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When it comes to financial services M&As, putting it together means incorporating technology assessment and standards into the due diligence process.

Pundits have long predicted that structural changes in the banking sector combined with advances in information technology will lead to industry consolidation. Now that a greater degree of optimism has returned to the stock markets, there's a little less talk and a lot more action (See sidebar, "July Heat," on page 32).

The frothing deal market among the smaller players may foreshadow another wave of mergers among the largest banks. If that's the case, then financial institutions such as Wachovia and RBC Financial Group hope to internalize the lessons learned during the mergers in their respective recent pasts in order to prepare themselves for whatever may come.


Mega-mergers require a completely different mindset and organizational strategy than do in-market, roll-up acquisitions by smaller players. In the front-page, high-stakes world of big-bank M&A, management teams face incredible pressure to set a long-term strategic direction for their new company while meeting the short-term expectations of the various stakeholders-customers, employees, shareholders and regulators.

Under the klieg lights, it's alarmingly easy to assume that the respective information systems of the two merger partners will work together as planned. For most banks, technology and operations comprise the second-largest expense following salaries.

That being the case, it's amazing how little the typical acquirer knows about the systems being purchased along with their acquisitions.

Traditionally, dealmakers haven't been on the most familiar terms with best practices in systems integration. "It's scary-rarely did technology come up in conversation," says Dominick Cavuoto, president of global financial services, Unisys Corp. (Blue Bell, Pa.), and a former senior vice president of technology and operations at Bankers Trust. "It was viewed as an integration issue, not an M&A issue."

Unlike trucks, heavy machinery or even power plants, information technology holdings have long been a big question mark during "what-if" merger strategy sessions. Even during the due diligence phase, there's only so much that banks have been able to find out about their prospective purchases. "If you want to do the right level of due diligence, you need a thousand people who know about the deal," says Cavuoto. "Generally, you can't do system comparisons until you can get the deal to go forward."

The result has been entities such as Citigroup, which immediately following its creation in 1998 was described as "a network of mini-fiefdoms that didn't have uniform standards, technology, or accountability," according to "Tearing Down the Walls," a new biography of CEO Sandy Weill (See "The Closing Line," pg. 50). Indeed, it's a testament to the logic of the underlying deal that Citigroup has been able to succeed despite the daunting technological obstacles of large-scale merger integration.

But the outlook for technology assessment in M&A might be changing. With the use of systems that keep track of IT assets and the underlying workflows driving businesses, banks can better prepare themselves for future headline deals while also gaining operational efficiencies that might make those combinations occur on better terms.

Still, executing a bank merger isn't quite like playing with Lego toys just yet. It's an undertaking that requires careful planning and fastidious execution. Fortunately, bank executives presiding over recent mergers have learned from the mistakes of their predecessors, and have given technology and operations a central role throughout the M&A process.

Wachovia Corp. (Charlotte, N.C., $364 billion in assets) is the result of a merger between the "legacy" Wachovia (assets: $74 billion, 1Q01) and First Union (assets: $253 billion, 1Q01). The management team had plenty to do before the merger was consummated in September 2001, such as fending off an unwanted bid from SunTrust, divesting branches to achieve regulatory approval, and terminating Wachovia's agent bank relationship with Bank One.


But after the merger, Wachovia's CEO Ken Thompson (former chairman and CEO of First Union) sent out a clear message: Nothing was more important to the company than merger integration. To back up his point, he named as co-heads of merger integration Bob McCoy, former CFO of legacy Wachovia, and David Carroll, former chief e-commerce and technology officer at First Union.

The combined entity had to make some difficult choices about which of approximately 969 systems to keep. "We bundled those applications and we formed assessment teams based on the business requirements," says Carroll. Each team had to choose between two bundles, based on how well each would help the business unit to meet financial targets, while having a minimum impact upon customers. "We only had one recommendation that wasn't unanimous between the two sides," says Carroll. "That's rare."

The experience taught Carroll valuable lessons for future deals. "The watchwords are planning, testing and training," says Carroll. "We won't start building until we have a crystal-clear business plan and business requirements." He also emphasizes his close work with Jean Davis, who heads up IT, e-commerce and operations.

