By Barry Rafe, Anita O’Connor and David Dinkin
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PDF Help For more than a decade, a spotlight has been on mergers and acquisitions
(M&A) in the financial services industry. The media and industry analysts
have paid close attention as major transactions have reshaped financial
services worldwide. The era of the "big deal" may be ending, though. There are
not many attractive candidates still to be acquired, and the price of a good
candidate is going up and up.
What comes next? Accenture believes that financial institutions can
continue to reshape themselves through the savvy use of smaller but
significantly more numerous deals involving subsidiaries. What’s more,
Accenture research suggests that while such deals provoke little stock market
reaction in the short term, there is a connection between subsidiary trading
strategies and organizations that create long-term value.
A Different Kind of Deal Subsidiary trades are transactions in which a financial services company
buys or sells a subsidiary business. Specifically, we define a subsidiary trade
as the purchase or sale of any subsidiary business of any value, or the
acquisition of a whole business not already owned by another company, with a
deal value of less than $500 million.
Examples of subsidiary trades include the deal announced in 2001 by
Citizens’ Financial, the Royal Bank of Scotland’s US subsidiary, to acquire
Mellon Financial’s regional banking business for $2.1 billion. This deal is
especially notable because it is structured as if it were an “ideal” subsidiary
trade: It focuses on strengthening each financial institution’s core
businesses. It will expand Citizens’ retail and commercial operations into
states adjacent to its existing operations in New England. Meanwhile, it will
allow Mellon to concentrate on corporate banking, asset management and high net
worth banking.
In another subsidiary trade, Deutsche Bank and Zurich Financial Services
have agreed to a deal, expected to be finalized in the first half of 2002,
worth several billion dollars. The deal’s main component is that in exchange
for just over three-fourths of its German life insurer Deutscher Herold and all
of its life insurance operations in Italy, Spain and Portugal, Deutsche Bank
will acquire Zurich Financial Services’ US asset management arm, Zurich Scudder
Investments. Other aspects of the trade include arrangements for the
distribution of insurance, asset management and banking products between
various Deutsche Bank and Zurich Financial Services entities.
 These types of trades have been
on the rise for a decade (see Figure 1). Individual subsidiary trades seldom
draw the media attention given to M&As, and they rarely increase share
price at the time of the announcement. This is understandable considering the
differences between these two types of deals. For a large financial
institution, a major merger or acquisition might take place only once in a
five-year period, involve more than $5 billion and be seen as a bold move on
the part of top management to dramatically shift the direction of the business.
In contrast, a financial institution might make two to five subsidiary
trades per year, undertake those trades to implement corporate strategy in an
incremental way, and not even disclose the value of the deals.
Cumulative Effect of Subsidiary Trading Subsidiaries can be acquired, for example, to obtain a regional business
as an expansion of a broad business portfolio, to secure a customer base, or to
gain a special capability or skill that can be leveraged through the broader
business. Subsidiaries can be sold if they are underperforming, if they no
longer fit with an evolving corporate strategy, or if they are unwanted parts
of a larger merger or acquisition. A well-thought-out series of subsidiary
trades can both fortify and hone an organization.
The impact and risk of each individual subsidiary trade is smaller than
for a major M&A action, if only because the dollar amounts involved are
smaller. Yet the cumulative effect of subsidiary trading can be powerful. A
number of these deals, undertaken over time, can reshape a financial
institution as surely as any single merger or acquisition. However, done poorly
or without a clearly thought-through strategy their overall effect can be
negative.
How “Value Capturers” Approach Subsidiary Trading
Accenture research confirms that subsidiary trading has significant
potential to improve shareholder value for a financial institution—if it’s
carried out in a strategically focused way.
Our analysis is based on research that evaluated more than 300 firms over
a 10-year period to distinguish between those that successfully captured
“superior value”—measured by total shareholder returns—and those that did not.
To investigate when, why and how companies bought and sold subsidiary
businesses, Accenture studied 26 of the firms. Although all 26 were actively
involved in subsidiary trading, only 14 were successful “value capturers.” Our
premise was that subsidiary trading as done by the value capturers contributed
in a substantial way to their respective performances.
What did the more successful firms do differently when dealing
subsidiaries?
- Value capturers were far more focused on trading core
businesses, particularly within their home territories. This trend was strong
and consistent across the United States and Europe. It seems to suggest that
value capturers had already decided on what their core business was, and that
they continued to take a serious, strategic approach to subsidiary
acquisitions, being as careful as possible to avoid obtaining unrelated
business units that then had to be divested.
- Value capturers were net business accumulators. They made
larger acquisitions, spending on average about one-and-a-half times more on
each deal than companies who were not value capturers. And they had
significantly fewer divestments, suggesting that because they made smarter
acquisitions, they needed to unload fewer and smaller mistakes.
Taking a Strategic Approach to Subsidiary Trading Financial institutions that want to use subsidiary trading as a strategic
tool to add value should emulate the approach of the value capturers.
- Stick Close to the Core. While this may
be obvious, it is true that for some financial institutions the first step may
indeed be to think through what their core businesses are now and what they
should be going forward.
- Make the Deal Worthwhile. Any
transaction requires effort throughout the transaction lifecycle, and
acquisitions in particular can be distracting, time-consuming and not
immediately seen as creating value. To see value created requires taking a
long-term, multiple-deal approach and concentrating on the cumulative effect of
deals.
- Treat Subsidiary Trading as Integral to the
Business. If subsidiary trades are treated as one-off projects,
outside the mainstream of business, they are likely to be managed in an ad hoc
manner and will not reap the maximum value for the organization. Instead, make
subsidiary trading a key part of the business for the long term. Create strong
internal processes to manage the selection of trades and how, if at all,
acquisitions will be integrated.
As M&A becomes more costly, financial institutions should consider
subsidiary trading as a promising approach to reshaping the business. As our
value capturers illustrate, when subsidiary trading is done consistently and
over the long term, it has significant potential to contribute to increasing a
company’s shareholder value.
Barry Rafe,
partner-Accenture Finance &
Performance Management,
Financial Services industry group, is based in Sydney.
Anita O’Connor, specialist-Strategic Research, Accenture
Financial Services industry group, is based in London.
David Dinkin, partner-Accenture Corporate Strategy, Financial Services industry group, is based in London.
For more information, please
contact us.
The views and opinions expressed in this article are meant to stimulate
thought and discussion. As each business has unique requirements and
objectives, these ideas should not be viewed as professional advice with
respect to your business.
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