Financial services firms are looking to inorganic growth opportunities to accelerate transformation. And that puts M&A and corporate development teams on the front line of the transformation strategy. Are they ready?
As the pace of disruption picks up speed and traditional sources of value start to shift and dissolve, many financial services executives recognize that 'more of the same' is no longer a sustainable strategy in the long run. Transformative changes must be made. They must be made quickly, and they must be executed strategically.
The most prudent also understand that the type of transformative change they require to compete in today's rapidly evolving industry can't be achieved through organic growth strategies alone.
That has led many financial services CEOs to look outside their organization for new sources of inspiration for achieving their transformation objectives. In fact, in a global survey of financial services CEOs conducted by KPMG International, 46 percent said they now see inorganic growth strategies as the fastest way to transform their business and operating model.
...46 percent of financial services CEOs said they see inorganic growth strategies as the fastest way to transform their business and operating models, according to KPMG International's CEO Outlook survey.
The sprinters have left the blocks
Many have already started focusing on executing the type of acquisitions, divestitures, alliances and partnerships that they hope will enable them achieve their transformation objectives. Our view of the market suggests that the insurance industry — generally speaking — has been relatively more active in this regard; many of the larger banks are only just starting to catch up (particularly around the payments part of the business).
Yet KPMG professionals' conversations with financial services executives suggest that many of those at the forefront are increasingly finding themselves struggling to convert their desire for transformative deals into actual results and value. Several deals and partnership agreements are being contemplated or have been signed. But, for the most part, not much has changed from a transformation perspective. Frustration levels are rising, as post-deal transformation remains a challenge.
Our view suggests that banks and insurers could be doing more to ensure their transformative deals actually enable the desired transformation, and deal execution is geared towards maximizing and accelerating synergy capture and value creation.
...when making deals for strategic transformation purposes, 'value' is typically perceived from a longer-term perspective, and thus becomes much more difficult to define and measure.
Taking a new view on value
The problem, in our experience, is that far too many banks, insurers and asset managers continue to approach transformative deals and partnerships as if they are no different from the deals they have done in the past.
The reality is that they need to be approached differently. The vast majority of deals historically were focused on achieving scale. In those situations, 'value' was measurable from a short-term perspective in terms of synergies achieved and market share gains. But when making deals for strategic transformation purposes, 'value' is typically perceived from a longer-term perspective, and thus becomes much more difficult to define and measure.
The first step, therefore, is for financial services CEOs and their M&A and Corporate Development teams to clearly define future ambition and design executable strategies that align with and enable the organization's transformative goals.
Defining future ambition
Everything should link back to value. Understanding the 'true' potential value of an acquisition or partnership can give CEOs more confidence going into a deal and help ensure that their M&A and Corporate Development teams achieve the value that was expected at the outset.
More than simply working with the business leaders to define and understand their future ambition, the key to success is in using that information to reorient the way the deal makers think about everything from deal origination and valuation through to structuring and integration. It's about making sure there is strategic alignment between the business leaders and the transformative deals being pursued.
The pitfalls of making deals without this critical first step are myriad and far too common. We have seen financial services firms snap up unique fintech companies only to squash their uniqueness with bureaucratic controls and force-fit cultures. Others have invested early into innovative technologies and then failed to appropriately integrate and scale the innovation across the enterprise.
The truth is that even the most tough-minded business leaders can 'fall in love' with a potential acquisition target and misjudge its present worth, potential value and long-term suitability as a strategic acquisition.
Those that get this first step right, however, are the ones that make sure the 'front end' of the dealmaking funnel is pointed in the right direction to achieve the organization's strategic transformation objectives. They are targeting investments they already know they can integrate into their business. And they are buying assets they are confident can scale and adapt as the organization grows.
Designing executable strategies
Sourcing the right strategic deal and partnership opportunity is one thing. The ability to strategically integrate them in a way that enables the organization to transform and deliver the value expected is another thing entirely. But here, too, CEOs and their M&A and Corporate Development teams have a critical role to play. More often than not, deals are signed and then 'tossed over the wall' for the business leaders and functional executives to deal with.
KPMG member firms' work with leading financial services institutions suggests that not enough time is spent working with business leaders and other internal stakeholders to plan ahead for the integration prior to signing the deal. Successful integration of deals that are done for strategic transformation purposes require strong leadership, robust governance and relentless orchestration across the enterprise — addressing critical people, process, systems and (perhaps most importantly) cultural issues.
Clarifying the degree of integration and level of effort required to maintain focus on value realization, problem resolution and value creation is typically underestimated. Addressing cultural issues in both the acquiring company and the acquired company will help accelerate the transformation of the organization towards 'acting as one'.
In our experience, post-deal business transformation and integration initiatives require well-informed decision-making processes with respect to the strategic choices to be made for the combined organization. Identifying integration options for the prioritized operating model choices (varying the degree of integration and the sequence of integration) is critical for maximizing and accelerating synergy capture and value creation.
Clearly, each deal and partnership opportunity will be different; understanding and responding to the nuances of each situation will be key. It is therefore important to have the ability to track — and the agility to 'course correct' — any deviation to the proposed value creation plan and attainment of the defined future ambition.
Ultimately, the point is that more work needs to be done at the front-end and at the back-end of the deal to ensure that the deal and/or partnership enables the desired transformation and value is achieved. If transformation is the ultimate goal, the days of simply 'doing deals' and 'tossing over the wall' are over.
Successful integration of deals that are done for strategic transformation purposes require strong leadership, robust governance and relentless orchestration across the enterprise — addressing critical people, process, systems and (perhaps most importantly) cultural issues.
Ready for what's coming
Financial services institutions are expecting their M&A and Corporate Development teams to help them deliver on their transformation objectives.
Those who are quick to adapt their deal-making and partnership strategies to reflect the transformation objectives of the organization — from deal identification through to post-deal integration — will not only be better placed to achieve the transformative value they expect, they will also be better placed to pivot as the markets shift.
Those serious about delivering transformative outcomes, therefore, may want to start by talking to their deal-makers on how to enable organizational transformation.
Other articles in Frontiers in Finance - October 2019
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- Paytm: Solving problems to create opportunity
- Capturing the benefits of simplification
- Voices on 2030: The Future of Financial Services
- Agility with discipline: Transforming MUFG's Transaction Banking business
- Connect to compete: Delivering the next-gen target operating model
- Does banking's future outweigh its past?
- Spotlight: Goldman Sachs breaking new ground with Marcus
- Next-generation banking technology and tax implications
- AI offers the smartest solution for transition to RFRs
- Tax, transfer pricing and transformation: What Asset Managers may be forgetting
- When opportunity comes calling: Using the deferral of IFRS 17