. KPMG advisers worked closely with the IMO team on this task, resulting in a seamless deal closure and the

development of a highly effective target operating model for post-deal conversion.

A KPMG adviser who worked on the deal comments, “I think we identified two main issues from this project. First, the need for a strong, well resourced IMO team very early in the deal, able to begin the integration planning well before completion.”

“Second, the importance of keeping close track of dependencies and interconnected risks in the management of the integration teams. This was vital to allow the IMO to maintain an accurate picture of the critical program path, while allowing the integration teams to understand how their work affected the realization of the deal goals.”

Integration managementCase study



2. Revenue versus cost synergiesFor most of the FS companies covered in the study, and also for the clients of the KPMG teams that have contributed to this report, the phase of focusing heavily on cost cutting is over and the emphasis now is on finding opportunities for growth.

That means looking for opportunities to build revenues, often through expanding

distribution, developing new product lines, or entering new markets. But, compelling though these opportunities might seem when the deal is being negotiated, revenue synergies are rarely given much weight by the equity markets when they are valuing a deal. This undervaluing of growth opportunities has caused substantial

problemsforacquirers;dealshavecollapsed because of it.


0% 10% 20% 30% 40% 50% 60% 70%

Growth of market share in existing markets

Expansion into new geography

Cross selling products and services

Expansion into a new sector

Leverage of intellectual property and technologies

Other

None/refused 7%3%

3%

20%

30%32%

37%53%

46%53%

56%62%

9%

2%


Which of the following revenue synergies were targeted in the deal?

Financial service companies generally target more revenue synergies than the average especially in cross selling products and services.




4. Track progress




I have a database of 3–400 deals

which shows that while cost synergies are often announced, revenue synergies are talked about, but that’s all. More robust analysis of revenue synergies will definitely help.

Tim Prince, Director, Canadian Head of Integration and Separation

The underlying logic for this skepticism is clear. Cost reductions are directly under the control of the acquirer, who can, for example close redundant departments or reduce a labor force virtually at will. Revenue synergies, however, are often in the hands of clients and customers, who may or may not choose to do business in the way that the architects of the deal are predicting. It is the extra level of uncertainty that leads markets to be skeptical of deal values based on anticipated revenue growth.

Despite this, it is possible to persuade markets of the value of revenue predictions, provided the arguments are strong enough. Francesca Short

of KPMG’s UK member firm says that acquirers need to be able to answer some pretty fundamental questions.

“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,” she says. “But there is always the question, ‘Why can’t you do that anyway? Why do you have to do the deal to get this growth?’ This is especially true in bancassurance, for example, where businesses may well have done several similar deals in the past and may be challenged on whether they are making good use of the distribution they already have.”



Separation and transitional service agreements

In the complex group structures that are common in today’s FS companies, it can be very difficult to separate out businesses earmarked for sale if a significant part of their operational support, in the form of IT processing, finance or HR, is provided centrally by the group.

In these cases, a solution may be to agree Transitional Service Agreements (TSAs), so that the support services continue to be provided by the seller for an agreed period post-separation.

This was the case with a US-based international financial services organization which KPMG’s US member firm helped in the disposal of its retail asset management business. A key rationale for the deal was to allow the KPMG client to focus on developing its institutional client base, but in the course of the disposal to an independent investment management company, it became

clear that if both businesses were to remain operational during the transition period, some form of TSA would be needed.

As Mohammed Sheikh from KPMG’s UK member firm says, the vendor is rarely a specialist in providing services to external clients, which means that the operation of the TSA may not be as efficient as it could be from a specialist provider. A further issue is that the acquirer does not have full control of the business they have bought until the full process of transition is complete, meaning that the integration process takes longer and can cost more.

In this case, the KPMG team focused on effective communications to all stakeholders throughout the process, and developed a governance model consisting of senior finance executives to ensure that issues were identified and reported promptly, and executive decisions made in good

time. When it emerged early on that TSAs would be needed, the KPMG team worked with the client and the acquirer to identify precisely where support was necessary, and to iron out the details.

