Aiming higher, reaching further: Why it’s time to rethink dealmaking in a disrupted financial services marketplace

Opportunistic deal targeting and pursuit of short-term cost savings can only go so far in equipping your business to compete in a financial services (FS) market that is facing once in a generation transformation. What then does our new survey of 100 FS executives reveal about creating value from M&A in this complex and fast-moving marketplace?

The buying spree within FS in the UK and worldwide shows no signs of abating. When we asked the 100 FS dealmakers taking part in our Creating value beyond the deal: financial services research about the main objectives for their recent transactions, cost efficiency and market reach were predictably high on the list. Crucially, however, the number one driver is dealing with the disruption in the industry.

Beyond the impact of technology, this disruption is manifesting itself in the gathering shift in customer expectations and go-to-market strategies. At the heart of this is a move away from delivering everything in-house towards a platform model in which best-in-class products, services and technology are sourced from multiple providers. With a well-developed FinTech ecosystem to draw on, the UK is at the forefront of this shake-up.

Most deals underperform  

What also comes through from our survey is that most executives believe that their deals underperformed. 

When asked what they would do differently next time, most pointed to the need for improved pre-deal assessment and target selection, along with a formalised blueprint for delivering value from the deal. Many also highlighted the need to pay closer attention to cultural issues and talent retention. 

Developing a new playbook for M&A 

Viewed together, the findings from our survey raise fundamental questions about what a good deal now looks like when business models are in a state of flux and boosting scale and reach through acquisition can no longer deliver survival and success on their own. Deal underperformance also highlights the need for a rethink of priorities, planning and execution. Four clear priorities emerged:

1/ Determine what part of the value chain you have the right to own

‘Same as’ is no longer good enough – customers expect and can get more. The starting point for deal and underlying business strategy is therefore judging where you can excel. 

This might be superior capabilities and experience in a particular service or customer segment. You might also be well-positioned to provide the supporting infrastructure for others as part of a utility model. 

Other operations can then be delegated to partners within your delivery network. Partner selection and relationship management are clearly critical. Effective separation and divestment are also crucial as you begin to strip back your business to its core strengths and refocus resources on growth.

2/ Determine whether to build, buy or borrow

Having determined your USP, you can explore opportunities to develop these strengths through acquisition. You can also seek out the service providers and joint venture partners you need to fill out your offering. Full acquisition may be necessary – for example in enabling a FinTech business to develop the industrial scale needed to bring prototypes to a mass market. A lot of major groups are also acquiring long-term strategic stakes in promising start-ups. 

3/ Be ready to hit the ground running 

Deliverable action plans involve more than just systems, logistics and reporting. On a human level, there is a window of opportunity straight after deal announcement when people are ready to embrace change. But without quick and discernible action, this window could soon close and change become much harder to achieve. 

4/ Getting the essentials right

Large institutions understand the advantages of working as part of an ecosystem, incorporating the benefits of strong innovation and smart technology into less agile, more conservative, organisations. While the financial services sector has always embraced innovation, this evolution of the industry will require significant dependance on third parties. Smaller, technology focused organisations may not adopt the same standards in areas such as governance, resilience or operational risk -  this can create issues. Embracing integration without resolving such complexity raises the stakes with both customers and regulators; and recent high profile cases have put the industry under increased scrutiny.

5/ Identify and embrace the people and cultural traits that will make the difference

While it’s difficult to find a target with a wholly compatible culture, you can seek out attributes that you might want to imbue within your own organisation such as agility or creativity. Similarly, it’s important to pinpoint the innovators and other influencers and develop engagement and incentive plans to keep them on-board. Some of this key talent will be within the leadership, but most are less prominent and therefore need to be carefully sought out.

So, dealmaking in all its forms will continue to be a key part of FS strategy. But it isn’t a solution in itself. As business models evolve, deal objectives are set to become more complex and the resulting need for sharp targeting and execution increase.

Please download the report to find out more.