M&A and Data Management: Discovering the Overlooked Synergies (By Paul McInnis, Head of Enterprise Data Management, Eagle Investment Systems)01.12.2016
Financial services consolidation is expected amid increasing cost pressures and a renewed focus on top-line growth; acquirers need to recognize the importance of data management and IT amid post-merger integration.
In an Ernst & Young survey from last year, nearly half of the financial services executives polled said their organization would be pursuing acquisitions over the next 12 months. As interest in deal-making escalates, executives should consider how technology and data governance fit within their overall acquisition strategy, as success in M&A can hinge on the buyer’s ability to realize synergies in these areas.
The percolating interest in deals is driven by a number of factors. Chief among those are the parallel pressures to cut costs and grow revenue, which should drive M&A deal volume for the foreseeable future. In 2015, for instance, MergerMarket tracked $496.4 billion worth of transactions in the sector, worldwide, up from $242.4 billion.
For the investment bankers tasked with selling companies, it can be quite easy to introduce synergies into the valuation calculus. Factor in some cost cuts and potential cross-selling opportunities and suddenly a 10x TTM EBITDA valuation looks like a bargain for a privately held asset manager with a differentiated skillset. But as operators know, capturing those synergies is often much harder.
In financial services, where IT-related synergies make up the bulk of an acquisition’s projected cost savings and growth opportunities—representing up to 60% of the available synergies according to a 2011 McKinsey & Company study—it is all the more critical to have a deep understanding of a merger’s implications to the systems and infrastructure of both the target company and the acquirer. While each deal presents a unique set of circumstances, there are some universal best practices that can help acquiring companies when it comes to managing their data.
As a general rule of thumb, the earlier the data management and IT team can be included in the deal process, the better it is for the organization at large. Post close—or even post announcement—is often too late. If the IT team can participate in the M&A process from the earliest stages of a potential acquisition, they can add real value in recognizing the systems or functions that may pose integration problems down the road and also help identify available synergies that otherwise might be overlooked.
Those overseeing data management must understand the thesis behind the acquisition and ensure that the priorities articulated in the data management integration plan are squarely aligned to the business goals behind the transaction. For instance, data management needs can differ substantially depending on whether the deal in question is a vertical or horizontal acquisition. In other words, an asset manager seeking to buy their way into new asset categories may have diverging data management needs than if they were simply using M&A for a marketshare grab involving overlapping product sets.
REVISIT DATA GOVERNANCE
We have seen several cases in which a merger actually served as the catalyst for a more holistic data governance strategy. As firms grow in scale, they often find that the heightened volume and pace of data requires a formalized approach—one that dictates how data is collected, stored, distributed and used by an organization. When scale comes instantaneously and business practices change overnight, the need for a prescribed approach becomes all the more acute.
During any business disruption, be it a merger or otherwise, the initial inclination of the rank and file will be to speculate how the deal may impact their day-to-day role. It is critical to communicate early and often, and leadership should be established as soon as possible. Just as an acquisition can serve as a catalyst for a data governance strategy, the integration process may represent a logical time to introduce a “Chief Data Officer” role if such a position does not already exist. With insight into the larger plan and direct accountability, a CDO can steer the data management integration process and then build out the role to ensure governance strategies and technologies evolve with the market.
MAP OUT THE JOURNEY, CELEBRATE THE MILESTONES
When it comes to integration, there is a tendency to move as quickly as possible. Nearly all consultants will preach the benefit of implementing a 100-day plan. However, most data management projects require greater deliberation and warrant a long-term rendering, providing a vision as far as five or even ten years out. Whether it is creating an investment book of record (IBOR) or migrating multiple systems onto a single accounting platform, there needs to be a vision of clearly articulated milestones that inform the decision making process along the way. Most organizations find it beneficial to start small and then take on the larger, more holistic initiatives once they have logged a series of successes.
The biggest challenge when it comes to developing a data management integration plan is that no two mergers ever look alike, at least not from the perspective of the information team. Each deal has its own unique considerations. If there is one constant, though, it is that acquirers who have built out an open and scalable IT architecture—one that can quickly absorb new demands, whatever they may be—will have an easier time orchestrating the integration process. For example, those who employ cloud-based data management systems (built specifically for the cloud) will always have an easier time plugging third-party tools into the platform. More acquisitive companies will also see the benefit in operating a centralized data warehouse, which creates a single touchpoint for necessary information and helps ensure that data, once integrated, is accurate, clean and consistent with established business ontology standards. The more flexibility, acquirers will find, the more agile they can be in moving quickly to expedite what is normally one of the more lengthy components in post-merger integration.
REALIZE THE OPPORTUNITY
M&A is always going to introduce a certain level of disruption and uncertainty, particularly for those in data management tasked with unraveling all of the data needs for an organization. While acquisitions do bring added pressure, for data management professionals, M&A can represent an opportunity to establish a vision for data governance that, otherwise, may not have the impetus or broad support to be pushed forward. Perhaps it is another synergy, but the occasion to reset or establish a vision around data governance is one of the often-overlooked benefits of M&A.