Unite And Conquer - InformationWeek

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Unite And Conquer

Financial-services firms have had lots of practice at integration; here's what some of the biggest have learned from their mergers

When First Union and Wachovia decided to become a single financial-services company through a merger of equals in April 2001, executives were already thinking about integration. Across the industry, consolidation had been running rampant for at least a decade, and between the two companies, they had already conducted more than 100 mergers. As a result, they were keenly aware that the integration process could make for either a successful merger or a nightmare that could drive away customers and cost millions of dollars.

Bob McCoy had been CFO at premerger Wachovia, but he and David Carroll, former chief E-commerce and technology officer at First Union, were quickly named co-heads of merger integration at the new Wachovia Corp., whose total assets tip the scale at $342 billion. A quick study of the post-acquisition histories at both banks taught McCoy that a successful integration effort had to abide by three basic rules: He couldn't try to do too much at once; the most effective applications would be the ones that stayed; and every business unit needed to be involved by lending members to the merger project.

McCoy and Carroll were given charge of the team, working with 100 employees to pull together more than 1,000 applications and a joint customer base of 20 million to make Wachovia the fifth-largest financial-services company in the country within three years. "We have to take our time, but do it fast," McCoy says. "Our priority is that we do it in a way that has little impact on our customers, but we know that Wall Street won't stand for us to take too long to get the savings" from cost efficiencies promised to investors.

The financial-services industry has been consolidating into an increasingly smaller group of multibillion-dollar conglomerates that offer customers the full gamut of money-management opportunities. But it's an industry fraught with proprietary software, systems handling millions of transactions, hundreds of lines of businesses, and customers who won't hesitate to take their money elsewhere. But after years of experience, the best firms are getting the hang of how to bring billions of dollars in assets and technology together.

The payoff is real, says Guillermo Kopp, director of financial-services strategies and IT investments at advisory firm TowerGroup. The potential cost savings on technology, which generally accounts for 15% of operational expense, can make an argument for consolidation much more convincing. "A merger is likely to produce a 30% opportunity in IT cost reduction," Kopp says. "And there's the multiplier effect: If you do these consolidations right, for every dollar you save in IT, you can save up to $7 in other operational expenses."

J.P. Morgan Chase & Co., the second-largest U.S. financial-services firm, with $693.6 billion in assets resulting from the 2000 merger between J.P. Morgan and Chase Manhattan Bank, is experiencing benefits beyond immediate cost savings as it makes the transition from the second to the third phase of integration. Phase one, the bolt-on phase, involved gluing the business units together by selecting the best-of-breed technology from the two IT shops. J.P. Morgan is now moving from phase two, rationalization, to phase three, optimization. For rationalization, the company works toward using only one of each technology; for optimization, it finalizes the optimal model for each business process.

It's in the optimization phase that the advantages of a merger crystallize, says Mike Ashworth, CIO of J.P. Morgan Chase's investment bank. The merger forced the new company to scrutinize the efficiency of its entire technology operation and improve it by selecting and building on the best technologies available. One fruit of its labors is J.P. Morgan Chase's SwapsBack project, which optimizes the integration of the two companies' interest-rate swapping systems. During the bolt-on phase of the merger, all swap transactions were moved to Chase's platform because Chase housed the larger number of swaps and the transition needed to be completed by the preset integration deadline. Once the integration dust settled, J.P. Morgan Chase migrated the SwapsBack system to J.P. Morgan's platform, which proved to be the better bet because it's Unix-based and thereby cost-efficient and flexible, Ashworth says.


Much planning and calculating went into that decision. "You look at everything from running costs across the two systems to flexibility," Ashworth says. "This is a product area that continues to evolve for us, and we need to be able to add new features."

J.P. Morgan Chase will wrap up development work on the SwapsBack project this year and move 30% of the transactions to it by year's end. Once it's complete, the company expects to save more than $10 million annually while improving customer service.

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