Predicting significant mergers and acquisitions (M&A) activity this year among financial institutions has been more of a sure bet than a prediction. Following several years in which M&A activity was more subdued than anticipated, a recent flurry of M&A – from large-scale banks to small credit unions – has shown that the long-term consolidation trend lives on as demand for financial institutions to scale up persists.

As financial institutions come together to form larger organizations with significantly improved scale seemingly overnight, less easy to predict are the missed opportunities emerging from several of the mega-deals that are in the works. Most acquirers hire expensive advisors to help them achieve ambitious cost savings and revenue growth – so how can successful integrations that result in several million dollars’ worth of incremental profitability be viewed as missed opportunities?

The Three Approaches to M&A Integration

There are three basic approaches to M&A integration, each with benefits and risks – as well as opportunities.

1. Winner Takes All. This is the simplest approach, with all products, procedures and systems of the acquiring company being applied to the combined company. Although it has obvious drawbacks, there are situations where the approach makes sense.

PROS:

Quick decisions
Minimal new integrations
Lowest conversion risks

CONS:

Ignores best practices
Acquired assets may not have a proper home

The Winner Takes All approach is best applied when the acquiring organization already has significantly more (at least five times or more) scale than the acquired organization. It’s also most applicable when acquiring small financial institutions in need of rescue.

Opportunity: Take the time to understand the culture of the acquired organization. Learn what worked and what didn’t, adopting positive practices where possible. Acknowledging and retaining the good parts of the organization, even in a Winner Take All approach, will help the acquired personnel feel ownership in the new entity and its mission going forward.

2. Greatest Hits. The most common approach in large mergers, the Greatest Hits model is intuitive when it comes to analyzing the two organizations’ product suites, procedures and systems prior to deciding which of the two options is better. The result is effectively a “greatest hits album” of two successful organizations. This approach, however, can have surprising limitations when trying to compete in a new asset class, as solutions and processes that worked at a smaller scale may not always successfully translate upstream.

PROS:

Easy to choose from two options
Adoption of a variety of best practices
Leverage existing knowledge and tools
Can largely be managed with existing employees

CONS:

Adds more time to the conversion plan
Subject to internal biases
Potentially starting behind incumbent competition in multiple areas
May need future conversion projects to address product or system gaps

The Greatest Hits approach is best applied when integrating companies of similar size that jointly remain below recognizable industry thresholds (e.g., still less than $1B in assets). As an example, two $300M-asset FIs won’t have dramatically new market opportunities when they emerge as a new $600M company. Similarly, two $2B-asset FIs merging into a $4B organization won’t enter a substantially new asset class – as opposed to a newly combined $8B FI that needs to start preparing to surpass the notorious $10B mark.

Opportunity: Ensure internal experts from both legacy organizations have a voice when evaluating two options. It’s easy for newly anointed leaders to lean on what they know best and inadvertently overlook what was created by their counterparts. Rely on small groups of SMEs from both sides to develop an independent recommendation for leadership to consider.

3. Super Scaler. This approach takes advantage of the new organization’s scale as part of integration. As a larger organization, can you push the credit card P&L to offer a more competitive rewards program for members? Can you add new mortgage products or expand the suite of business services? Maybe up your marketing ante and explore technology alternatives to MailChimp and Constant Contact?

PROS:

Minimize future conversion projects
Protect new brand image by offering competitive products and services
Capture new market share

CONS:

Adds integration time and complexity
May require external expertise to identify optimal solutions
Higher one-time integration costs

The Super Scaler approach is best applied when combined entities have materially different market potential and competition. This is very apparent when a merger creates a new $10B+ regional powerhouse that needs to scale up to $20B as quickly as possible. It’s even more relevant when large FIs combine into $20B+ juggernauts and need to become major regional players in hyper-competitive markets.

Opportunity: Set your sights on your new competition and be willing to upgrade legacy products and solutions. Avoid the temptation of focusing too narrowly on cost savings through traditional M&A “synergies” when it may be worth larger one-time investments to achieve long-term growth goals. Nothing is worse than going through a ton of integration work only to realize you’re behind the competition.

Avoid the Competitive Lag Loop

No matter the M&A approach, a worst-case scenario is getting stuck in a “competitive lag loop” – competing for market share against incumbents who perpetually feel one step ahead. Consider the scenario of a newly formed $12B-asset FI from two similarly sized predecessors. Simply adopting capabilities from the legacy companies will almost certainly lag behind best practices found in competitors of the same size. Moreover, other FIs in that asset category are already feverishly working to get as far away from $10B as possible.

The moral of the story: optimize your new organization where feasible. Focusing too much on the speed of conversions or the financial gains of M&A are integration traps. You’ll feel great compared to where you were, but bad about where you’re going.