Unite And Conquer

When First Union and Wachovia decided to become a single financial services company through a merger of equals in April 2001, executives were already thinking about integration. Across the industry, consolidation had been running rampant for at least a decade, and between the two companies, they had already conducted more than 100 mergers. As a result, they were keenly aware that the integration process could make for either a successful merger or a nightmare that could drive away customers and cost millions of dollars.

Bob McCoy had been CFO at premerger Wachovia, but he and David Carroll, former chief E-commerce and technology officer at First Union, were quickly named co-heads of merger integration at the new Wachovia Corp., whose total assets tip the scale at $342 billion. A quick study of the post-acquisition histories at both banks taught McCoy that a successful integration effort had to abide by three basic rules: He couldn't try to do too much at once; the most effective applications would be the ones that stayed; and every business unit needed to be involved by lending members to the merger project.

McCoy and Carroll were given charge of the team, working with 100 employees to pull together more than 1,000 applications and a joint customer base of 20 million to make Wachovia the fifth-largest financial services company in the country within three years. "We have to take our time, but do it fast," McCoy says. "Our priority is that we do it in a way that has little impact on our customers, but we know that Wall Street won't stand for us to take too long to get the savings" from cost efficiencies promised to investors.

The financial services industry has been consolidating into an increasingly smaller group of multibillion-dollar conglomerates that offer customers the full gamut of money management opportunities. But it's an industry fraught with proprietary software, systems handling millions of transactions, hundreds of lines of businesses, and customers who won't hesitate to take their money elsewhere. But after years of experience, the best firms are getting the hang of how to bring billions of dollars in assets and technology together.

The payoff is real, says Guillermo Kopp, director of financial services strategies and IT investments at advisory firm TowerGroup. The potential cost savings on technology, which generally accounts for 15% of operational expense, can make an argument for consolidation much more convincing. "A merger is likely to produce a 30% opportunity in IT cost reduction," Kopp says. "And there's the multiplier effect: If you do these consolidations right, for every dollar you save in IT, you can save up to $7 in other operational expenses."

J.P. Morgan Chase & Co., the second-largest U.S. financial services firm, with $693.6 billion in assets resulting from the 2000 merger between J.P. Morgan and Chase Manhattan Bank, is experiencing benefits beyond immediate cost savings as it makes the transition from the second to the third phase of integration. Phase one, the bolt-on phase, involved gluing the business units together by selecting the best-of-breed technology from the two IT shops. J.P. Morgan is now moving from phase two, rationalization, to phase three, optimization. For rationalization, the company works toward using only one of each technology; for optimization, it finalizes the optimal model for each business process.

It's in the optimization phase that the advantages of a merger crystallize, says Mike Ashworth, CIO of J.P. Morgan Chase's investment bank. The merger forced the new company to scrutinize the efficiency of its entire technology operation and improve it by selecting and building on the best technologies available. One fruit of its labors is J.P. Morgan Chase's SwapsBack project, which optimizes the integration of the two companies' interest-rate swapping systems. During the bolt-on phase of the merger, all swap transactions were moved to Chase's platform because Chase housed the larger number of swaps and the transition needed to be completed by the preset integration deadline. Once the integration dust settled, J.P. Morgan Chase migrated the SwapsBack system to J.P. Morgan's platform, which proved to be the better bet because it's Unix-based and thereby cost-efficient and flexible, Ashworth says.

Much planning and calculating went into that decision. "You look at everything from running costs across the two systems to flexibility," Ashworth says. "This is a product area that continues to evolve for us, and we need to be able to add new features."

J.P. Morgan Chase will wrap up development work on the SwapsBack project this year and move 30% of the transactions to it by year's end. Once it's complete, the company expects to save more than $10 million annually while improving customer service.

