While most bank mergers begin with high expectations on synergy benefits, various studies indicate that, unfortunately, three quarters of mergers fail to create value. Bank mergers are often difficult and result in varying degrees of success. From our experience, mergers are challenging to execute and manage. Some of these challenges, when not addressed properly, have led to sub-optimisation of perceived merger benefits.

In assisting numerous banks in post-merger integration, we have gained insights on the pitfalls to avoid, and keys to success in capturing merger benefits effectively. In this first part of a series of two articles, we discuss major sources of benefits and related challenges.

The key sources of merger benefits are derived from revenue synergies and cost savings. Additionally, mergers may create strategic and operational positioning benefits that are difficult to quantify financially. The hard part is in knowing where the predominant value levers are, and enabling sufficient attention and priority to ensure creation of value.

Revenue synergies: For an in-market merger, they come from two main areas:

FCustomer Acquisition and Retention: These are aimed at leveraging the combined customer base, in targeted cross selling, as well as specific plans to minimise customer attrition. Immediate initial tasks are to quickly determine overlaps, address customer concerns, and track customer gain/loss monthly.

FRevenue Growth: these are aimed at leveraging the new reputation, scale and skill of the new entity to quickly gain market share.

Cost savings: Sources of savings come mainly from savings arising as a direct and immediate result of a merger, and those that can be achieved over time, because of larger scale. Following are major saving areas.

FOverlap of personnel: This happens at two levels _ first, at senior levels where, for instance, one head of retail is now needed instead of two, and second, at functional levels, typically in some corporate support areas. By far, personnel savings tend to be the largest category, but need to be addressed carefully, avoiding loss of good people and damage to bank image in the process.

FDistribution channels: In retail banking, channel consolidation will be a major source of savings. Overlaps of branches, ATMs, contact centres all are likely to contribute to a meaningful reduction in cost..

FTechnology: As banking platforms are integrated, both development and maintenance efforts will shrink correspondingly. While overall technology spending will be higher than before, on a combined basis there are usually significant reductions on an ongoing basis.

FPremises: As head offices merge and the distribution strategy is revised, premise space consolidation opportunities arise, resulting in the possibility of real-estate divestments or reduction in leasing requirements.

Establishing dedicated teams to address each of these areas comprehensively will ensure a focus that goes beyond operational integration, to synergy realisation.

Major challenges: However, even as the teams are put in place to merge operations, significant integration challenges arise. Particularly, there are three areas which, if not addressed effectively, could lead to shortcoming for the start of the merged entity.

FOrganisation development: One of the toughest areas is organisation development for the combined entity post-merger. Although the BU splits are generally similar, the leaders to be appointed will complicate the situation.

In essence, transparency in communicating the overriding intent and guidelines of the organisation restructuring can minimise resistance and staff distraction. Above all, key executive positions need to be decided on quickly to reduce uncertainty, and enable new leaders to focus on integration for success of the combined entity.

In reality, the organisation structure will have to go through several iterations over the next few years, in line with the expansion path of the bank.

FAddressing employee concerns: Even in a situation where it is made clear from the start that the merger is to realise top line potential and hence no layoffs will be made, staff will still be concerned.

To address the concerns, a comprehensive communication plan should be developed, aimed at addressing key concerns. A filter-down approach needs to be taken to ensure the right messages are communicated downwards through the ranks with management levels given training on what and how to communicate _ while managing the grapevine.

FPeople capacity management: It is inevitable that resources will be freed up once integration efforts taper down. So while some banks are committed to keeping the ''no-layoff'' promise for a period of time, it still needs a mechanism to make good use of resources freed up.

A mechanism should be set up with physical locations for ''in-transit'' members of staff, and training should be provided to redeploy staff to new areas. Not all staff can be retrained, so the mechanism should also include outplacement services and training to staff on re{aac}sume{aac} writing and identification of up-skilling needs.

Proper planning, particularly in the appointment of dedicated, capable task forces and in effective communication to all relevant stakeholders to proactively address concerns, will provide a good start for the integration effort.

In part two, we will focus on success factors to manage a large-scale merger integration, which requires significant effort on top of running the day-to-day business.

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Kevin Kwek is a senior principal in A.T. Kearney's Financial Institutions Group, and Teerin Ratanapinyowong is a senior manager in A.T. Kearney's Financial Institutions Group based in Bangkok, e-mail:

kevin.kwek

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