Is M&A still effective for growth?
or – and then there is the issue of borders. Language and technology differences are the greatest barriers to any merger and acquisition, which is why most rarely succeed. Add to this the challenge of staff and executive retention and change management, and any M&A (merger and acquisition) in the financial industry is always a big wall to climb.
It intrigued me when my friend Jason Henrichs highlighted this in a couple of recent LinkedIn posts. He emphasized that merging two inefficient operations only creates a larger inefficient operation. Instead of following the old playbook of gathering deposits, making loans, buying a competitor, and repeating the process with more branches and people, the new playbook advocates using technology to reduce friction, increase productivity, and establish scalable processes that do not rely on a large workforce. Operational efficiency, driven by technology, is now the new scale game that will determine the winners in the industry.
Henrichs also pointed out that CEOs often spend millions integrating two supposedly complementary banks, only to realize that they have magnified the same pre-existing problems. His insight highlights the challenges that arise when merging different organizations, particularly in the banking sector where culture, language, and technological differences can significantly impede success. The history of bank mergers in Europe further illustrates this point; despite attempts like the proposed merger between Deutsche Bank and Commerzbank, many European bank mergers have faltered due to high risks and costs.
A quick search on why European bank mergers fail reveals several contributing factors. Legal discrepancies in capital waivers, deposit insurance, tax, and insolvency regulations can hinder cross-border mergers. Moreover, regulatory variations in banking rules and national supervisors’ influence present additional challenges. Cultural barriers, including linguistic differences and national protectionism, further complicate the consolidation process. Investors often expect significant cost savings from mergers, which can be difficult to achieve, leading to disappointing outcomes.
In conclusion, the ongoing debate between organic growth and acquisitive growth in the financial industry underscores the complexities of mergers and acquisitions. While the allure of expanding through acquisitions is tempting, the reality is that the success of such endeavors is often hindered by cultural, linguistic, and technological differences. As the industry shifts towards embracing technology and operational efficiency, traditional methods of growth through mergers may need to be reevaluated. By prioritizing innovation and scalability over size and asset accumulation, financial institutions can navigate the challenges of mergers and carve a path towards sustainable growth in the ever-evolving landscape of the banking sector.
