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UBP in the press 08.03.2022

Consolidation in banking: the challenges of an acquisition

Consolidation in banking: the challenges of an acquisition

Le Temps (07.03.2022) - The number of private banks in the Swiss financial sector keeps shrinking and, with the wave of mergers and acquisitions that took place in 2021, it has now fallen below the symbolic threshold of a hundred: in a recent analysis, KPMG and the University of St-Gallen counted 96 in mid-2021, down from 101 in early 2020.

When including transactions that were finalised in the second half of 2021, there are only 93 left of the 163 that were active in 2010.

The main cause of this consolidation is well known: constantly rising operating costs due to tightening regulations, pressure on margins from low interest rates, and the need for expenditure in technology to keep services on the cutting edge, improve internal processes and prevent cyberattacks.

In such a competitive industry as finance, these constraints have made the consolidation unavoidable and likely to continue. There are more small and medium institutions looking to secure their futures by joining up with stronger partners, and many are turning to the larger banks, although it rarely leads to a deal.

No guarantee of success

While more takeovers are to be expected, there is never any guarantee that a deal will be successful. Both parties are faced with many questions about the proposed new entity: will the staff find their place in it? Will its corporate culture work? Will it be able to provide the best services and satisfy all the clients? Will it be as profitable as expected?

The answers to these questions are crucial but cannot be found in the data collected during the due diligence process. They will come from the meetings between the two companies’ managers and from the quality of the relations and trust between their people.

"So any firm considering such a transaction must take into account a number of non-financial factors before embarking on such an operation with not only logistical and financial but also human implications."

Whether the target of an acquisition is a well-established bank or a local asset manager, shared values is always key to the success of the union. However promising the financial forecasts are on paper, and however many sophisticated guarantees are provided, in our experience any attempted merger without close cultural ties is highly likely to fail.

Look at it like hiring an employee: it doesn’t matter how experienced and skilled an applicant is if the essential ingredient for a long-term relationship – cultural fit – is not present.

Complementarity is key

The second important requirement is complementarity. An acquisition should be a step towards a vision, part of a coherent and clear strategy to add a string to one’s bow, whether it be a new area of expertise or a new geographical region, for example. Acquiring another company just to grow one’s asset base makes no sense.

The price is the third determinant. How much goodwill the buyer is prepared to pay is closely linked to how complementary the target company’s operations are to its own, particularly in strategic terms. Overpaying can bring risks, as can picking a target whose area of expertise is too different. This means reducing uncertainty to a minimum by running in-depth analysis of the target’s clients and offering.

Fourthly, transparency is a major variable in the success of a takeover, particularly during the integration process. For any employee, finding out your employer is being acquired comes as a shock and makes you feel uncertain about your role and your prospects. There’s nothing more worrying for the staff of a bank that has just been taken over than lack of visibility. Communication is therefore paramount, especially in the two or three quarters between the announcement and the completion of the deal.

The employees must be informed as transparently as confidentiality rules allow about the upcoming stages in the process. The better the acquiree’s bankers understand the acquirer’s strategy, the better they will communicate with their clients and the more beneficial the merger will be to all parties.

Shared systems

The fifth and last, but not the least, essential factor is data – the IT migration and the integration of client and product data into the acquiring bank’s IT systems. These are two distinct operations but the speed at which they are carried out is decisive. As regards the IT migration, banks that have control over their own systems have a clear advantage over those that have outsourced their IT management. They can define their own priorities and, if necessary, step up their resources to keep the deadlines, which are very tight because as long as the migration is not completed, neither is the integration. And as long as the integration is still pending, the staff have to work on different IT systems and will not have access to all the information about all the clients.

Those five ingredients are essential but there is no definitive acquisition recipe. Every integration is a new challenge and when it succeeds, it gives us a little more experience to bank for the next time.

Ian Cramb Ian Cramb
Chief Operating Officer

Hedge funds

UBP is one of the longest-standing investors in hedge funds and a leading European player in the sector.

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