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Distress Driven M&A Transactions in Financial Services Sector Need to be "Handled With care" Says New Report from Hay Group

Bucking the wider global slump in M&A activity, the financial services sector has witnessed a period of significant consolidation, with 599 deals executed over the second half of 2008, worth a collective US $410 billion the highest half-year valuation figure in recent times. Against this backdrop, research conducted for Hay Group by Mergermarket, amongst 90 leading companies in the financial services sector reveals, however, that many deals are being jeopardized by the inevitable pitfalls borne out of speedy transactions that limit the scope for thorough due diligence.

Philadelphia, PA (PRWEB) June 23, 2009 -- Bucking the wider global slump in M&A activity, the financial services sector has witnessed a period of significant consolidation, with 599 deals executed over the second half of 2008, worth a collective US $410 billion - the highest half-year valuation figure in recent times. An increasing number of these deals are distress driven, as companies seek refuge either in larger companies or through consolidation with other smaller companies, and cash rich buyers look to capitalize on the falling valuations of troubled targets.

With survival at stake, the flurry of distress driven deals witnessed across the financial services sector have, out of necessity, been executed at speed. Whilst all industry sectors have seen a reduced timescale from announcement to completion, this has been particularly acute in the financial services sector with the average deal timeframe contracting from 56 days in Q1 2008 to 46 days in Q4 2008 a reduction of 10 days. Against this backdrop, research conducted for Hay Group by Mergermarket, amongst 90 leading companies in the financial services sector reveals, however, that many deals are being jeopardized by the inevitable pitfalls borne out of speedy transactions that limit the scope for thorough due diligence.

One of the most notable oversights amongst professionals active in M&A in the FS sector is the underestimation of the value of a target company's intangible capital - the organizational, relational and human make-up of the company. Companies believe that just 32 percent of their market value is tied up in these intangibles, whereas in reality, the value of such capital is more than double this at 75 percent in stable market conditions (Ocean Tomo, 2008 research). In addition, financial services firms admit to spending just 29 percent of their time during the due diligence process quantifying and assessing the intangibles of a company. This disconnect between the perceived and actual value of such assets, combined with the speed of the deal, diminishes the opportunity to create value post-deal.

However, Hay Group's research suggests that firms in the sector are becoming more aware of the role that intangible assets play in the M&A process, with 75 percent of respondents conceding that a greater focus on such assets would have improved the success of previous transactions. Compellingly, 67 percent would ideally approach their next M&A transaction with an increased and earlier focus on intangible capital such as culture, governance and leadership.

George McCormick U.S. M&A Director at Hay Group comments: "The financial crisis has meant that distress driven deals need to be executed quickly, however, the acquiring party still must be wholly aware of the assets it is acquiring. These 'shotgun' deals need to be handled with extreme care as those that rush in run the risk of too many oversights in the due diligence process. Significant underestimation of the value of a company's intangible capital can have a detrimental effect on preserving post-deal value. There is a fine balance between speed and losing out on an opportunity, but executives need to focus on the planning and integration of intangible capital early on in the deal where possible."

Within the last year, 30 percent of financial services M&A deals have been cross-border in nature; this shows no signs of decreasing with 94 percent of respondents expecting the level of cross-border deals in the sector to either remain the same or increase in the coming months. However, 61 percent of the M&A professionals surveyed have experienced greater issues arising from intangible capital integration in cross-border deals, with cultural differences identified as the principle obstacle, followed by issues surrounding leadership and loss of customer base.

McCormick continues: "Difficulties surrounding the successful integration of intangibles are seemingly most acute in cross-border transactions. Underestimating these difficulties can break even the most promising of the deals, as many companies engaged in cross-border acquisitions or mergers have found out. Reviewing the intangibles, particularly through a cultural lens in the due diligence phase as well as properly planning and addressing them in the post-merger integration process, are increasingly becoming key parameters to the success of cross-border M&A deals."

For further information:
Mitch Kent
T: 215 861 2315
M: 215 820 5173

About Hay Group:
Hay Group is a global consulting firm that works with leaders to turn strategies into reality. We develop talent, organize people to be more effective, and motivate them to perform at their best. With 85 offices in 47 countries, we work with over 7,000 clients across the world. Our clients are from the public and private sector, across every major industry, and represent diverse business challenges. Our focus is on making change happen and helping organizations realize their potential.

For more information, and a full copy of the report (available July 2009) please visit www.haygroup.com

This press release was distributed through eMediawire by Human Resources Marketer (HR Marketer: www.HRmarketer.com) on behalf of the company listed above.

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