Mergers and Acquisitions in Banking: Understanding the IT Integration Perspective

Abstract

The aim of this exploratory study is to understand the key issues associated with integrating Information Technology (IT) in banking mergers and acquisitions (M&A). The study is undertaken by reviewing a number of high-profile cases and interviewing the IT practitioners who managed the corresponding processes. The result is a comprehensive review of a poorly understood and researched area providing insights into the significance of the IT-related elements in the M&A integration and specifics of the M&A IT integration process. The study concludes by formulating a blueprint layout and integration model describing the timescale, stages, and principles of efficient IT integration. The layout and model can be used by organisations to guide and facilitate the execution of their future banking M&A transactions. Keywords: banking, mergers & acquisitions, IT integration Aims and ObjectivesThe aim of the study is to contribute to the knowledge base on best practice for IT integration within Mergers and Acquisitions (M&A) in banking. A number of large banking M&A cases were investigated through interviews with high-ranking officers who were directly involved in realisation of the corresponding transactions. Eight cases spanning fifteen years to the present time and involving major international institutions like Citigroup, Nomura, UBS, Deutsche Bank, Lloyds, and Royal Bank of Scotland were studied. The objective of the project was to study the IT integration process, its drivers, dynamics, and associated problem areas, and identify theoretical models and frameworks, as well as empirical principles in use. The outcome would be the creation of a summative profile of the IT integration process in banking M&A. Literature Review Why Focus on the IT Integration in M&A in Banking?The rationale behind the study's focus on IT integration in M&A in the banking industry is two-fold. Firstly, M&A in the financial services sector have accounted for almost 40% of the M&A worldwide in the past two decades (circa $7.1 trillion in 88.3 thousand instances between 1985 and 2002 according to Thomson Securities Financial Data, as cited in Walter (2004)), a significant part of those transactions being attributed to the banking industry. Secondly, the M&A failure rates are generally far above 50%, including high profile cases such as recent Santander's takeover of Alliance and Leicester (Williams, 2010). Yet despite IT being an essential element and major enabler in modern banking, there is no appropriate common reference framework for efficient banking IT integration available in the public domain. This makes a persuasive case for investigation of approaches for improving the efficiency of IT integration in banking M&A, particularly through the development of new structured models and frameworks. To achieve this, a full understanding of the M&A IT integration process is required. Is IT Integration Really That Important?In 2004, Walter (2004) noted a long period of dramatic restructuring for the financial services industry during which a...

Mergers and Acquisitions in Banking: A Framework for Effective IT Integration

“…To achieve that, a number of large-scale high-profile banking M&A cases were investigated by interviewing key senior level technology officers directly involved in the delivery of those projects. Some of the results of the study were published in another work, Kovela and Skok (2012), which among other things confirmed that IT is a critical resource and enabler in the business model of modern banking and therefore a clear link between the business strategy driving the merger and the priority of the IT integration tasks which are key for the efficiency of M&A transactions. The current paper builds on and complements these findings by proposing a framework for those embarking on the process.…”

“…Firstly, M&As fail to increase shareholder value in more than half of the cases (58.3% between 1992 and 2006 according to Cools et al, 2007) and in banking specifically that can often be directly attributed to the IT integration related problems (Williams, 2005;Williams et al, 2007;Kovela & Skok, 2012;Deloitte, 2014;The Mergermarket Group, 2014), e.g. the cases of Santander's takeover of Alliance and Leicester (Williams, 2010) and integration of the RBS Group's IT infrastructure (King, 2012 andBoyce, 2012).…”

Post-merger IT Integration in Banking: Literature Review

“…Tanriverdi and Uysal (2015) give an account of many sources discussing the high complexity and cost of IT M&A integration which is relevant to an IT-heavy industry such as banking. Kovela and Skok (2012) and Roehl-anderson (2013) also indicate that despite the expense of post-merger IT integration often being considered immaterial in the overall scale of the deal the costs are still substantial. Learning to do the task properly would therefore potentially save organisations engaged in M&A funds which could be deployed more productively elsewhere.…”

“…An earlier academic paper by one of the authors of the current study, Kovela and Skok (2012), proposed a summative layout of the M&A IT integration for banking institutions, updated and represented below in Figure 1.…”

“…The importance of a proper assessment of the IT landscapes of both the acquirer and target banks is considered by Wirz and Lusti (2004) and Alaranta and Mathiassen (2014) who point out the challenges consequent to the degree of (in)-compatibility of IT platforms being merged -a significant degree of incompatibility may significantly escalate the time and cost of integration. Connected to this situation is the issue of legacy systems as pointed out by Beck (2011) and Kovela and Skok (2012). As IT asset portfolios in banks often have a significant proportion of systems that have been in place for decades and where documentation and qualified specialists are now scarce, integrating such assets may prove a challenge and a significant increase in time and costs, yet simply turning them off may be too risky.…”