Case Study: Merger for a Regional Bank

Case Study

Managing a Merger for a Regional Bank

Background

ABC Group is the fifth largest financial services provider in Southeast Asia by total assets, with a vision to be "Southeast Asia's most valued universal bank". It offers consumer banking, investment banking, Islamic banking, asset management and insurance products and services. Its key regional offices are located in Malaysia, Singapore, Indonesia and Thailand.

ABC Group acquired two banks in Indonesia: Bank X and Bank Y. In term of assets, Bank X was the sixth largest bank in Indonesia whereas Bank Y was the tenth. To comply with the Indonesia Central Bank's "single presence policy", ABC embarked on a plan to merge these two banks. The merger would create the fifth largest bank (ABC XY Bank) by total assets of more than USD 10 billion and also among the top five in terms of distribution network in Indonesia.

Challenges

Due to the nature of the banking business, two of the most important aspects of a bank merger is managing its people and the IT and operations merger integration.

The speed of completing the merger depends on the speed of the IT & Operations integration, whereas true "one-bank" service happens only upon completion of the IT & operations integration. The IT & Operations integration timeline will also drive the timeline for most other activities.

The two legacy banks posed several unique challenges that had to be addressed:

• The two legacy banks have similar size customers and transactions that would make the combined banks operate with double the volume.
• Bank X and Y are strong players in their respective market segments. Bank X is a strong corporate market player whereas Bank Y tends to focus more on the consumer and commercial markets.
• The two banks have huge customers base, 3.3 Million customers in total.
• Geographic spread (more than 650 branches, 1267 Automated Teller Machines (ATM), 237 Self Service Terminals (SST) located in across country)
• Distributed and decentralized systems in the two banks (more than 100 applications need to be aligned and integrated or rationalized)
• Need to retain and integrate two different legacy systems for credit card business alignment - Bank Y's merchant acquiring system and Bank X's card issuing system
• Different network architectures (hub & spoke vs. star topology)
• Selection of talented employees to continue the management and operations and how employees would work in a new environment

ABC needed to quickly integrate its new acquisition to realize merger synergies (both cost and revenue) and carry out the merger integration exercise without destroying any value or losing key customers. This process involved the integration of business units, operations and IT of both banks.

Questions

Question 1

You are leading the Accenture team to develop the IT Strategy for the integration services for the merger of the two banks. Using Accenture's proven "Merger Integration Framework and Methodology" what steps and what areas will you prioritize to ensure that the strategy fits with the overall goals?

To help you in making a decision, here is Accenture's Merger Integration Framework and Methodology

Please visit accenture.com for further references.

1.     CASE DEFINITION ANALYSIS

1.1 ABC Group

5^th largest financial services provider in Southeast Asia

Vision: Southeast Asia’s most valued universal bank

Sectors: consumer banking, investment, banking, Islamic banking, asset management, insurance

Key offices: Malaysia, Singapore, Indonesia, Thailand

In Indonesia, ABC Group acquired bank X and bank Y.

1.2 Bank X

6^th largest bank in Indonesia

1.3 Bank Y

10^th largest bank in Indonesia

1.4 ABC XY Bank

    Result of merger between Bank X and Bank Y by ABC Group.  Total assets of more than USD 10 billion, top five in terms of distribution network in Indonesia.

1.5 Background

To comply with Indonesia Central Bank’s “single presence policy”, ABC plans to merge Bank X and Bank Y. The merger result in ABC XY Bank.

1.6  Problems

This indicates that IT and Operations Integration aspect should be prioritized as 1^st priority over People Management aspect.

1.7 Unique challenges to be addressed:

1.)   Combined bank operates with double volume

2.)   Bank X is a strong corporate market player and Bank Y focus more on the consumer and commercial markets

3.)   Two banks have 3.3 million customers in total

4.)   Geographic spread: 650 branches, 1267 ATM, 237 SST in Indonesia

5.)   More than 100 systems’ applications need to be integrated

6.)   Two different legacy systems for credit card need to be integrated (Bank Y will acquire system and Bank X will issue system)

7.)   Different network architecture

8.)   Selection of talented employees to continue the management and operations and how employees would work in a new environment

1.8 Important points:

The integration process of the new acquisition should be:

1.)   Quickly

2.)   Synergic (both cost and revenue)

3.)   Without destroying value

4.)   Without losing key customers

5.)   Involving integration of business units, operations, and IT of both banks

2.     ROLE SIMULATION

Position  : Leader of Accenture Team

Project    : To develop IT Strategy for the integration services for merger of the two banks

Methods : Using Accenture’s proven “Merger Integration Framework and Methodology

Focus      : Prioritize steps and areas to ensure that the strategy fits with the overall goals

3.     PRIORITIZATION

3.1 Areas Prioritization

Important areas to be prioritized are:
1.)   Bank Merger Integration

While choosing the right acquisition targets and quickly identifying sources of value are critical, effectively integrating these acquisitions into the enterprise may be the single most important success factor for merger between Bank X and Bank Y into ABC XY Bank. In the bank merger integration process, there are 2 important aspects to be prioritized, those are:

1. IT and Operations Integration (1^st priority)

2. People Management (2^nd priority)

2.)   Banks Value Creation

ABC Group also focus on the areas that will create the most value, structuring the integration program around those key value drivers, and making sure each receives adequate focus and resources along the Bank X and Bank Y merger integration process.