But the lessons of the past might not always prepare an organization to purchase the organization of the future. Specifically, if Wachovia, which maintains its own IT infrastructure, were to consider a merger with a bank that fundamentally outsources everything, the combination would require some hard decisions. "Unless we had some 'burning bush' revelation and said, 'Oh gosh, let's just outsource all of our stuff, too,' then you've got an added financial hurdle to break that outsourcing contract," says Carroll. "Or, you've got to keep it, in which case you're then running dual platforms and not getting any efficiencies-not to mention what that might imply for your clients having to deal with two different sets of products, procedures, or whatever."

Even kicking the tires has to wait when the target has nothing to show but a contract. "You get to walk through data centers and stuff like that, but if you're in the due diligence phase in a confidential transaction, you can't even do that," says Carroll.

As such, there would be an additional layer of uncertainty before such a deal could be consummated. "It can lengthen the due diligence and lower your confidence level on the outcome, because you can't ever get into a vendor and do the kind of assessment that you can in a partner company," says Carroll. "If a material part of their operations are managed by somebody where we can't see anything other than the contract, that lowers my confidence rating."

Still, there are some ways for potential acquirers to get a sense of what would be involved in such a merger. "Look at the number of people transferred" from the bank to the outsourcer, says Michael Blum, a partner with the business consulting services group at IBM (Armonk, N.Y.). "If it's 4,000 people, it's a significant data processing organization."

Other clues include whether data facilities were built specifically for that deal, the locations of those facilities, and the information available about the tax incentives given to the firm by the countries, states and municipalities involved. "It's hard-to-find information," adds Blum.

Turning the hypothetical deal around, banks that outsource their IT infrastructures may be able to contemplate acquisitions with relatively fewer headaches. "If your architecture is set up for 'on-demand,' it's an open standards environment," says Blum. "It should be a lot easier to take on systems with similar standards."

But that's only part of the M&A picture. "In some respects it's gotten easier and in other respects it's gotten more complicated," says Marty Lippert, vice-chairman and CIO of RBC Financial.

Lippert should know. During his tenure at RBC Financial Group (Toronto, assets: $398 billion), he has presided over an expansion strategy involving 10 completed acquisitions in the U.S. affecting an additional 2.4 million new customers.

Standards have definitely made the job easier, Lippert notes. "Internet-based applications and development in J2EE and .NET have made some of the integration issues a bit easier, in that the XML kinds of languages are a bit more straightforward in terms of our developers being able to get their arms around them."

Yet complexity rears its head elsewhere. "The security issues have gotten a lot more complicated than what they had been in the past," says Lippert. "We do a 'deep dive' on that one."

Starting at the due diligence stage, RBC takes particular note at a potential target's Internet firewalls, patch levels and intrusion-detection procedures. "The security infrastructure that an acquired company may have becomes a very important element of due diligence with respect to how quickly you can look to begin integrating and leveraging that acquired company into the parent," says Lippert.

In executing a cross-border M&A strategy, the technology issues take a back seat to other concerns. "It isn't so much technology that ends up being our inhibitor with respect to speed," says Lippert. "It's two different regulatory jurisdictions that we're operating in."

For that reason, RBC has supported many of its out-of-market acquisitions using the software platforms obtained through prior deals. "As we've acquired various banks in the United States, they're all consolidated onto the RBC Centura banking platforms," says Lippert. RBC Centura Bank (Rocky Mount, N.C., 2Q01 assets of $12 billion) was acquired in June 2001.

Similarly, when RBC acquired U.S. brokerages Dain Rauscher (Minneapolis) and Tucker Anthony (Boston), it did not attempt to merge them into its domestic Canadian brokerage system, but rather merged them onto Dain Rauscher's systems.

Although in-country mergers would be easier for RBC to contemplate from an IT standpoint, a June pronouncement by the Canadian finance ministry instituted a cooling-off period of 15 months before Canada's five largest banks can seek regulatory approval to merge with one another.

Even so, RBC carefully designs its home-market systems for anticipated growth. "We spend a very defined part of our architectural design process on the scalability issues associated with what we're building," says Lippert. Indeed, RBC tests its scalability at IBM's Gaithersburg, Md., testing facility, where it simulates transaction volumes at a multiple of their actual levels.

While preparing for expansion, RBC and the other Canadian financial institutions can take the regulatory delay as an opportunity to sway public opinion in their favor and to develop IT architectures that would enable smoother business combinations if and when the green light is granted. But what might these IT architectures look like?

