Complete Blog 6 - Integration - Evidence from my experience
I have a keen interest in M&A because of the strategic importance they have for a company and the transformational impact they can have on markets. It is arguably the biggest decision a manager has to make in their career; who to acquire, for what price and how to integrate to create a synergistic organisation are all key considerations. That is assuming the manager has shareholder wealth maximisation as their goal. As eluded to in the RBS blog a few weeks ago, agency and hubris motives for acquisitions often play an instrumental role in destroying shareholder wealth. It is this interest in M&As which I hope will spur me on when I am reading my 85th journal article on the shareholder wealth effects of M&A decisions during my dissertation research.
For this weeks blog I will be discussing M&A integration and my experiences on placement and at my part time job.
Lloyds Banking Group
B&M Stores acquisition of Heron Foods
As I have worked part time for Heron Foods throughout University, I thought it would be good to use their recent acquisition by B&M Stores as an additional case study.
B&M acquired Heron Foods on the 2nd August for £152m. As Heron were not a listed company, they were not valued by the market which gives rise to challenges. While it is likely that discounted cash flow techniques were used (as the vast majority of practitioners use it), the price paid represented EBITDA 8 times over, indicating the valuation incorporated the multiples technique.
There appears to be clear strategic sense for B&M acquiring Heron in this horizontal acquisition. B&M are the UK's leading discounted general merchandiser while having a minor presence in the ambient food market. Heron offer branded food at affordable prices and touch into the household & general merchandise market. The combination will allow B&M to benefit from economies of scale in the purchase of ambient food. Furthermore, this provides B&M with exposure to the convinience and discount segments of the grocery market, at a time where consumer expectations are changing in-line with these segments, providing significant growth opportunities. .
The market clearly believes there is room for synergies to be realised, evidenced by the 3.5% share price increase upon announcement. This contrasts with research which indicates that on average M&A do not create value for acquiring shareholders, but because of the premium often offered, generates large returns to target shareholders. However, these short term returns are futile for many shareholders who are looking for long term value. This stems from successful integration to fulfill the potential synergies - and from my perspective this integration is worrisome
When deliveries arrive, there are some B&M products included and there is no guidance where or how we are supposed to merchandise it. This results in the removal of some Heron products on offer and certainly from my perspective, it doesn't seem to be selling anywhere near as well. I actually believe Heron provide a vital offering to the poorest in society as well as people who like to shop around for the best value. Yet, there is uncertainty among customers and staff alike. Rumours that shops will be turning into small B&M stores provide discomfort to those who rely on Heron for their affordable food, but also to employees like myself who are unaware whether jobs will be lost. There has been no communication from the leadership of Heron nor B&M and this has allowed these rumours to proliferate. This is something I believe is fundamentally wrong. There needs to be transparency internally in order to give people peace of mind.
It undoubtedly marginalises staff and I know of people who are looking for employment elsewhere. This leads to a 'brain drain' within the organisation; those with knowledge of processes, and those who have built up relationships with regular customers, end up leaving. With an already high turnover of staff before this uncertainty, being acquired could be a cause of value destruction in the long term and a factor in failing to realise potential synergies with B&M.
It is interesting to compare the communication at Heron with my placement experience. When Lloyds acquired MBNA, there was an announcement on the intranet, leadership calls also provided clarity on the strategic sense of the deal and certainty for what it meant for colleagues. This is how I believe acquisition and integration communication should be handled.
Summary
Although M&A are frequently cited as being unsuccessful the majority of the time, there are still many deals which create short term value and have the potential to create long-term value. Integration is key to realising synergies and for banks there should be due diligence undertaken to fully understand the IT architecture post-completion. Communication and transparency are also key when trying to integrate, as it avoids the alienation of staff from both organisations and facilitates harmonious working relationships.
Further reading;
For this weeks blog I will be discussing M&A integration and my experiences on placement and at my part time job.
Lloyds Banking Group
Before I talk through the difficulty in integrating IT systems, I have reflected upon a frequent conversation which occurred on placement. Colleagues still asked each other what heritage they were (i.e HBOS or Lloyds) and while it wasn't important and didn't lead to anything, it was interesting that almost 10 years on, there is still a sort of psychological separation of the two banks among the integrated back office functions. This actually shows that attitudes and cultural issues are much harder to integrate and alter than any physical infrastructure.