A KPMG adviser who worked on the deal says, “The deal was completed seamlessly, and we were glad that we had been able to start shaping the TSAs early in the process, because they were key to the successful operation of the post-close interim and long term business model.”

“But a key lesson we took from the deal was that there are significant benefits to be had from changing finance arrangements as early as possible to avoid the need for TSAs in future. Partnering with the buying entity is vital to help ensure the smooth running of the deal, but once the process is completed, the cleaner the break can be, the better for all concerned.”

Case study


Markets are generally easier to persuade of the value of revenue synergies if the CEO is able to speak confidently and convincingly about them. It’s common to hear business leaders telling their audiences that there is a strategic rationale for the deal, they are going to pay a certain amount for the acquisition, there will be these cost savings and, if all goes well, the deal team thinks that this combination of businesses will produce revenue synergies of X.

This may seem to be a prudent and careful line to take with skeptical markets, but if revenue growth assumptions are built into the price (and vendors will do their best to make sure that they are) then the markets will need to hear a good explanation of how these assumptions will be realized.

In some countries, like the UK for example, there are requirements built into the rules governing takeovers to ensure that the acquirer does report on all the synergies cited during price negotiations. This might make a




4. Track progress


The story needs to be complete,

clear, compelling and convincing for all the audiences that will need to hear it.




difference to the amount of information that an acquirer will want to make available to the market at the point where they are gathering support for the deal. But it does not change the principle that the better the explanation for the price being paid, the more likely it is that the markets will accept it.

Miguel Sagarna cites cases where the synergies predicted for a deal have relied partly on media announcements of synergies for similar deals in the recent past. “This might have been an acceptable method of benchmarking in the past, but it isn’t any longer. Even though it may be difficult to arrive at detailed numbers, people are getting more and more interested in seeing the results of a bottom-up approach to

synergies. The premiums the market is prepared to tolerate now are much lower than those they were prepared to accept in the past.”

Tiberius Vadan agrees on the need to define and justify synergy assumptions very clearly, but he goes on to recommend an equally clear set of priorities which need to be communicated both externally and internally.

“It needs to be clear to your internal team, and to the market, that your first priority is not to lose any customers.” he says. “If CEOs shy away from talking about their plans in detail, or it’s not clear what they plan to do, then that in itself runs the risk of leading customers to go elsewhere.”

Detailed bottom upprocess

24%

Top down high levelapproach

76%


Did pre-completion synergy assessment involve a top down high levelapproach or a detailed bottom up process

You need to break the price

down into components and be able to explain your thinking to the market. If you are not convincing, the market may conclude that you are overpaying. And, in fact, they may be right.




You may be a serial acquirer, but unless you are tracking, how do you know whether you

are successful or not? People are waking up to this, and are looking for improvements in tracking performance.

Mohammed Sheikh, Partner, KPMG in the UK, Head of Integration and SeparationTransactions & Restructuring, Financial Services

4. Track progressIn a sector where doing deals is the life blood and primary purpose of so many participants, we should probably not be surprised that tracking revenue and cost synergies once the deal has been completed tends not to receive much attention.

In the banking sector in particular, there is a curious reluctance to check on the promises and assumptions that formed a key part of the negotiations, to see if they were delivered. Tim Prince, of KPMG’s Canadian member firm, sees this as a function of the separation of the deal-making teams from the operational teams. “The deal maker’s accountability stops once the deal has been done, so there is no motivation on them to see the process through to completion.” he says. “I have clients telling me that it is not their job to track synergies, so they don’t really care whether they are delivered or not.”

This is a significant problem, and one which seems increasingly to be concerning shareholders. Mohammed Sheikh of KPMG’s UK member firm reports an increasing view that the quality of the tracking of deal synergies should be a measure of the success

and skill of the acquiring company in completing the deal.

Tracking can mean tracing deal-specific cost savings for 18 months or two years after a deal is done, when the temptation may be to simplify matters by including them in a larger pool of costs to be reduced over time. This can seem a more sensible use of scarce accounting resources, but it is an essentially short term view. One of the most valuable things an acquisitive company can do is to build up a reputation for carefully tracked progress in previous deals, which will add credibility to the predictions made for future acquisitions.