3.)   Focus on customers and key customer retention

In the merger integration process, Bank X and Bank Y are required to maintain its key customers and market shares. Bank X is required to maintain its corporate market and Bank Y is required to maintain its consumer and commercial markets. Thus, there should be enough focus on this customers and key customer retention.

4.)   Determination of right acquisition targets

Acquisition targets must consider well jump-starting integration activities, value creation, top critical decisions needed, potential challenges/issues to be addressed, well-structured communications plan, governance and process controls, synergy opportunities, bold changes implementation, and so on to ensure that the acquisition targets are well-structured and right. The acquisition targets for this case are:
Creating ABC XY Bank as a result of merger between Bank X and Bank Y by ABC Group. ABC XY Bank is targeted to have total assets of more than USD 10 billion, operate with double volume, be top five in terms of distribution network in Indonesia, have 3.3 million customers in total, and have 650 branches, 1267 ATM, 237 SST in Indonesia, with a vision to become Southeast Asia’s most valued universal bank.

3.2  Steps Prioritization

The steps prioritization is created based on Accenture’s proven “Merger Integration Framework and Methodology. The steps prioritization is:

3.2.1      Establishing Merger Framework

Phase of establishing merger framework is required to obtain inputs required for planning the merger integration. This phase is divided into two sub-phase, those are minimum entry requirements and required outcomes.

3.2.1.1  Minimum Entry Requirements

This sub-phase includes 4 steps, those are:

·       Detailed Due Diligence in Progress

The first step, the due diligence process is required to get the following information from Bank X and Bank Y (considering that these information will be useful for the merger integration process):

o   General Corporate Matters

o   Financial, Accounting, and Taxes

o   Technology and Intellectual Property

o   Product / Service Offerings

o   Operations

o   Sales and Marketing

o   Human Resources and Personnel

o   Legal and Regulatory

·       Overall Financial Targets

The second step, the overall financial targets of ABC XY Bank should be determined and designed clearly in a well-structured planning. The overall financial targets must take several aspects into account, those are:

o   ABC XY Bank will have total assets of more than USD 10 billion

o   ABC XY Bank will be top five in terms of distribution network in Indonesia

o   ABC XY Bank will have 3.3 million customers in total

o   ABC XY Bank will have 650 branches, 1267 ATM, 237 SST in Indonesia

·       Agreement in Principle

The third step, before go further into the next step, new principle and value for ABC XY Bank must be designed. The new principle and value should contain and preserve principle and value of Bank X and Bank Y. Finally, the new principle and value must be shown to Bank X and Bank Y to evaluate that it suits with the principle and value of both Bank X and Bank Y.

·       Preliminary Recommendations for NewCo Top Level Executives and Board of Directors

The last step in this phase is to obtain the preliminary recommendations for NewCo Top Level Executives and Board of Directors. The recommendations are taken from Bank X and Bank Y policy. People who are recommended for this position should be talented and seasoned professionals from either Bank X or Bank Y, based on the agreement between Bank X and Bank Y.

3.2.1.2  Required Outcomes

This sub-phase includes 6 outcomes, those are:

·        Identified NewCo Top Level Executives and Board of Directors

This outcome will be obtained from preliminary recommendations for NewCo Top Level Executives and Board of Directors, which are proposed by Bank X and Bank Y.

·        Established PMO (Project Management Office)

Based on the information about Bank X and Bank Y got from due diligence process, overall financial targets of ABC XY Bank, ABC XY Bank’s principle and value, and preliminary recommendations for NewCo Top Executives and Directors, a PMO can be established. PMO is created as facilitator. It facilitates the evaluation and prioritization of projects and opportunities. But PMO cannot be used as the decision maker. Thus, the other outcome is required as the decision maker, that is Integration Team Structure.

·        Defined Integration Team Structure

Integration Team Structure is created and defined to take role in each decision making needed in the Bank X-Bank Y merger integration process.

The integration team structure, with the PMO will address the unique challenges faced by ABC XY Bank:

·       Combined bank operates with double volume

Ø     Will be solved by Market Team, Business Process Team, Organization Team, People Team, and Stakeholders team

·       Bank X is a strong corporate market player and Bank Y focus more on the consumer and commercial markets

Ø     Will be solved by Market Team and Business Process Team

·       Two banks have 3.3 million customers in total

Ø     Will be solved by Market Team, Business Process Team, Organization Team, People Team, and Stakeholders team

·       Geographic spread: 650 branches, 1267 ATM, 237 SST in Indonesia

Ø     Will be solved by Application Architecture Team, Data Architecture Team, and Technical Architecture Team

·       More than 100 systems’ applications need to be integrated

Ø     Will be solved by Application Architecture Team

·       Two different legacy systems for credit card need to be integrated (Bank Y will acquire system and Bank X will issue system)

Ø     Bank X will issue and design a new system, together with Business Process Team, and Stakeholders Team, while Bank Y will just acquire the system issued by Bank X.  