Such returns are what banks are looking for from IT departments when they merge. But it doesn't always work out that way. Analyst Kopp breaks post-merger integration strategies into four categories: the best-technology approach and the business-process approach, both of which can work well, and the gap-analysis approach and the museum approach, which aren't as great, he says. Gap analysis, which involves the extensive evaluation of different migration strategies, potential outcomes, and best practices, isn't advisable because the exercise is tedious and takes too long, cutting into cost savings. The museum approach--the worst option, Kopp says--is centered on merged companies keeping operations running on all their different systems. This approach is typical of companies that are vertically organized across geographies and are resistant to change, Kopp says, though he declined to cite specific examples.

Some of the most successful acquisitions have used the best-technology approach, Kopp says, in which the best practice and system are selected and standardized and all applications are migrated to that platform, as occurred in the Citibank acquisition of Salomon Smith Barney. "At times, this approach requires dueling it out on features and functionality, but from a dollars-and-cents perspective, it works," he says. "With Citibank and Salomon Smith Barney, the best brokerage platform was at Salomon, so now all retail transactions run on that platform, end of story."

Wachovia has been using the best-technology approach for its integration efforts, but with a keen eye on what changes would impact the most customers. Within months of disclosing the merger, teams of Wachovia and First Union IT workers in each line of business were charged with selecting systems, keeping in mind what the future business was going to look like, the volume of business the systems would have to handle, and how many customers would be affected by a migration.

For the deposit system, it was easy: First Union had nearly four times the number of deposits coming in, so it would be more disruptive to migrate all of them to Wachovia's deposit system. But Wachovia had a brand-new data center in North Carolina. The decision was made to move all the mainframes from First Union's data center in Florida because the newer data center would be better able to handle high volumes. "We had to have the systems operating well and up all the time, and we knew we'd be putting a lot on them," McCoy says.

J.P. Morgan Chase was much the same. In evaluating technologies for the bolt-on phase of the integration, the process was twofold: First, look for what applications could best map to business strategies, then select the best-of-breed application that fits within each strategy. For the foreign-exchange business, that meant selecting Chase's systems because Chase was the market leader and had a stronger installed base and scalable technology.

But sometimes the answers aren't so obvious, says J.P. Morgan Chase's Ashworth. "In terms of pure functionality, one app may be better, but the integration cost might be high, so it's better to take the other app and upgrade it," he says. Helping the decision process, developers can learn how to improve an application by studying the features of the former competitor's solutions. "We're capturing the intellectual property buried in applications by doing our business analysis," Ashworth says.

Other integration approaches can work, too. Take the Bank of America and NationsBank merger, in which technology decisions were made using the business-process approach, whereby technology becomes the enabler of improved business performance, TowerGroup's Kopp says. "It's not asking how to consolidate two systems; it's asking how a company can consolidate two sales processes and then how technology can back that."

The risks are high during a post-merger integration. A single outage will turn customers away, with the merger serving as the scapegoat, so McCoy's team at Wachovia has to keep an even tighter relationship with all its vendors and partners. Should Visa or MasterCard have outage problems not associated with Wachovia, customers will still blame the bank and the merger. "We have to be supersensitive to these issues to be sure problems are fixed right away," McCoy says. "If ATMs go down in Georgia, we have to know the cause right away" and work closely with vendors to fix it, or risk having customers take their business elsewhere.

Banks will seldom admit they've made mistakes in these massive undertakings or project future merger activity, but the steps J.P. Morgan Chase and Wachovia have taken might ensure post-merger acquisitions are at least as easy. J.P. Morgan Chase has documented the formal lists of questions asked during each technology-selection process and put all the lessons learned in a playbook; Wachovia has a manual with inserts from each line of business as decisions were made and project processes established, which will come in handy for the integration team handling last month's acquisition of Prudential Securities--smart tactics in a merger-intensive industry moving fast toward Internet-based business and industry standards.

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This article originally appeared in InformationWeek, a weekly magazine that combines the goals of business with technology to help you make the strategic decisions that affect your company's bottom line. Visit InformationWeek at: www.informationweek.com