Merger Mellon Financial and Bank of New York - Case Study Example

?Merger Mellon Financial and Bank of New York Merger of Equals”, how does it differ from acquisitions of a smaller firm by a larger one in what is required during the integration? Mergers and acquisitions usually used as if the two were synonyms however, both terms are different from each other. How the two companies deal with the purchase and how the purchase is being reported to the public is what differ one term from another. Acquisition is when a firm takeover another firm (the target), become the only owner and its stock would still be traded unlike the target company. On the other hand, “mergers of equal” is when two companies seek the benefit ofbecoming one single company and neither is acquiring the other. Usually both companies are about the same size and shareholders would surrender their shares to be given in return the shares of the new single entity. Prior to the integration, a proper due diligence must be conducted before negotiating and closing the deal.Mergers are governed by each state’s law.The board of directors of the companies and the shareholdersmust approve the merger of equal first before it is put into action.After the approval is given, acommunication ground should be established and an integration process should be taken to combine the two business units systems in one new system. First, a merger integration committee (MIC) should be formed. The responsibility of MIC is to arrange and organize the integration process and to prepare the proposal for shareholders’ considerations. MIC considered being the main player in executing the merger not to mention being the coordinator for a harmonic and smooth integration as well as a value added post-merger success. The MIC should have weekly meetings to solve any issues that are notgoing as scheduled. In the case of the merger of equals of Bank of NY Mellon, the largest security servicing firm, the integration committee dedicated a lot of efforts so it will not be surprised by any chance. It dealt with the business lines in two methods in which it hired representatives to help in executing and request detailed reporting in weekly basis. The vision and objectives of the merger should be served through selecting the best possible Integration plan and team.The value of the new organization can be created through the ability of taking tough decisions, which occurred during the shift of the administration, the procedures the technologies, the system not to mention the culture to implement the new organization vision. Changes made usually include the leadership structure (executives and board members) as a redistribution of positions and authority is likely to occur. The integration plan includes integration of strategy, reporting, people, procedures and culture. The administration style is the one who design and create the culture and the behavior which is one major part of the due diligence taken prior to the merger. As change is a critical part for any organization, Integration efforts of systems and servicesfirst require evaluating the speed of change (whether it is radical or not). It is crucial to dedicate theneeded time to complete processes. Second, it is important to maintain the customer focus during the integration and not to neglect it. Moreover, a clear intensive communication must be insured from an early stage internally and externally. Internal communication can be established by maintaining optimism and positivity among each employee toward the new transformation that has been brought by the merger. 2. List the five key risks and related controls the newly merged company faced during the integrations phase. Please consider the strategy considered by management of both companies during the negotiations? Culture risk; Culture is the set of values, beliefs, behaviors, assumptions shared among employees of a certain entity.It is what effect and influences the actions of the people within the firm, explains attitudes and why people behave in a certain pattern. It is taken for granted for people from the insideas it comes as a second nature to them and onlypeople from the outside would have a clear image of an organization culture. Integrating cultures in a merger is a tough part as evidence shows that culture plays a significant role in a successful merger. ‘In one study, culture was found to be the cause of 30 percent of failed integrations’ (Leading through transition:Perspectives on the people side of M&A). Bank of NY and Mellon have differing corporate cultures in terms of their levels of centralization. The different spirits of the two business entities can be seen through the business reputations each one has gained through the years. Bank of NY known to be “hard-charging” while Mellon is considered having a laid back and casual culture. In the integration process, tough decisions must be taken and it requires a quick response. This may not be possible if the two different approaches of making decisions driven by the two different cultures appeared to be a barrier. It would lead to a slow or a complete failure when taking decision. Bank of NY Mellon took a planned and examined approach to share views about the new organization culture. The firm spent six months measuring and analyzing which values to incorporate in the new culture. The firm also conducted surveys and interviews in whichexecutives were asked about a description ofthe corporate culture. All of these efforts