After several weeks of anticipation, the merger between National Bank of Abu Dhabi and First Gulf Bank was announced last month. This followed the news of International Petroleum Investment Company’s (IPIC) merger with Mubadala, and speculation remains of other similar mergers.
While the markets ponder the merits of the proposed deals, it is perhaps also worth considering the more practical issues that a merged entity’s management needs to consider.
Mergers and acquisitions (M&A) are certainly a powerful and established way for large companies to accelerate their growth. The allure is clear - with scale should come revenue and cost synergies, as well as the ability to undertake larger, more ambitious initiatives.
In general, the market’s initial reaction to M&A tends to be positive, if the investment thesis is clear and reasonable. Investors will generally give companies the benefit of the doubt of being able to deliver. In the last three years, there were no fewer than six corporate transactions involving UAE banks, and in every case, the combined market capitalisation of the merged entities initially rose between 1-3 percent compared to the sector average, indicative of a thumbs up from the market.
However, in almost every case, the market capitalisation then slipped back to pre-announcement levels. This reflects the fact that it can often be very difficult in practice to realise the expected long-term benefits of a transaction. While estimates vary, typically, less than half of the deals deliver returns to shareholders that are above industry benchmarks, and in line with the original investment thesis.
Extracting values from such deals is tricky, so here are some practical considerations. First, make sure that the targets are realistic. Be reasonable about what is achievable and use that as the base case. This not only applies to the value of synergies, but also to the timing within which the synergies will be realised. Defining an achievable post-merger integration plan is critical. Do not set yourself up for failure from the get go.
Second, build momentum. This can take two forms: achieving visible wins in the first 100 days, and clearly setting out a roadmap of regular milestones. These can take the form of customer letters going out, alignment of staff titles, and plans for branch consolidation and brand unification. It is essential to capture wins early on as it sets the stage for the rest of the integration.
Third, focus on communicating and retaining your customers, both corporate and retail. They are ultimately the people that pay the rent and the dividends. During uncertain times, it is easy to lose customers, especially in competitive markets.
Fourth, make the important human resources decisions up front. Be very clear about both the board and the management of the new entity. Decide any staff synergies as quickly as possible. This does not mean that these decisions have to be implemented immediately. Whatever the strategy is, though, be deliberate, communicate and execute. Uncertainty will cause management and staff to focus on worrying about their futures, detracting from performance at a time when it is most important.
Fifth, ensure the top team is aligned with how the new entity is structured. If it is a merger of equals, then the top management team should be equally split between managers of the two former entities. Ideally, it should not be seen as a takeover but a true merger.
Sixth, relentlessly focus on realising synergies. A common failing is that cost synergies are identified early but never fully realised. Optimising a branch network or rationalising IT spend are typical avenues, but they only work if they are properly followed through. Revenue synergies are also a lot more difficult to realise (for example, through cross-selling complementary products), but they are equally important.
Seventh, do not ignore culture: it can make or break things. If not dealt with early on, this can potentially become one of the biggest challenges in realisation of synergies. As soon as an “us versus them” mentality sets in, the mission is doomed.
Lastly, be laser focused on any steps to be executed to get the combined businesses up and running For example, exchange memberships, IT systems changes, user training.
This should happen even before efforts to realise synergies, so that the staff can get back out in the market and are not tempted by the siren calls of the head-hunters who will inevitably circle them, aiming to pick off disaffected employees.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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