An M&A Wave Is Coming to Financial Services. Are You Ready?

The cyclical trend seems set to continue: Every decade or so, as interest rates fluctuate, the financial services industry (FSI) is hit with a wave of mergers and acquisitions (M&As) that reshape the competitive landscape for years to come. 

It happened in the late 1990s, amid the initial internet stock market bubble. It happened in the wake of the 2008 financial crash, as highly leveraged institutions were sold in fire sales. And signs point to it likely happening in 2023, as companies settle into the new interest rate environment stemming from the U.S. Federal Reserve’s big fight against inflation. 

FSI M&As increased 89% to 210 transactions in 2021—well over 2020’s 111 deals, according to Deloitte. That jump had a lot to do with pent-up demand, and 2022 was largely quieter. 

But as elevated interest rates dry up opportunities for organic growth, FSI firms are expected to start eyeing acquisitions as a way to expand market presence or launch new products. Meanwhile, many fintech organizations—even those that are well established—may be snatched up as startups with higher costs of capital look for stability.

Of course, inking a deal is just the beginning of any M&A journey. The really hard part comes next: integrating organizations to realize new targeted value. In my experience—following more than a decade of front-row looks at M&As while working at Goldman Sachs—success is much more likely at firms that digitally transform back-office functions to unlock the full potential and power of data. And the more companies view risk management and control functions as compliance imperatives, the better.

Here are two must-haves for M&A success—and two tripwires that can risk failure.

Set a Data Strategy for the Long Haul

True integration requires everyone across the newly expanded company to speak the same language. Getting there involves a lot more than flipping the switch on a new tech stack and migrating data from an acquired company into the general ledger. Data structure, taxonomy, and definitions are crucial.

As a company builds a consolidated data ecosystem and compares products and revenues from different regions (for example), decision-makers need to be sure that an apple is an apple and an orange is an orange. Consistency in reporting and analytics is not optional for any successful integration. It’s a starting point for lasting, strategic change.

Important data strategy questions should be asked early in the integration process. According to your priorities, what do you need to compare? For example, various stakeholders, from investors to customers to regulators, increasingly care about workforce diversity and environmental, social, and governance (ESG) issues. 

Another question: What would a dream data ecosystem look like—one that goes beyond the basics to really help the firm operate and grow strategically? Imagine, for example, an environment that brings together all bank loan and deposit data streams. It hooks to a deeply digitally enabled accounting environment, offering the right level of transparency and control, and a custom analytics array.

The data integration of key enabling functions, such as human resources (HR) and finance, should be built around answers to an organization’s core directional questions. Ideally, cloud-enabled software offering transparency, auditability, and data modeling capabilities is in the mix. Moving beyond legacy systems is never easy, but it’s always worth the efficiencies and flexibility gained.

Put the Right People in the Right Places 

Of course, great tech is no M&A panacea. Historically, there’s been a heavy focus on technology integration and mapping, with tech teams taking the lead. Obviously technology still matters, but today, with the growing scope of M&A due diligence and regulation, strong change management practices are also crucial.

As companies evolve into new digital platforms, they need to put the right people in the right places with the right responsibilities—and then hold them accountable. Functional mapping, clear ownership and accountability, transparency. All these things play an important role in ensuring a smooth and successful integration. All the more so for any company moving into the cloud and managing related risks. 

The human factor is also a compliance issue. Auditors and regulators are going to look beyond finances when sizing up risks. They want to see whether a post-transaction business will be run effectively and responsibly. Robust risk management and control functions, along with auditability, are essential in this operating environment.

Avoid Tripwires

Successful integration is far from assured. Here are two common missteps companies should keep in mind as they navigate an M&A.

1. Putting Bubble Gum and Bandaids on IT

I’ve seen organizations squander early-stage opportunities to create a consistent set of HR and financial records—an important factor for forward momentum. True integration requires carefully translating datasets, thoughtfully transforming IT infrastructure, and boosting transparency wherever possible. 

Yes, that takes time and energy—and it might even feel like something to kick down the road while you patch together existing systems in the near term. But the truth is that doing so can create negative impacts that play out for years. From an IT perspective, an organization might inadvertently create key people dependencies. The risk of financial data inconsistencies and audits may rise, which could mean Securities and Exchange Commission refilings over time. And, because so many organizations are using outdated, brittle legacy systems to begin with, patching them together can make an already-complex working environment downright byzantine.

The bottom line: The integration process can be a powerful opportunity for the digital transformation of key enabling functions such as HR and finance. Companies that move forward with legacy systems often find it ever harder to get rid of them later.

2. Cutting Costs Too Fast

The logic of many M&As involves workforce efficiencies, and there’s often temptation to swiftly reduce the cost basis through layoffs. But this approach can introduce significant risks. Companies learn the hard way that they should have completed key integration steps before letting people go and created incentives to retain top talent, with the goal of minimizing the risk of integration processes and new operating models.

Once people are out the door, there’s a steep price to realize risks. Old HR and financial systems that have evolved over decades might have to be painstakingly relearned. Ironically, this can delay integration aspects and prevent the new company from moving forward on stronger, more efficient footing.

Seize the Opportunity

In some ways, 2022 was a transitional year for FSI, as interest rates ratcheted up and fears of an economic downturn reshaped the competitive landscape. Looking ahead, widespread uncertainty may well settle into a new normal of higher interest rates and tamped-down organic growth—but that hardly means transitions are over.

Future-minded FSI leaders are seizing the opportunity to shift investment spend from the front office to the back office. Because whether the looming M&A wave impacts an organization directly or not, there’s increasing recognition across the industry that modernizing financial and people systems needs to happen—and now. Given the growing strategic value of data and evolving regulations, the ROI on improved transparency, flexibility, and auditability can’t wait.