Three principles banking executives can use to make an informed choice on what to divest or acquire and how to successfully execute the transaction.
Australian banks are facing what is becoming commonly known as the ‘commodity trap’. Traditional revenue streams are being squeezed due to regulatory, macroeconomic and customer pressures, with declining returns. The current business models for most banks will be increasingly challenged by a number of disruptive forces that are structural (not cyclical) in nature.
As a result, mergers, acquisitions and/or divestments are options that can be used to help restructure the bank for success in this challenging environment and position it to thrive, not just survive, in the future. Re-deploying capital from divestments into core businesses can strengthen a bank’s position as can acquiring a capability to better serve customers.
M&A is one of many strategic options bank executives can use to drive growth along with in-house innovation, product development and R&D. However it should be stressed that any proposed M&A activity should be assessed, critically evaluated against other strategic options, and assumptions tested with rigor, rather than be seen as a silver bullet.
Done right, a successful acquisition can propel a bank forward into a competitive position, done wrong it can erode value, confuse customers and de-motivate staff. A successfully executed divestment can re-focus a business and simplify operations to better serve customers.
Below are three guiding principles that can help banking leadership teams and executives navigate through the disruption and reposition their business to thrive.
A solution from five years ago could be an obstruction today. It is common in the banking sector to see projects and strategies being executed that are no longer aligned to customer needs and changing requirements. With the speed of change in financial services today, projects that made sense only a few months back might not make any sense today. This can make a merger, acquisition or divestment almost impossible due to the lack of capacity or capital across the organisation.
Track benefits and hold stakeholders accountable for in-flight projects. Unless projects are regulatory in nature, or are strategically aligned to add value, they need to be re-assessed, repositioned or exited. Capital and resources tied up in non-critical projects can stop a bank moving forward. With more agile newcomers to the market, no bank can afford this and executives should have the courage to stop initiatives that no longer make sense – no matter how far progressed they are.
Customer needs are changing. Faster, more personalised products via digital distribution is the future.
The likelihood is that there are gaps in how you serve customers today and how you are set up and funded to serve customers tomorrow. The question then becomes, ‘build or buy’? Acquiring, or partnering, to access capability can be a sensible option that can allow a bank to bring to market a capability far faster than if it was to build in-house.
However, the integration of smaller technology-focused fin-techs that add capability rarely delivers on the expectations of the transaction. And good governance is the primary reason for businesses failing to successfully deliver the value of the transaction.
Larger banks tend to have far more meetings, committees, rules and procedures than their smaller acquired businesses. At first, this doesn’t seem like a big challenge. But it is. Talent leaves, as does IP, and soon enough you find that all the best people have left the acquired business.
Put governance and organisational structure near the top of the integration agenda after strategic rationale. Ensure the acquired business has enough delegated authority to allow it to be innovative and productive and integrate only areas that release synergies or where control is required.
Regardless of the type of transaction, be it divestment, partnering or acquisition, without buy-in from the stakeholders involved there is a high risk that the deal will fail to live up to expectations. For far too long decisions on who to partner with, what to acquire, or what to divest have been made by small groups of individuals in boardrooms, based on limited information with little subject matter expertise input.
This often leads to unrealistic expectations set from the top, disenfranchised staff, stress and confusion. While it’s acknowledged that not everyone can be brought into every strategic M&A discussion, the most successful acquirers engage a wider group of specialists internally and externally at the earliest stages of a potential transaction.
This one simple act alone has a material impact on the likelihood of a transaction being viewed as successful or not.
Mapping a course to avoid the challenges of change will not work as a strategy. Change is now the constant. It is also well documented that many acquisitions and divestments destroy value for organisations when they don’t follow these principles. Being clear on objectives and accountability, engaging stakeholders, along with setting up the right risk and governance structure will set a business up for transaction success.
This requires focus, prioritisation of scarce resources and organisation capability and inevitably stopping non-critical and non-strategic projects. The job of acquisition is always harder than expected. On average, there are over 300 operational touch-points between a target and an acquirer, similar to a divestment. It is complicated and demanding.
Before embarking on any inorganic action, ask: Is there unequivocal organisation buy-in? Has there been enough planning with clearly articulated success criteria and resource deployment? Is there an understanding and ability to manage the risks? Only when you can answer these questions should you think about charting a new course of direction to successful, sustainable growth.
Analysis of the four major Australian banks' full year financial results for 2019.