For most Bank M&A the motivation derives from cost synergies realised from closing of bank branches and cross-selling of products (although leadership would not cite agency as their motive, even if it was indeed the motive). However, there is often a long term cost associated - legacy IT systems. Prior to my placement, I was very ignorant of the importance of data and IT systems to a banking group's operation. I hadn't yet learned that data is the new oil. In my year at Lloyds Banking Group, I was working as a project assistant on a number of projects looking at establishing BCBS239 compliance of Credit Risk Data. Like you, I had absolutely no idea what BCBS239 was, so I will provide a very simple summary to help.
For most Bank M&A the motivation derives from cost synergies realised from closing of bank branches and cross-selling of products (although leadership would not cite agency as their motive, even if it was indeed the motive). However, there is often a long term cost associated - legacy IT systems. Prior to my placement, I was very ignorant of the importance of data and IT systems to a banking group's operation. I hadn't yet learned that data is the new oil. In my year at Lloyds Banking Group, I was working as a project assistant on a number of projects looking at establishing BCBS239 compliance of Credit Risk Data. Like you, I had absolutely no idea what BCBS239 was, so I will provide a very simple summary to help.
Like so many other pieces of regulation, the Basel Committee on Banking Supervision Regulation 239 "Principles for effective risk data aggregation and risk reporting" was brought about in response to the Financial Crisis. In the boom years, where property prices were steadily increasing, there was sufficient liquidity in markets and all was rosy, risk reporting processes were adequate. However, what occurred when liquidity dried up and house prices started declining was panic. This panic meant that previous slow-moving markets shifted faster than Usain Bolt. The complex risk data architecture, as a result of M&A, often meant by the time decisions were to be made on the risk reports produced, the data going into the metrics created an inaccurate reflection of the current position of the Group and the economy. Subsequently, BCBS239 looks to aggregate risk data into a single platform in a timely, complete and accurate manner with transparency in the lineage, to make risk reporting more robust and reliable, provide concentration of exposures with drilldown ability, while ensuring prudent decisions are made.
Although on the face of it, this regulation looks to solve the problem of M&A legacy systems, and it does for risk reporting, yet from an operational perspective there are still issues. The data for certain products that banks sold decades ago often goes into old and unsupported source systems. Subsequently, there are only a limited number of colleagues internal to the company who understand its intricacies. The scarce number of accounts these systems hold mean it is not cost efficient to upgrade them to a modern operating platform.
Legacy IT is not only an issue for the organisation, but for customers too. Upon browsing the Financial Times last week I spotted a comment regarding the Lloyds-TSB and HBOS acquisition. It stated that even after 10 years, one cannot cash a Halifax cheque at a Lloyds Bank branch. While two separate brands, they are under one Group structure, so it does seem logical to give the customer a better experience in this sense. This epitomises the issue from a customer's perspective, in that two brands have incompatible IT systems.
Furthermore, there is no question mobile banking is the future. My placement year solidified this already prominent idea. Certainly for my generation there is very little need, if ever, to go into a bank branch.This has led forward-looking banks to implement strategies and divert resources away from branches towards other, more cost-effective, platforms. My mother works in branch and although there are long queues for cashier services, I feel this will only accelerate people's adoption of online and mobile banking platforms. Mobile banking is an area where I feel legacy IT systems will be a tremendous disadvantage, as I shall discuss next
Mobile-only FinTech Banks - Displacers of Incumbents?
Having banked with Lloyds Bank all of my life, just because I had no reason to change, - as is probably the case with so many other people - I shocked myself when I opened a Monzo Account in the summer (a prepayment card while they test their Current Account). FinTech companies were another phenomena brought to my attention during placement year. I had heard of it, but hadn't explored it in detail. Placement year evenings were a lonely time, so I looked into it and even managed to read one of the first books since about year 10 English Language classes, entitled "Bye Bye Banks?". It was an insightful read and I'd highly recommend it for anyone looking at a potential threat to the traditional retail banking as we know it.
