Fast-track transformation: Small acquisitions that can make a big difference

One of the big questions raised during the European Banking Transformation and M&A Conference we hosted in March is how can established banks compete with agile challengers that are not only raising the bar for customer service, but also able to undercut them on price.

While seeking economies of scale through consolidation might once have been an answer, the conference felt that few leadership teams have the bandwidth to manage a huge merger and digital transformation at the same time. Bringing together two inefficient banks could also only end up creating a larger but still inefficient institution.

Sharper targeting

That’s why the conference felt that the focus of M&A is shifting to smaller and more targeted ‘smart’ acquisitions as banks look to modernise their capabilities and lay the foundations for new business models. This could be specific talent and tech to drive innovation. Other focal points include specialist lenders, for example, or high margin operations operating at particular points in the value chain.

Yet, these deals are no panacea. Participants commented that an obvious risk is buying technology that can’t be integrated into the systems of, or scaled up for, the needs of a large institution. With the key assets being targeted increasingly being innovators and tech specialists, the other big risk is a culture clash or allowing their creative potential to be stifled within a large corporate machine.

A lot of this prized talent is coming from organisations where the cultural DNA is agile, entrepreneurial and often unconventional. It’s therefore vital to create an environment where they feel comfortable, where they see opportunities to advance their careers and where their creativity is nurtured rather than suffocated. Without this meeting of minds, key acquired talent will become demotivated or leave, which not only undermines deal value, but also risks losing them to a competitor.

What this underlines is that just because the deal only involves a small number of people, this doesn’t mean the buyer won’t have to change to make the most of the acquisition. This in turn reinforces one of the other big messages coming out of the conference, which is that the weight of legacy that needs to be overcome if banks are to compete is as much cultural as technological.

Game-changing potential

So, it’s important to ensure that cultural considerations are built into deal planning from the outset. These capabilities-driven transactions are also going to require a shift in how deal value potential and realisation are communicated to boards, investment committees and analysts who are used to the more clear-cut measures such as synergy savings and access to new customers. But the transformational impact in a fast-evolving marketplace could be game-changing.