·       Different network architecture

Ø     Will be solved by Technical Architecture Team

·       Selection of talented employees to continue the management and operations and how employees would work in a new environment

Ø     Will be solved by People Team

In addressing these unique challenges, the dedicated team must prioritize IT and Operations Integration-related challenges above People Management-related challenges, considering the case analysis shown in the box below:

·        Defined Guiding Principles and Integration Approach/Feasibility

Results and informations obtained from the minimum entry requirements should be designed into one, resulting in Guiding Principles and Integration Approach for ABC XY Bank as outcome.

·        High Level Communications Plan/Approach

A detailed, integrated communications plan must be developed for each key stakeholder group of Bank X, bank Y, and ABC Group—especially, employees, customers, suppliers, local communities and financial analysts—and implemented immediately after the merger announcement.

·        High Level Integration Roadmap

At the final step, all of the outcomes are integrated as a high level integration roadmap which will become a main reference for the merger integration process.

Phase of establishing merger framework will result in inputs required for planning the merger integration.

3.2.2      Conduct Integration Planning

Inputs got from the previous phase will be used in this phase. This phase including 6 steps, those are:

·         Target Operating Planning

Target Operating Planning is created based on the current operating model of Bank X and Bank Y.

·         Defined Synergies by Team

This step is required to capitalize fully on synergy opportunities owned by Bank X and Bank Y by tying all potential synergies from both of the banks to specific execution plans.

·         Synergy Tracking Approach

This step is about implementing robust approaches to Bank X-Bank Y synergy tracking and reporting. This step is required along the conducting of integration planning to improve the performance of the synergies. The tracking will be useful in evaluating the synergies efficiencies, as well as eliminate the synergies weakness.

·         Integration Plans/Key Milestones

The integration plans and key milestones should be designed to ensure that the merger integration succeed.

·         Established Customer and Employee Programs

This step is intended to establish a new integrated customer and employee programs for ABC XY Bank, based on the analysis upon the challenges that Bank X is a strong corporate market player and Bank Y focus more on the consumer and commercial markets.

·         Updated Integration Roadmap

In this step, the additional aspects which are got from the phase of conduct integration planning are added to the old integration roadmap, resulting in an updated integration roadmap for ABC XY Bank.

Phase of conducting integration planning will result in the final integration plans for the merger integration.

3.2.3      Execute Integration Plans

Phase of executing integration plans is about executing the integration plans resulting from the previous phase, that is conduct integration planning. This phase involve 4 aspects, those are:

·         Deployed Integration Plans

This aspect is about applying integration plans resulting from the previous phases to ABC XY Bank.

·         Ongoing KPI Reporting

After the integration plans of ABC XY Bank are applied, its performances will be monitored and controlled using KPI (Key Performance Indicators) Reporting.

·         Ongoing Synergy Tracking

The synergy tracking of ABC XY Bank which has been done in the phase of conducting integration planning will still be continued until this phase.

·       Integration Results

Finally, the execution of the integration plans will provide the result for ABC XY Bank.

4.     ADDITIONAL ASPECTS

According to the client’s (ABC) request, the integration process of the new acquisition should be:

4.1  Quickly

4.2  Synergic (both cost and revenue)

4.3  Without destroying value

4.4  Without losing key customers

4.5  Involving integration of business units, operations, and IT of both banks

Thus, for fulfilling these 5 aspects whom ABC Group requested, there are several additional aspects to be concerned, those are:

·  Building a quantified project timeline

Ø     so that the integration process can be finished quickly, suitable with ABC Group’s request.

·  Optimization of team synergies defining, synergy tracking approach, and ongoing synergy   tracking steps.

Ø     so that the merger integration will be synergic (both cost and revenue).

·  Focus on preserving value of Bank X and Bank Y in establishing merger framework for ABC XY Bank.

Ø     so that it will not destroy value of both Bank X and Bank Y.

·  Focus on customers and key customer retention

Ø     so that in the merger integration process, Bank X and Bank Y will not losing its key customers and market shares.

·  Requirement of detailed due diligence process

Ø     so that detailed information required for integration of business units, operations, and IT of both banks can be obtained.

5.     REFERENCES

www.accenture.com

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Accenture. 2006. Pernod Richard IT Merger Integration Propels High Performance. USA: Accenture

Accenture. 2008. A Major US Bank: Banking Merger and Integration. USA: Accenture

Accenture. 2008. Mergers & Acquisitions: Planning and Executing for Success. USA: Accenture

Accenture. 2009. Comcast Integrated HR Platform Helps Enable High Performance. USA: Accenture

Accenture. 2008. BBVA: Banking Acquisition and Integration. USA: Accenture

Accenture. 2010. Accenture Merger, Acquisition, Divestiture and Alliance Services. USA: Accenture

Accenture. 2008. Asian Banking Group: Banking Merger and Integration. USA: Accenture

Tinlin, Andy and Alberto Verga. 2009. Seven Catalysts for Merger Integration Success. USA: Accentur

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