Tracking benefits can, however, be complicated, and in an ever-changing and growing business establishing reliable metrics can really help. Bernie Crowe says that in one business the projected headcount reduction benefits were not captured, because the people were re-absorbed back into the business to support an unexpectedly high level of growth. This doesn’t mean that the synergies were lost. Efficiency metrics showed that, although headcount did not reduce, efficiency improved.




4. Track progress




5. Cultural integrationFS companies are not alone in relegating cultural and HR issues to the bottom ofthelistofduediligenceitems;inthegeneral survey only 38 percent said they had carried out any HR due diligence, well behind all other matters. But with the exception of those in the asset management sector, virtually all the FS companies polled conceded that their management of people and cultural issues was not good.

Illustrating one approach to this problem, an investment management CEO from the UK said, “It was pretty straightforward. We understood that the

new employees were different and we just took that into account. We created the best of both worlds.”

A different, more directive approach was revealed in a comment from a Korean insurance executive who said “We used training and workshops to educate the new employees”. By contrast, a retail banker from Germany said, “I think we just ignored the issues that arose.”

There is a business logic in spending relatively little time on cultural issues in the case of, say, two large retail banks where much of the benefit of

Cultural realignment is a

major issue, especially when it comes to mergers of equals. The big banks have built up distinctive cultures over many, many years, so when there is a merger it is a really big event. People freak out.


32%22%

12%

12%

6%

6%

3%

2%

2%

1%

1%

1%

9%9%

10%6%

3%

5%

4%

9%

18%7%

20%

What were the top three people lssues?


0% 5% 10% 15% 20% 25% 30% 35%

Retention

Culture

Redundancy processes

Operating model

Appointments

Terms & conditions

Communications

Recruitment

Harmonizing/integration

Remuneration Packages

Pensions

Restructuring

Other

None/refused





4. Track progress



the deal comes from bringing together and reducing the size of two branch networks. The logic begins to break down when lack of attention to people issues results in the loss of important IT or fund management staff. It breaks down completely if cultural problems result in the failure of the deal.

Francesca Short is very clear that lack of attention to cultural differences can destroy value in a deal very quickly. “I have seen a recent case where a global insurer bought a local player without taking the time to ensure that key people in the local company realized they were going to be part of a global organization and were willing to make the necessary adjustments. The deal is failing because of this, and the acquirer realizes it.”

Acquiring new customers

These issues seem to arise most readily in those sectors where financial services is seen primarily as a numbers

business rather than one relying on social customs, preferences and habits of thought. It may be possible to overcome these issues within an organization by removing people whose views do not fit. But it becomes more difficult when the cultural differences are between a FS company and its newly acquired customers.

This has proved a problem for some of the European banks who have moved into the US markets, where the time needed to integrate US acquisitions has been longer than they had anticipated because of the need to adjust European products and services to US regulations and customer expectations.

It has also proved to be an issue for FS companies moving into China, where, despite a tendency to focus on financial matters in due diligence, personal relationships have a particularly strong influence over how and with whom

people do business. Building the required relationships can take more time than acquirers are initially prepared to allocate, and this may be one of the reasons for the reassessment of the value of Chinese tie-ups mentioned by Sam Evans earlier in this report. In China many capability transfer programs fail to deliver enhanced value because of relationship issues as opposed to problems with the content of the program. We are aware of organizations spending 12–18 months building relationships with their partner, to create mutual trust and buy-in to a tailored program for local market conditions.

There are effective diagnostic tools that can help to pinpoint and deal with potential cultural clashes. These are gaining increasing acceptance in the FS sector. If used more widely they could have a significant impact on the levels of success in post-deal integration.



There are many different sub-cultures in the financial services sector, but two very common primaryculturesstandout;theoutsourced, commission-based, independent salesforce, versus the in-house, employee-based version.

Many of the large retail banking, insurance or bancassurance deals that KPMG member firms advise on involve bringing together these two cultures in a single organization. This can prove to be very difficult.