combined together contributed to the successful integration of the two entities’ cultures. Client risk; Both Bank of NY and Mellon anticipated earlier that none-effective integration in the asset servicing capabilities would affect clients and cause confusion and disruption. This would bring the risk of losing customers which is not an option as both CEOs of Mellon Financial and bank of NY emphasized. Customers should be assured a service with no disruptive and management performance should be maintained during the integration phase. Both entities foreseen this risk and have taken several precautions to insure a successful merger. The establishment of the board integration committee prior to the integration was a brilliant step to go through the integration experience in advance. The operating guideline was very straightforward as it stated and emphasized a “no loss of customers”. Client were put first and prioritized. Customersatisfaction was being run through an intensive analysis to ensure providing superior customer service and to maintain current customer base. Technological risk (deferring computer systems); The preventive measure and control taken to avoid this type of risk was also the establishment of the board integration committee which was ‘technology oriented’. This prior to integration experience which was mostly technology-based allowed a productive and efficient integration of the two entities differing computer systems. Governance risk; The role of a well governance structure is to protect shareholders’ interests from any conflicts of objectives that would arise. Governanceis the approach and the process used in managing and controlling a corporation. During the integration phase, governance was in the head of the issues which was taken in depth by both entities. One of the merger agreements included the formation of the Board integration committee which main purpose and aim was to provide the best governance practice. The committee was headed by anintegrated experienced figure such as Tom Renyi who was part of the integration of Irving Trust into the Bank of NY. The committee efforts made sure to business decisions are in the right path toward the new organization objectives. Financial risk; The integration of giants was titled as a ‘Merger of Equals’, following this school of thought both the giants had to come up with ideas that would help them to execute the idea in best possible way, which faced great financial risks. The official news of merger resulted in Bank of New York’s shares soaring by 12% to $39.75 and Mellon rose by 6.8% to $42.78 (Dash, Eric, December 2006). 63% of the new company is held by the New York’s current holders and only 37% by Mellon, which means that the idea of ‘equal merger’ stands strongly challenged in terms of finances involved (Dash, Eric, December 2006). Merger and integration costs were estimated to be around $1.4 billion, accounting for integration consultants’ fees, consultant fees, legal and investment banking fees, severance costs etc. Usually mergers result in company losing some of its big clients so the company also faced the risk of decreased revenues in case of shedding off of clients, hence they strictly followed the strategy of ‘Lose no customers’. Though BNY and Mellow has a well thought out saving plan, of saving $350 million in year 2008, then $595 million in 2009 and $700 million in 2010 to get back into business with sustainable profit margins. Due to the prevailing financial risks faced by the company, of increasing costs, management has decided to layoff around 3,900 employees. Question 3 What impresses you and worries you about BNY Mellon’s integration plan and process? BNL Mellon merge is one of the greatest mergers seen in the history of financial world. One just cannot ignore the fact that this merger gave birth to worlds’ eleventh largest financial giant, which means the competition has just gotten even better and even bigger. The management has, apparently, come up with a well thought out plan to carry out the transition in a very smooth and consistent manner. PMO was established to act as a watchdog to the process of integration and release instructions in case of any discrepancies being faced during the process. To me the step to hand over the 13 business lines the responsibility to come up with their own integration plans is a sensible move, because the professionals in the related business line are well aware than anyone else to decide for their smooth transition. But on the contrary we cannot subside, the risk faced by the giants, that is, risk of increased costs, which means that since all the 13 business lines and overlapping services were given a right to choose for themselves the best integration plan, this will immensely increase the costs for the company, giving way to difficulty in transition process. To cater to this problem a limited was set up by M&I budget program, which helped smoothen way for transition. The timeline defined for the process was also well thought out, evenly spread over the spam of three years, which increased the probability of a smoother execution in a decent manner. Though, the long duration of transition made it difficult for the two giants to handle and serve their clients with continued level of services, dedication and consistency while undergoing a transition at the same time. So to me this duration defined should have been a little less so that company could get back to its normal practices in as less time as