Post merger Integration
The results of a survey by Best Practices LLC have revealed that post-merger integration is critical to the success of the merger   

In 1997, NationBank acquired Florida-based Barnett Banks Inc. for $15 billion, an amount that was worth 4 times the book value of Barnett. NationBank found itself in a situation common to several other companies involved in mergers and acquisitions – since it had paid such a high purchase premium, it was under pressure to carry out the post-acquisition integration in the shortest time possible. NationBank adopted a shortcut to create value by cutting costs. However, the strategy did not work, and further, most of Barnett’s customers left.

In April 1998, NationBank merged with Bank of America to create a nation-wide banking company. NationBank’s strength lay in Southeast USA, Texas and the MidWest, while Bank of America dominated in California and the Pacific Northwest. Moreover, Bank of America also had a good presence in credit cards, mutual funds, Internet banking and corporate finance.

The merger, finalised in September 1998, did not succeed immediately. In August 1998, the Russian debt crisis had caused Bank of America to write off $372 million from a $1.4 billion unsecured loan to D.E.Shaw & Co, an investment firm. Bank of America suffered further trading losses amounting to $350 million, in the third quarter of 1998.

However, Hugh McColl, the CEO of NationBank, having learnt from previous failures, was determined to make the merger succeed. Since it was a merger of equals, no purchase premium had been paid, and there was therefore no immediate pressure to deliver. Therefore, the post-merger integration process was implemented in a phased manner. The developments until date include the consolidation of the large corporate businesses and asset management businesses of both banks, conversion of branches in the southern US to adhere to a uniform model, and a new corporate logo. Branches in California (the largest and most critical market), Oregon and Texas will be converted to the new model by 2001.

The market responded positively. The merged entity, which had retained the name Bank of America, gained a market share of 6% in consumer loans and deposits, and 13% in corporate loans. Its overhead reduced by $1 billion in 1999 and its efficiency ratio (amount spent per dollar of revenue collected) dropped from 56.5%-53.5%. Bank of America earned a return on equity of 19.6%, in the beginning of 2000.

3 keys to successful integration

In 2000, Best Practices LLC undertook a survey to identify the best practices in mergers and acquisitions. The survey involved interviewing the top management of 50 leading companies, and identifying the best practices in integration planning.

Issues involved in post-merger integration ranged from managing cultural differences to integrating employee compensation and benefit systems to standardising operations. The key elements identified for successful post-merger integration are as follows: -

1. Vision: -  According to the survey, in many successful mergers, as soon as the merger is announced, the companies form an integration team, which acquires information from the managements of both companies about their expectations. Senior management executives in both companies also have discussions on the future vision, goals, values and policies of the new company. This plays a key role in designing a vision for the new entity.
   
   While creating a new vision, emphasis should be laid on ensuring that integration leads to enhanced shareholder value. Moreover, the information gathering process ensures that there is less resistance to change, which speeds up the process.

2. Strategic Leadership: - The next important thing is to appoint a key executive, who has the ability and influence to organise resources to carry out a smooth transition and integration. The executive is responsible for the entire integration process, from planning to implementation. Often, this leader also happens to be the head of the joint integration team.
   
   Alternatively, there can also be a separate head for the integration team, who forms a link between the operational level and top management, and who reports directly to an executive sponsor.

3. Action Plan: - Successful mergers have in common a comprehensive plan and implementation process that is effective and also shortens the integration period. The plan should have clear-cut definitions for various responsibilities, and should be periodically reviewed by the integration team.
   
   The integration process should be streamlined to increase efficiency. For instance, General Electric's Capital Services has such a streamlined integration process, known as the "pathfinder model", while Synopses, an engineering software company has a process known as the “People-Product-Process” Model.

Conclusion

Companies should look at mergers as a means to achieving the greater aim of growth and competitive advantage. An important prerequisite to fulfil this goal is to have a comprehensive strategy for the new entity, which outlines its future direction. The strategy should take into account the changes taking place in the industry as well as expectations of employees, customers and shareholders. Thus, successful post-merger integration will lead to a competitive advantage in the new market scenario.

Related reading:
M&A Integration Excellence Report : Anonymous : Best Practices Database Awaiting Results : Milligan, Jack : The Daily Deal