To begin, meticulously tracking the various IT resources available to an organization not only protects against rogue software but also enforces a clean, M&A-ready shop. That's what Opsware (Sunnyvale, Calif.) has done for MetLife, which consolidated 10 data centers into four using the software. Another client is EDS (Plano, Texas), which recently licensed the Opsware platform for use in its own operations, in a $52 million, three-year deal. EDS' use of Opsware on its 50,000 servers should allow the company to increase its server-to-administrator ratio by a factor of five (from 15:1 to over 75:1).

Inventory isn't just for machines. It's also for business processes, which is the promise of Business Blueprinting, a technology strategy promoted by Unisys, in partnership with IBM, for business integration and software development tools, and Microsoft (Redmond, Wash.), for .NET development tools and server products.

Blueprinting is a descendent of 1980s-era computer-aided software engineering (CASE) tools, which attempt to generate software based on the diagrammatic representation of a business. So instead of adding custom computer code to accommodate new customers or products, just change the blueprint-which in turn will generate new code automatically. To the extent that the blueprint can accommodate all of the possible forms of an enterprise, use of such tools can help senior-level management to gain greater control over the development process.

Unisys customer ING Group (Amsterdam, $471 billion in assets) has gone to great lengths to create a blueprint for insurance. "Technology-based business blueprinting allows organizations with diverse operations and geographic presence to achieve greater operational efficiencies," according to Age Miedema, chief operations officer for European insurance operations, ING Group. "We expect to move current and prospective products to market with considerably greater speed, all while providing better service to our customers and distribution channel partners."

Two banks having detailed, functional blueprints might pull off an Internet-speed merger. Combine the blueprints together in the same computer model, drag any redundancies to the recycling bin, press "Build," and voila!-a new company is born, with fully integrated, scalable systems from day one. Maybe even new business cards, too. And that would make for a fairly fearsome competitor.

Key Principles of a Successful Merger
David Carroll, co-head of merger integration at Wachovia, offers the following advice for anyone putting together two banks:

- Identify the major cost drivers: scalability, efficiency and volume. "You may have a system that's very efficient at one volume but incapable of the same level of efficiency if you triple the size of the throughput," says Carroll.

- Perform a "black hole analysis." That's an attempt to identify potentially catastrophic integration risks, such as having to replace a long-in-the-tooth mainframe operating system or aging data center.

- Look for cultural differences within IT. "We may have good deal economics and we may not find any catastrophic risks, but we may say either philosophically or technologically, these groups are so far apart that we're going to have a lot of risk with integration," says Carroll. That's a risk stemming from the nature of the IT profession. "Technologists tend to be passionate about what they do and their beliefs," he adds. "Sometimes they have a binary view of the world."

- Maintain good operational hygiene. "You need to have good, current business practices around reconcilement, documentation, all the things that would lead to someone being 'accused' of running a great shop," says Carroll. "It's a lot easier to put two 'clean' shops together."

July Heat

Bank Merger Deals Announced in July 2003 Included:

Acquirer Acquiree
BOK Financial (Tulsa, Okla., assets: $13 billion) Colorado State Bank and Trust (Denver, assets: $316 million)
Sky Financial Group (Bowling Green, Ohio, assets: $12.7 billion) Great Lakes Bank (Cleveland, assets: $206 million)
Wintrust Financial Corp. (Lake Forest, Ill., $3.9 billion) Advantage National Bank (Elk Grove Village, Ill., $104 million)
BancFirst (Oklahoma City) assets: $2.8 billion) Lincoln National Bank (Oklahoma City assets: $117.1 million)
Prosperity Bancshares (Houston, assets: $2.0 billion) MainBancorp (Dallas, assets: $196 million)
Southern Financial Bancorp (Warrenton, Va., assets: $1.1 billion) Essex Bancorp (Richmond, Va., assets: $379 million)
BancTrust Financial Group (Mobile, Ala., assets: $700 million) CommerceSouth Banks (Eufala, Ala., assets: $320 million)
Cascade Bancorp (Bend, Ore., assets: $685 million) Community Bank of Grants Pass (Grants Pass, Ore., assets: $50 million)
Vineyard National Bancorp (Rancho Cucamonga, Calif., assets: $600 million) Southland Business Bank (Irwindale, Calif., assets: $33 million)
Source: PRNewswire

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