In one recent case, a large insurer with a model based on in-house fund management and an employed salesforce had acquired an equally large competitor which did very little in-house fund management, preferring to direct clients to funds managed by others, and relied heavily on an independent, commission-only salesforce.

The deal was presented to shareholders primarily as a method of removing a competitor, but it was clear from the start that the merged organization would also need to pursue revenue synergies if the deal was to be seen to be successful.

This would involve finding a way for the two very different approaches to work together.

The solution proposed by the KPMG team was to segregate the market into distinctly different audiences, and develop distribution channels and product offerings designed specifically for each channel.

“We needed to recognize where there was a sensitivity to independence and where there was not,” says the partner who led the team. “People wanting detailed investment advice generally needed a much higher level of service and a wider range of funds than those who were simply looking for a good deal on a mortgage or a safe home for their pension money. So we needed to develop a very flexible framework that allowed advisers to give the high service that some clients demanded, while encouraging them to channel suitable investments into the parent company’s own managed funds, where security rather than independence was the priority.”

This is a short to medium term solution. It has meant leaving

some parts of the target company unintegrated, but adapting the merged organization’s support and management systems to cope with the different ways of doing business.

In the longer term, the KPMG proposal is to focus on developing the skills, market knowledge and profitability of the adviser teams, so that distinctions between employed and independent advisers take second place to the quality of the service that any adviser provides to clients, and the profits they generate.

“Younger advisers are hungry to do business,” says the partner, “the issue is how you train them, support them, and make writing the right kind of business easy for them. This does mean letting go those advisers who are not profitable, and you have to have the metrics in place to determine who those people are. But if you can develop a properly motivated and incentivized salesforce with the right mix of skills, concerns about where they originated will fall away as they compete for new business.”

Merging different salesforce culturesCase study



The combined experiences of KPMG’s specialists around the world suggest that there are six key questions that need to be asked regularly in the planning of a deal. The answers to these questions will give some valuable indications of potential future problems. They are:

1. Is there a clear plan in place for the whole of the deal, including integration, with agreed metrics to define and measure success?

2. Can the plan be carried out quickly?

3. Do we know in detail what we are going to do the day after the deal is completed?

4. How long is it taking to get answers to our questions from the target company?

5. Are we thinking hard enough about how we will integrate customers and employees into our new, enlarged company?

6. If this deal goes wrong, do we have the energy and the resources to do it all over again and get it right?

In ASPAC where control can be difficult to achieve, it is also important to ask – How well do you understand the local market and your potential partner. Is there motivation on both sides for a true partnership? Where can your organization really add value?

Is the deal going to go well? Six key questions to ask

Patchwork organizations

reveal poorly executed previous integrations. Some can hit a button and tell you the information you need, others need to go to each different system and ask individually. It can take months.



Perform better due diligence

“I would definitely expand the due diligence in some areas.”UK, Insurance, VP

“We would carry out far more detailed due diligence.”US, Investment management, Managing director

Understand the different labor laws and cultures between countries

“We must understand the culture and context of the country where the acquisitions are being made.”Spain, Investment management, CFO

More focus on cost/finances

“Be less aggressive in revenue projections from the acquired business.”US, Retail banking, Finance director

Conduct faster implementation/integration

“We would have a team that specialized in acquisitions to speed the proceedings up.”Spain, Corporate & investment banking, CFO

“We would integrate the target business quicker."Korea, Insurance, Finance controller

Understand the target company’s market

“I would say that I would do a more thorough survey of the market to have all the tools needed to acquire the companies that we want to acquire.”Brazil, Corporate & investment banking, CFO

HR planning

“I would handle difficult managers better.”US, Investment management, Director

What will you do differently in your next deal? Answers from FS executives

28 | Is the deal going to go wel l? Six key quest ions to ask


Two organizations might say they are on the same system, but one could be using the

original version, patched up, customized and no longer supported, while the other could be using the very latest release. You have to ask the right questions to find out things like this.

