Straight talk on bank deals (Corporate Dealmaker)

Straight talk on bank deals

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Imagine the information technology issues that arise when two giant banks merge. Each has a huge IT infrastructure, created over many years to serve millions of customers and operate the institution's complex financial plumbing. Melding the two must be a major technical challenge, right?

Actually, no. "It's not a technical problem at all," Ken Harvey says. "The real issue is getting two people at the table together who are used to using two cash management systems and choosing one of the systems."

Having sat at many such tables, Harvey speaks with some authority. He's currently group chief information officer at London-based HSBC Holdings plc, one of the globe's biggest banks and also one of its most acquisitive. Before that he was CIO at Household International Inc., the Prospect Heights, Ill.-based consumer finance company HSBC bought for $14.6 billion in 2003. Household averaged a dozen deals a year in the 1990s, rolling up small rivals in the U.S., Canada and Britain, and its skill at merging back-office functions was key to making the deals work.

IT synergies nearly always loom large in bank deals, of course. After Royal Bank of Scotland Group plc bought National Westminster Bank plc for £22.9 billion ($41 billion) in 2000, it cut £1.22 billion in costs without shuttering branches, largely because of IT integration. In the U.S., Bank of America Corp. is forecasting annual after-tax savings of $175 million to $225 million from integrating FleetBoston Financial Corp.'s platforms.

Conversely, a failure to effectively mesh systems can leave a bank vulnerable - as has proven the case with the U.K.'s Abbey National plc, now likely to be taken over by Spain's Banco Santander Central Hispano SA in an £8.5 billion deal. Prior acquisitions left Abbey with 15 different systems, including one each for its four mortgage businesses. "If you think about what the rationalization is behind a bank merger, people talk about synergies and larger scale," says Octavio Marenzi, chief executive of Boston-based consulting firm Celent Communications LLC. "The problem becomes that many banks don't integrate the IT properly, and therefore they're not as truly integrated as they think they are."

In Ken Harvey's view, that shouldn't happen. What integrators of bank IT systems need is, first, a clear goal - a single platform that incorporates the best features of each institution and that supports a unified customer database accessible by different product groups across the merged banks. And second, a willingness to make decisions and move rapidly toward that goal. "What we've done is we've quickly brought the right people together, agreed on the assets [that would be kept] and brought them together," Harvey says, speaking in the HSBC headquarters overlooking London's Docklands. "Where people get in these death dances is when they take six or seven months to make these decisions."

Harvey's pacing is brisk. In the month before a deal is announced, he says, the IT heads of the two banks must meet to start hammering out a systems strategy. Since tough decisions are required, their success (or lack of it) can offer important insights into the cultural compatibility of the two institutions. Within two weeks of the announcement, Harvey says, the banks must know which portions of each bank's systems will be kept. Indecision is expensive - and possibly disastrous - because CEOs must then mediate. Not being experts in technology, he says, they will bring in a consultant to adjudicate, paying millions of dollars to decide six or seven months later what should have been decided free in the first week. All the while, IT employees are fretting about job security, learning to dislike their merger partner or maybe just leaving for rival institutions.

As an example of a successful integration, Harvey points to HSBC's purchase last year of Bank of Bermuda for $1.3 billion. Bank of Bermuda is small - the price represented less than 1% of HSBC's $171 billion market cap - but it had some technology that interested HSBC.

The upshot is that HSBC is adopting Bank of Bermuda's global fund services platform, while the Bermudian institution is converting to HSBC standard platforms for core banking, trade finance, foreign exchange and private banking. "I would like to think that our system is the repository of the best systems of all the institutions that we've bought," Harvey says.

Another of Harvey's precepts has to do with customers - fair enough, since gaining them is generally the whole point of a merger, and clumsy transitions give competitors a chance to poach. The integration plan shouldn't just be as painless as possible for customers. It should also include some improvement - better checkbooks or nicer account statements - that is quickly visible to them.

Having retained these customers, a bank can try to form a richer relationship with them as it moves toward a unified marketing database. Merger or no merger, though, this is a challenge - not just for the IT staff but for marketers, who have to know what information to look for and how to use it. It's worth the effort, however. "The actual yield on unsolicited but targeted mail is less than 1% in the U.S.," Harvey says. "But if you combine the right to talk to the customer with knowledge of the customer's next need, it gets up to 7% or 8%."

Smaller banks with high-quality database marketing systems are being rapidly bought up by larger ones. In August, Barclays plc of London bought Juniper Financial Corp. for $293 million to expand its credit card business using such technology in the U.S.

Of course, for big, global institutions, formed through many mergers, complete IT integration is nowhere near. "You don't see many successful integrations within a single country," IT consultant Marenzi says, "and when you factor in many different countries, it becomes even more scarce."

For its part, HSBC operates in 76 countries and deals with a multitude of currencies, regulations and cultural differences. The bank has individual systems for its largest markets - the U.K., U.S. and Hong Kong - and another multilanguage, multi currency system called Hub that it uses for another 52 countries. Harvey says the bank is constantly analyzing whether the benefits of migrating the U.S., U.K. or Hong Kong systems to Hub would justify the cost.

So far, the move hasn't been worth making. If that changes, though, count on Harvey to move decisively. - Peter Moreira

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