possible. The M&I has come up with a comprehensive chart which shows the progress in the transition process, of every department and business line which according to my understanding is a good measure to keep everyone updated to whatever is happening in the transition phase and will also help get better insights if the need be, for the required task which is facing difficulties in the process. Two meetings were scheduled in these two years, meeting one captured the pre-transition state of affairs in the business line, and the concerned authorities came up with detailed integration plan of how to carry out the process and what impact it’ll have on the situation of the business line. The second round of meetings was held to cover four major objectives; firstly, ‘how each group will deliver their respective 2007 synergies’; secondly, ‘2008 synergy plans’; thirdly, ‘projected M&I expenses and, fourthly and finally ‘feasible revenue synergies’. This was a good step to keep everyone updated with the progress. Besides this it was a good step to ensure that all the business line were aligned with the big idea of the company, the purpose behind the merger should be kept alive, and should not be lost during the transition process. PMO’s helped the business line executives to cover up their short comings and present in a better way during big meetings, PMO’s gave ideas to improve their performance in the future with respect to company objectives and market trends. As a precautionary measure very controlled amount of information was shared before the legal specifications of merger finalized and signed officially. This according to me is a sensible step when carrying out such big mergers. Question 4 What is hard about the integration process and likely to go wrong? It is not an easy process to undergo such a large financial merger and integration process and the entire procedure is faced with several short comings and a lot can be expected to go wrong in no time. To begin with according to my analysis, communication is one of the most essential components in keeping an organization functional in the most efficient way possible. Good flow of communication throughout the units of a business is like a machine oiled in appropriate manner to function at its full capacity. So when integrating two huge companies to form a financial giant then certainly maintaining a smooth flow of communication across all the business lines operating under this umbrella is a fairly hard task and one of the major reasons behind the failures of several companies in history has been less adequate flow of communications across the business units and offices. Secondly, the reconciliation of assets and summing up of older debts and advances, then clearing up of several legal and financial obligations before integrating the businesses is a hard job and just in case of a unintended misrepresentation of facts may lead to unexpected situations and crisis, in some cases may lead to failures of ventures too. Thirdly, conflict of interests amongst the employees of the two merging companies can lead to a tensed worked atmosphere and ultimately resulting in a hard time to settle down with each other which shall certainly result in a lot going wrong during the integration process. Fourthly, the cultural differences, evident from the history of the two organizations, may make it difficult for the two teams to work together as one team. According to my believe an organization’s culture is formed by the habits and attitudes of its employees, so is the case in this situation, hence the employees from these two reputable firms may find it difficult to integrate smoothly and continue with the functions at their full efficiency. Besides all these internal problems that may occur one need’s to keep its eyes open towards external threats as well that may adversely impact the transition process. Your competitors can take the advantage of the situation that you are distracted enough due to the internal changes occurring due to integration and may not pay attention to whatever is happening in the market and this may lead to competition taking over your piece of the pie, by attracting your customers away from you by providing better services as compared to you, since you are in transition phase and not operating at your full potential. Market trends also play an important role in smooth integration of a company. Suppose if market sentiment is negative about the conversion process then the share prices of the companies may fall resulting in a tight liquidity position for the company. Integration requires large amount of liquid assets as to clear all possible dues and debts before merging with the other company, and in such a situation if the liquidity base of the firm shrinks then it may become hard for the transition to be smooth and one of the partners may fail to merge and may default too. Intended misrepresentation of facts may also lead to hard transition situation and this may involve serious legal actions being taken against the company manipulating or misstating the facts in any way. Hence, all the above mentioned ways, to the best of my understanding, may lead to a hard integration process and tight times being faced by the employers and employees who also have their jobs on stake during a merger. Dash, Eric , December 2006, Bank of New York and Mellon will Merge, New York Times ,Retrieved from http://www.nytimes.com/2006/12/05/business/05bank.html?pagewanted=all&_r=0 Read More