Pursuing merger value in financial services

A team led by Wharton's Harbir Singh has been examining how value is either created or destroyed through post-acquisition merger practices in both the U.S. banking and insurance industries. In the banking study, Singh and former student Maurizio Zollo, now an assistant professor of strategy and management at INSEAD, compiled data from 50 institutions covering more than 500 merger transactions.

Key findings

• In both banking and insurance, successful integrators view acquisitions as a continuing line of business rather than as ad hoc projects. Banks that standardize and codify integration practices tend to perform better than those that treat acquisitions as discrete ad hoc events. Successful acquirers pinpoint relevant lessons from previous acquisitions, codify those lessons into paper-based or electronic support tools, and constantly update these tools as their experience grows.
  
• Significant merger experience greatly increases the potential for value creation and the likelihood of merger success, especially if the experience is built on homogeneous acquisitions.
  
• Both in-market and out-market acquisitions exhibit similar chances of success, in spite of the fact that the primary mechanisms for value creation differ (cost efficiencies for in-market; revenue enhancement for out-market deals).
  
• The extent to which the target's management team is replaced negatively impacts performance. This suggests that negative factors—disruptions in processes, routines and personal motivation stemming from a change in leadership—tend to outweigh the perceived benefits of improvements instituted by new management.
  
• Conversely, the level of integration affects performance positively. The value created through the complete integration of the target within the acquirer's organization largely offsets the hidden costs and disruptions associated with the integration process.
  
• In the insurance sector, consolidation-related gains in efficiency are more prevalent than similar gains stemming from bank mergers.
  

In addition to Prof. Zollo's Ph.D. dissertation, the research results have been documented in three academic working papers. One of these papers, "The impact of knowledge codification, experience trajectories and integration strategies on the performance of corporate acquisitions," has been selected tobe part of the Best Paper Proceedings of this year's conference of the Academy of Management, and short-listed (among 10 out of more than 400submissions) for the McKinsey Award at the 18th conference of the Strategic Management Society. Also noted below is an executive summary "snapshot" highlighting key elements from the two papers.

Non-bank acquisitions—a new initiative

While Singh and Zollo continue to analyze the data gathered, they are also seeking to expand the data set to include "non-retail banking" acquisitions. Of particular importance, for both academics and managers, are the processes through which US banks attempt to create value from the acquisition of firms involved in the brokerage, mortgage lending, consumer finance and asset management businesses.

To this end, they completed field work during the summer with the help of aselected group of experienced acquirers in order to assess the characteristics and potential drivers of success in these types of acquisitions. Their objective is to develop a brief survey to be rolled out to the entire industry by the end of the year. The survey will allow them to gather the necessary measures for the type of statistical analyses needed to produce an objective description of the phenomenon and reliable indications for the industry as to what works and what doesn't.

"Strategies or Routines ? Knowledge Codification, Path-Dependence and the Evolution of Post-Acquisition Integration Practices in the U.S. Banking Industry"
Maurizio Zollo, August 1998

"The Impact of Knowledge Codification, Experience Trajectories and Integration Strategies on the Performance of Corporate Acquisitions"
Harbir Singh and Maurizio Zollo, August 1998

"Can Firms Learn to Acquire? Do Markets Notice?"
Maurizio Zollo and Dima Leshchinkskii, January 2000

"Executive Summary"
Harbir Singh and Maurizio Zollo, August 1998