Carl Carande, National Account Leader, KPMG in the US, Banking and Finance

Pre and post-deal planning

Much of the discussion in this report has focused on the value of pre-deal planning and thorough due diligence. The problems that can arise when these processes are not carried out effectively were illustrated in one recent deal involving two large FS companies, on which a KPMG team advised.

As is relatively common on large scale FS mergers, the negotiations and regulatory approval process took the best part of a year to complete. Possibly as a result of a desire to get the deal completed, the formal due diligence process was completed very quickly and, unusually for a deal of this size, was carried out by an in-house team without significant external support.

Difficulties began to appear when the acquirer tried to run a reasonably extensive pre-completion planning phase, but found that many of the key questions that should have been answered in the due diligence process had been left unresolved.

“We found that there were still too many unknowns surrounding the operating models of the target company,” says one KPMG adviser who worked on the deal, “so we had to put off a lot of key decisions until after completion when we could see in detail what the target company looked like.”

The post-completion phase began with two weeks of intensive immersion in the businesses on each side. The whole process was split into several work-streams, with detailed presentations from each team intended to give the other side the in-depth knowledge of the business necessary for further planning.

Next came a hypothesis generation/joint design phase in which each work stream was asked to develop a plan for the parts of the business for which they were responsible.

“This was a very patchy process,” says the KPMG adviser. “Some of the work streams did very well, but they all suffered from the lack of an overall baseline from which to work.

This should have been produced by the finance department, drawing on the pre-completion work, but the finance team was scarcely involved in these discussions.

“Each team was allowed to pick the data it wanted to illustrate its plans, which meant that it was very difficult to see whether the performance predictions being offered for each part of the business were stretching or not. It was very noticeable that those work streams that brought in external advisers, to analyze the data carefully and to help devise proper metrics and KPIs, produced better and more convincing plans than those who chose to do it by themselves.”

The integration process for this deal looks set to go on for at least another 18 months. “It really should be done faster,” says the KPMG adviser, “but we are finding ourselves doing work now that should have been completed before the deal was signed.”

Case study



A wave of deals to come

KPMG’s specialists are unanimous in their view that there is a wave of FS M&A activity about to break. The next three years or so is expected to be a process of refocusing, re-shaping and transacting for FS businesses all over the world. The only question is when it will begin.

These plans are being driven by a unique combination of factors. Internally, as we have already seen, many organizations have gone through a severe round of cost-cutting and are now lean and mean enough to be looking for growth opportunities as a matter of priority. But there is still a huge amount of internal reorganization under way, as businesses struggle with the implications of a new economic environment where clients no longer have the high levels of trust they once

enjoyed, and business practices that were once entirely acceptable are now viewed with suspicion and mistrust.

These changes are leading big FS companies to look very hard at their operations, splitting out those that they think are non-core and running them separately, in preparation for a possible disposal once they have shown themselves to be viable stand-alone businesses.

Some of this activity is being driven by legislation like the Dodd-Frank Act in the US, and by recovery and resolution plans which will require some large institutions to assess what actions they could take to recover from a range of stresses, and if necessary to achieve an orderly wind down.

People have gone to hell

and back with the recession. They seem to think now that we are coming out of it. Clients are saying they want to concentrate on growth – that’s across all sectors.


67% of companies in the financial service sector agree that M&A will bounce back in their country next year.

Financialservices (34)

Strongly agree

Tend to agree

Tend to disagree

Strongly disagree

Not sure

Globalaverage (162)

26%32%

3%12%

7%15%

38% 35%

17% 15%

M&A will bounce back in my country next year (2011)


30 | A wave of deals to come


We are going to see a lot more

cross-border M&A, with interest from China and Russia. Premiums will increase. We will get back to the glory days, but not for a while yet.

Tim Prince, Director, Canadian Head of Integration and Separation

It is key to factor in the impact and

cost of regulation in your bid – new capital and liquidity rules will have a profound impact on future profit and return on assets.

