Paint it blue: on post-M&A integration

Few days ago, I discussed with a friend about integration of ABN AMRO with RBS after the consortium led by RBS Group plc acquired ABN AMRO. ABN AMRO’s bankers said RBS want to paint the office blue.

A very important motivation to acquire a company is synergy. Two companies can eliminate business units (and people) which overlapped, and this produces cost synergy. They will also have wider range of products to sell. Another important motivation is to enter into the market which the acquiring company itself have to spend years to develop to compete the existing competitors. For both Barclays and RBS, bidding ABN AMRO seemed to have this common motivation. For RBS, they did not have as good franchise as ABN AMRO in many markets, including Investment Banking business and Transaction Banking, and they also did not have strong network in Asia Pacific as ABN AMRO had. This motivation is common in the acquisition of Wing Lung Bank by China Merchant Bank, in which the latter one does not have much business in Hong Kong.

The success of an M&A depends on several factors. The most important one is the price paid. Acquisition prices are often at a premium of the pre-acquisition price. The takeover premium represent the estimated synergy which is captured by the acquired firm shareholders: the more of it, the more happy the shareholders are. However, high premium means that less of the synergy would be captured by the acquiring firm shareholders. For RBS-ABN AMRO deal, RBS seemed to have overpaid (and Barclays should be happy), so is the China Merchant Bank-Wing Lung Bank deal. Another important factor is whether the estimates of synergies are accurate. If the the acquiring firm over-estimated the attractiveness of the target, they may end up buying some rubbish. For Wing Lung Bank deal, Wing Lung ask price was 3 times of their book value as of 2007 year-end. However, they reported a first quarter loss due to their exposure of subprime mortgage. The book value would probably be lower if they use the latest book value to price the deal, and China Merchant Bank may discover that they have paid a high price to get a subprime exposure.

The success will also depends on the integration of two companies. How good the integration is would decide how much of the synergy can be realized and add value to the shareholders. In the post-merger integration, one area which has got less attention is the psychological part of the integration. A merger is likely to make the company to fire or demote some people. And the target firm employee would likely feel bad to see their old logo disappeared from the office, as they may probably be more identified with the old firm, and it is part of their self-concept. How to make all the members to feel good about the new organization, work for the new organization and adapt to a new corporate culture are important issue to address.

As I discussed with my friend, we agreed in an M&A, most of the time the focus would be given to the money aspect of the deal. And we both agreed that there is a very human aspect in a business combination, which deserves more attention.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.