Banking M&A: The digital fix
April 27, 2018
Companies that ignore the digital implications of an M&A deal will take longer to get to value, even if all other elements are flawlessly executed.
Digital transformation continues to be the top priority for financial institutions across the globe. From increased efficiencies to greater profitability, the digital lever is being applied with increasing frequency.
As banks better incorporate digital into their operations, they also need to better incorporate digital into the M&A deals they are entering.
Protecting digital customers
Savvy banks look at digital customers through a new lens, given their volatility and value, to protect them from the disruption that post-merger activities usually generate. Digital customers are far more valuable to banks when compared to traditional customers, bringing higher revenues and transaction volumes.
Putting digital at the heart of the deal
Companies that ignore the digital implications of any M&A event will take longer to get to value, even if all other elements of the deal are flawlessly executed. Forward-thinking banks radically modify deal shape and architecture to put digital at the center, just as they are putting it front and center within their own operating model.
Digital banks trade at a significantly higher rate than traditional ones, making it essential that incumbents move now to enter the digital era in earnest. Market data clearly shows an opportunity exists. For example, valuation multiples of digital, innovative banking players are 1.5 to 2 times higher than those of traditional banks.
To better balance their digital strategy and inorganic growth, leading banks are doing three things:
Reinvent with M&A
Placing an emphasis on evolving digital capabilities while growing inorganically, forward-thinking banks are redefining M&A from target screening to post-merger execution.
Put digital front and center
In M&A integration, leading banks are prioritizing digital, decoupling digital front-end rapid evolution from back-end integration. The early focus is placed on digital customer experience, digital operations and digital employee experience.
Rethink deal structure
Savvy banks embed digital ingredients, like new criteria for target screening and assets valuation, in pre-deal design as well as in post-deal governance. They include the Chief Digital Officer as a key member of the merger/acquisition steering committee. They ensure their bank integrates digital on the commercial front-end (“go digital”), as well as enterprise and operations (“be digital”).