Stuart M. Robertson, Global Banking Transactions and Restructuring Sector Lead

External factors driving change include the imminent appearance of large, well-capitalized Chinese acquirers on the market, with strong government backing and an urge to take the Chinese economy to the next stage in its development. They will find themselves in competition with acquisitive Russian interests, and with a resurgent private equity sector keen to shed the assets that they have not been able to sell on while markets were low, and find new targets for their skills.

Uncertainty over regulation

What is holding these transactions back is uncertainty over the detailed effect of new regulations plus regulatory reform and associated opening up of markets in ASPAC. The full implications of the revised capital requirements contained in the Basel III rules, for example, are still being worked out, and banks will not want to take major action on disposals or acquisitions until they have a good idea of how their overall capital profile will look under the new regime.

“In Europe, the introduction of Solvency II, combined with wide ranging changes to regulation of distribution, will drive the insurance industry into some major realignments.” says Francesca Short.

“The increased sophistication in risk analysis required will force insurers to reassess their capital deployment. For example, the benefit of holding closed life funds within large groups may come into doubt as the capital they tie up will increase significantly over Solvency I requirements. The tension between reducing complexity to reduce need for capital, and increasing the attractiveness of products to entice customers to pay explicit sales charges is causing interesting shifts in the balance of power between manufacturers and distributors of retail insurance products, which will spark numerous transactions as distribution channels are realigned.”

Globally, insurers will likely increasingly look for growth in underdeveloped markets where often the acquisition of a local player is a safer option than starting up a completely new operation. The key to the success of these deals, as we have said earlier in the paper, is to stamp the mark of the global player on the new acquisition to achieve consistent operational methods and governance structures, while retaining and using the unique local knowledge acquired.

These issues will be resolved in time, and our best estimate is that there is 5–7 years of large-scale restructuring ahead for financial services. Whether this restructuring will end up adding value to the sector or not, depends to a large extent on whether the key lessons of the recent past can be learned, absorbed and applied.



The value of using an advisor

It might seem paradoxical, but experience shows that the more practised a business becomes at carrying out successful acquisitions, the more they tend to rely on external advisors to help them manage the process. Studies suggest that deals where there has been a good external advisory team will realize, on average, around 30 percent more value than those that are done entirely in-house.

The key contributions that KPMG advisors can make to the success of a deal are:

• Experiences of past deals – no two deals are the same, but the same problems and issues do appear regularly. A good advisor will have handled these matters before, and will know what works and what doesn’t.

• Adetailedprogramplanthatwilltakea deal from initial due diligence right through to completion of integration, with all issues properly resolved.

• Specific,up-to-dateknowledgeofthe relevant regulations, including labor laws, tax matters, and local ownership requirements.

• Specialistknowledgeandexperienceon areas of due diligence that may be unfamiliar to the acquirer.

• Knowledgeonhowtoshapethenew entity, bring together a team specifically to manage the transition from two organizations to one, and drive the process from beginning to end.

• Resourcestohelpgetthroughthemore difficult tasks, including present revenue synergies in a compelling way to the market.

• Perspectivetohelpensurethattargets are stretching, but achievable, that opportunities are not missed, and that the rationale that made the deal attractive in the first place is delivered.

32 | The value of using an advisor


A new dawn: good deals in challenging times

Related Publications

Bruised but not broken: The global banking growth agenda


Contact us

Jeremy AndersonGlobal Chairman Financial ServicesKPMG in the UKT: +44 20 7311 5800E: [email protected]

Frank EllenbürgerGlobal Sector Leader InsuranceKPMG in GermanyT: +49 89 9282 1867E: [email protected]

John KellyGlobal Head of Integration & EMA Head of T ransaction ServicesKPMG in the UKT: +44 20 7694 3528E: [email protected]

David SayerGlobal Sector LeaderRetail BankingKPMG in the UK T: +44 20 7311 5404E: [email protected]

Michael J. ConoverGlobal Sector Leader Capital MarketsKPMG in the UST: +1 212 872 6402E: [email protected]

Wm. David SeymourGlobal Sector LeaderInvestment ManagementKPMG in the UST: +1 212 872 5988E: [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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Publication name: The architecture of integration

Publication number: 110735

Publication date: September 2011

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