Monzo, like many other mobile-only banks, offer a slick user experience with aggregating ability for all of your accounts along with some extremely useful money-management tools. This can be designed because they use modern day technology which is compatible with a variety of systems. They have not undertaken any M&A activity so do not have any legacy systems. This allows for the aggregation and easy processing of accounts and data. A couple of clear pet peeves for me when opening the Lloyds Bank app is the waiting time to open it. It takes probably 20-40 seconds, which is not significant really especially when compared to other banking apps. However, compared to other non-bank apps, there is significantly more friction when engaging with the app. It is this which legacy systems create - friction. From a user perspective in a mobile-banking world, this can be off-putting.
Therefore, for banks, while M&A may have generated value in the short and medium term, the seemingly cellotaping together of banks, instead of fully integrating, has given rise to a potential threat which could be to the detriment of long-term value.
B&M Stores acquisition of Heron Foods
As I have worked part time for Heron Foods throughout University, I thought it would be good to use their recent acquisition by B&M Stores as an additional case study.
B&M acquired Heron Foods on the 2nd August for £152m. As Heron were not a listed company, they were not valued by the market which gives rise to challenges. While it is likely that discounted cash flow techniques were used (as the vast majority of practitioners use it), the price paid represented EBITDA 8 times over, indicating the valuation incorporated the multiples technique.
There appears to be clear strategic sense for B&M acquiring Heron in this horizontal acquisition. B&M are the UK's leading discounted general merchandiser while having a minor presence in the ambient food market. Heron offer branded food at affordable prices and touch into the household & general merchandise market. The combination will allow B&M to benefit from economies of scale in the purchase of ambient food. Furthermore, this provides B&M with exposure to the convinience and discount segments of the grocery market, at a time where consumer expectations are changing in-line with these segments, providing significant growth opportunities. .
The market clearly believes there is room for synergies to be realised, evidenced by the 3.5% share price increase upon announcement. This contrasts with research which indicates that on average M&A do not create value for acquiring shareholders, but because of the premium often offered, generates large returns to target shareholders. However, these short term returns are futile for many shareholders who are looking for long term value. This stems from successful integration to fulfill the potential synergies - and from my perspective this integration is worrisome
When deliveries arrive, there are some B&M products included and there is no guidance where or how we are supposed to merchandise it. This results in the removal of some Heron products on offer and certainly from my perspective, it doesn't seem to be selling anywhere near as well. I actually believe Heron provide a vital offering to the poorest in society as well as people who like to shop around for the best value. Yet, there is uncertainty among customers and staff alike. Rumours that shops will be turning into small B&M stores provide discomfort to those who rely on Heron for their affordable food, but also to employees like myself who are unaware whether jobs will be lost. There has been no communication from the leadership of Heron nor B&M and this has allowed these rumours to proliferate. This is something I believe is fundamentally wrong. There needs to be transparency internally in order to give people peace of mind.
It undoubtedly marginalises staff and I know of people who are looking for employment elsewhere. This leads to a 'brain drain' within the organisation; those with knowledge of processes, and those who have built up relationships with regular customers, end up leaving. With an already high turnover of staff before this uncertainty, being acquired could be a cause of value destruction in the long term and a factor in failing to realise potential synergies with B&M.
It is interesting to compare the communication at Heron with my placement experience. When Lloyds acquired MBNA, there was an announcement on the intranet, leadership calls also provided clarity on the strategic sense of the deal and certainty for what it meant for colleagues. This is how I believe acquisition and integration communication should be handled.
Summary
Although M&A are frequently cited as being unsuccessful the majority of the time, there are still many deals which create short term value and have the potential to create long-term value. Integration is key to realising synergies and for banks there should be due diligence undertaken to fully understand the IT architecture post-completion. Communication and transparency are also key when trying to integrate, as it avoids the alienation of staff from both organisations and facilitates harmonious working relationships.
Further reading;
- http://www.bandmretail.com/~/media/Files/B/BM-Stores/reports-and-presentations/financial-reports/bm-heron-foods-acquisition-v2.pdf
- https://www.ft.com/content/a7247a43-9a25-399e-ba83-c910a37b922c
Comments
Post a Comment