CutterAdvantEdge

Issue 68, June 2009

Mergers and Acquisitions: Now What?

Mergers and Acquisitions strike fear into the hearts of systems and operations professionals, who anticipate longer hours, increased stress, and greater job uncertainty. Effectively integrating two or more asset managers means properly controlling time, cost, and risk through impeccable planning and execution. At Cutter Associates, we have seen mergers produce unnecessary, increased operating costs and operational risk due to a lack of process and discipline. In some cases, the task of creating a new operating model was further complicated by struggles over control and job preservation.

In determining how best to approach developing an operating platform for an acquisition, firms have three choices:

The acquiring firm quickly migrates the acquired firm onto their existing platforms
The firms rationalize the existing platforms and establish a consolidated operating model for the combined organizations
The acquiring firm simply leaves all systems, processes, and people in place at the acquired firm

Migrating to the Buyer’s Platforms

When the acquiring firm migrates the acquired firm onto its existing platform, the process and methodology are fairly straightforward. This choice is initially costly and time consuming, but once implemented, ongoing operations and systems costs are typically the lowest because in the end there is only one operating and system platform to support. The process is similar to the way we at Cutter Associates perform systems and operations strategy projects, and it involves the following steps:

Gathering and documenting the acquired firm’s requirements
Evaluating the target environment and its ability to meet those requirements
- The evaluation can lead to process optimization on the target platform
Documenting gaps and the actions needed to close them:
- Retaining some products from the old platform
- Enhancing the target platform
- Building components
- Detailed planning of roadmaps and project management
- Executing

Migrating to the buyer’s platforms can also mean fewer cultural issues because the acquired firm typically adopts the buyer’s culture. There will inevitably be staff redundancy issues because the combined firm no longer needs staff to support the retired infrastructure, but staff can also be retrained to support more value-added business functions.

Merged Platforms

When firms build a new operating model by combining components and processes from both entities, execution is much more complex and difficult to manage. Not only does it require more technical analysis, but the acquiring firm must also invest time and money to understand other aspects of the combined entity, including the location and retention of staff and the resulting combined culture of the new organization. CutterConsulting employs the following processes to ensure an orderly transition:

Understand the current and future business models
Before creating the combined operating model, it is crucial to determine the details of how investment products will be managed: how they will be merged, distributed, and changed, and how those decisions affect assumptions about growth.
Inventory existing operating platforms across both business models
It can be difficult to completely understand what all of the investment processing components are and where they live. Understanding mainstream products like Accounting and Trade Order Management is usually straightforward, but other mission critical tools in the business can be harder to find and understand. For a proper assessment of the current state, however, all components need to be identified and then categorized for analysis and comparison.
Analyze the components
Establish the strengths and weaknesses for each component against the requirements established for the category. Factors in the analysis include product functionality, analysis, and cost.
Build the target operating model
Build a target operating model that takes into account the target business model as well as the system component analysis. The target operating model should include component identification, data and workflow designs, and process definitions that focus primarily on recommended changes from existing process models. Once it has been determined which elements of each firm’s infrastructure are to survive in the combined firm, an organization structure needs to be created that will effectively and efficiently exercise these capabilities to gain the most value from them. This is an opportune time to re-think the organization model to achieve efficiencies in the labor force. While there is no single “best way” to structure an organization, most firms responding to a recent CutterBenchmarking survey have adopted a centralized approach for both their Operations and IT groups. Smaller and single-office firms will adhere to this model by definition; many large firms prefer this approach for its simplicity of design and straightforward lines of communication.

organizational models

Other, less tangible issues must also be understood to ensure success. For example, the cultural impact of the change needs to be handled in a way that minimizes negative effects. The strategy should include clarifying people’s roles in the new organization and developing consensus throughout the process.

Leaving Things as They Are

The final strategy has been the most common—leaving all systems, processes, and people in place at the acquired firm. Holding companies have been active buyers of investment management firms, and they have frequently used this model because no change means no up-front cost. But with industry revenues down, supporting multiple operating models within the combined entity often results in much higher ongoing fixed costs and more difficulty and complexity in understanding and managing risk.

Conclusion

a consulting perspective Cost control, efficiency, and risk management have become the investment management industry’s operating and financial drivers. In light of this, what strategy will your firm follow? If one firm is much larger than the other, the larger will most likely move the acquired firm onto its existing platforms. This is the quickest path to creating a single, integrated company, which is what senior stakeholders are looking for. If the firms have little in common but are hoping to complement each other’s strengths and cross-sell product to each other’s clients, the entities will probably be left intact. This approach offers lower risk and provides management more time to create an organization that appears seamless to its clients. Most situations, however, are not as clear-cut, and many combined companies adopt the merged platforms approach, which requires the greatest investment in preparation and planning, with time spent rationalizing infrastructure in light of new market demands and existing legacy constraints. Whatever happens with individual mergers and acquisitions, the norm for the industry is likely to become a more centralized operating model, especially for the middle and back office functions.

Finally, “leaving things as they are” will no longer be viable as holding companies will be forced to a more centralized model in order to be cost competitive and better able to manage risk.

With the largest knowledge base in the industry, gained through its three business lines of Research, Consulting and Benchmarking, Cutter Associates has successfully helped many asset managers make practical sense of the complex dilemmas that can arise out of mergers and acquisitions.