Cross-Border Banking: An Accenture Study of Cross-Border Mergers & Acquisitions in Banking

Banks are once again turning to M&A as a way to resume growth and achieve high performance. With the rise of developing markets, cross-border M&A activity in banking has increased.

Accenture undertook research on the success factors to help increase the chances of success for other banks.

As banks prepare for life in the post-recession world, they once again are turning their attention to M&A as a way to reignite growth. Many banks are hopeful that M&A will allow them to enter new markets, as well as acquire new customers for product and service expansion. And for many institutions, such deals increasingly will involve investing in new partners in other countries.

However, as they pursue cross-border deals, banks will face considerable complexity, not to mention heightened risk. Thus, it is important for these institutions to understand the factors that are critical to executing a deal in a way that minimizes risk and generates sustainable, long-term financial value for the acquiring bank.

To help shed light on these success factors, Accenture recently analyzed 89 publicly announced cross-border deals in the banking industry between 2000 and 2009. When appraising the success of each deal, Accenture used five key financial metrics to analyze how well the new foreign parent company was able to achieve sustainable financial improvement in managing its new local banking partner over time.

These were:

• The equity price performance of the deal one year following completion

• Annual revenue expansion

• Post-tax return-on-equity levels

• The efficiency ratio

• Market value performance of the acquired company.

Focused on these five metrics, the analysis revealed some important findings:

• Sixty-nine percent of cross-border deals realized positive equity returns.

• Forty-two percent of majority-stake deals realized profitability improvements in the first year, while 53 percent resulted in an improved efficiency ratio.

• Minority deals resulted in an average 19.5 percent compound annual growth rate, and made up four of the six best-performing deals.

• Emerging-market deals have generated a higher level of annual revenue expansion (18.7 percent compound annual growth rate) than those completed in developed markets (14.6 percent compound annual growth rate).

• Of the 15 best-performing deals overall in terms of revenue generation, 12 were done in emerging markets.

The research indicated that cross-border deals where 50 percent or more of the target bank is acquired tended to boost financial returns. Also, majority-stake deals largely outperformed minority-stake deals over time, although minority-stake deals can be successful in terms of revenue generation.

A majority of the cross-border deals have resulted in both short- and long-term success for the foreign acquirer—especially those involving emerging-market partners.

Perhaps the most compelling conclusion is that deals in which a bank acquires another bank in an emerging market have tended to outperform those in which the target firm was located in a developed market. In Accenture’s opinion, reasons for this trend could include:

• Emerging markets present a greater opportunity because of low banking penetration.

• They present global markets with the opportunity to acquire operations with long-term growth prospects at low prices.

• Emerging markets can offer a lower cost platform for global banks.

• Governments in emerging markets are often receptive to foreign investments.

• Growing payment flows between emerging and developed markets offer further opportunities for global banks with interests in emerging markets.

Recognizing the opportunities, several leading banks have made emerging-market deals a keystone of their cross-border business strategies. Notable examples are Spain-based international banks BBVA and Santander, which by successfully exporting their way of doing banking abroad, have steadily emerged as highly competitive global players. Both banks initiated expansion programs decades ago, starting in key Latin American countries. Once these subsidiaries were consolidated, the parent banks focused their attention on aggressively expanding their operations in the US market.

However, teaming with foreign banks can involve increased complexity and some risk. Choosing innovative target banks with strong leadership positions in promising markets is one strategy, as is achieving efficiency gains.

Accenture has decades of experience in helping leading banks realize their growth plans and achieve high performance through M&A.