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Why culture matters when banks merge

Feb 8, 2022 / Consumer Banking
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Bank mergers are occurring at a brisk pace these days. Some deals will be successful, while others will be less so. What accounts for the diverging outcomes?

Vibhas Ratanjee, a specialist in M&A integration from Gallup, discusses the role culture can play in making it more likely that a banking merger will work out according to the dealmakers’ plans.

A few takeaways from the conversation:

  • Conducting culture due diligence as part of the merger can reveal how to preserve the best of what the target bank offers.
  • Retaining impactful parts of the acquired bank’s culture can be a way for the acquiring banks to limit customer churn.
  • Big paychecks aren’t enough anymore – banks should provide greater access to “future skills” to attract and keep talent.

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Below is a full transcript of my interview with Vibhas Ratanjee,

M&A activity in the banking industry this year is forecast to continue at the brisk pace seen in 2021. And if past mergers and buyouts are any guide, a significant number of these deals will struggle to live up to the lofty expectations the day they were announced. Our guest this week is Vibhas Ratanjee, senior practice expert at Gallup who specializes in M&A integration. We’ll be talking about what acquiring banks can do to improve the chances that their deals work out for customers, employees and other stakeholders.

Vibhas, thanks for joining us on the BAI Banking Strategies podcast.

Thanks for having me on the podcast, Terry.

Vibhas, there was a lot of M&A activity in the U.S. banking industry in 2021, and expectations are that this year will be plenty busy as well. As you look back at the deals that were done in the past year, were the key drivers for those deals any different than the key drivers for M&A in other sectors or other industries?

Yes, Terry. We’re seeing some significant M&A activity and across a broad spectrum of deal sizes in banking. I think a big differentiator in banking deals, I would say, in the last few years has been capital investments in digital and technology. There’s some activity around fintech acquisition, nowhere where it needs to be, but encouraging. We all know that reduction in number of branches has continued unabated, more so in our current pandemic reality. I think many big banks will shop for new digital and post digital targets in 2022. A significant recent acquisition is Morgan Stanley’s acquisition of E-Trade, and JP Morgan has also been pretty active on technology acquisitions lately. We’re likely to see more deals that will help bank enhance their digital progress. In other sectors and industries, we’ve seen more deals aimed at consolidation or strengthening core businesses. With banks, we’re also seeing increasingly differentiated M&A focus. That includes things like a review of talent retention strategies or long-term revenue growth. Also a big focus on CX and ESG value, so a lot of distinctness is there.

You write a lot about the challenges that come with trying to make an acquisition successful. In an article you wrote a few months ago, you cite findings that the vast majority of M&A – as much as 90 percent of it – fails to pan out. How should we think about financial services M&A relative to that high fail rate? What does your research show about the main reasons why these bank deals don’t work out as they’re envisioned?

This may not come as a surprise to anyone listening, but culture has the potential to make or break your M&A. It’s a well-known fact that buyers spend a lot of time doing financial and operational due diligence, (but) very limited, if any, effort in understanding the acquired company’s corporate culture, their values, rituals, the brand, even what engages their customers. The challenge is that culture is really intangible and sometimes difficult to define. I think values, for instance, or core values, is sometimes used as a representation of organization culture. There’s a lot of work to be done there. Our recent research showed that just a quarter of U.S. employees strongly agree that they can apply the organization’s values to their work every day. Only a quarter believe in their organization’s values. So if leaders cannot define culture well enough for their own companies, how can they definitely redefine the culture of a company they intend to buy? Our work with M&A teams includes what we call a cultural due diligence process that fits within the larger due diligence framework. So I’d say that a really important factor in ensuring a successful M&A is a really deep, insightful look into culture.

Of course, M&A teams at banks know what due diligence means from a financial perspective. I mean, that’s core to what they do. But tell us more about what goes into culture due diligence. Whose job is it to do it? What are the variables that they have to consider – size of the deal, for instance, and most importantly, the benefits that it provides to the acquiring bank?

Just like financial or operational due diligence, cultural due diligence also requires a very structured and systematic approach. But many banks, what they do is they start out diagnosing the bank that they’re acquiring. But actually the work should start with first understanding your own culture. That provides incredible insights into a new strength that you’re trying to build on or new opportunities you’re trying to maximize as a result of the merger. Just trying to understand the target culture alone is narrow-minded. Looking within is the first step, but then finding points of synergy between the two cultures is the important next step. If you do that really well, if you’ve understood both cultures and overlaid them on each other in many ways, thematically you’ll know – through the process, the specific cultural strengths, or strategies, or products and technology, or customer experience, or ritual process of the target – what you need to preserve and protect, and also elements that you would do well to replace or improve, even within your own culture, and even areas that you could amalgamate and areas that neither company actually has a strength on and what competitors might. Those are the areas you need to further invest in, specifically, I think, in digital and technological spaces for most traditional banks. I think a culture due diligence is an important muscle to develop for banks. It’s something that needs to happen across different levels of leadership as well. It’s not just the deal team, but the larger organization needs to be focused on, especially in terms of those who are serial acquirers, for example. As we see more inorganic growth and consolidation in banking at the top, I’d say culture due diligence must be a critical tool in any deal team’s toolbox.

I get how you can do cultural due diligence of your own culture ahead of time, but the acquired company, the company that you’re targeting, you only have limited access to them ahead of time. What sorts of things can be done earlier in that process? If they are done, does that raise the chances that the M&A is going to be successful?

Yes, you’re right. I mean, there are challenges to doing a pre-deal culture due diligence, and partly because the reasons you mentioned. It’s really challenging to gain access to leaders, and managers, or employees, or independently assessing and observing culture on the ground. But there are various artifacts that do give you a clue. For instance, the mission of the organization, the mission, the values of the brand, or the purpose, or how the bank represents itself to their customers or digitally. I really think a great way to study a bank’s culture, the one that you’re acquiring, is to observe service delivery in their branches and their contact centers. The earlier you do this, the more intelligence you can gather on the lived, or on-the-ground, culture of the bank. Company culture, after all, influences employees and, in turn, customers. Really understanding how the bank is delivering to customers is a great way of understanding how strong their culture is. All of these early inputs are valuable, but at the same time, at the pre-deal level, they’re only a surface-level view of what might be radically different in terms of how bank operates behind the curtains. I think those differences will really manifest themselves more clearly in the post-merger phase or the post-merger integration phase. Doing a pre-deal culture review, I think, helps. I’m not sure if it dramatically improves the chances of successful M&A. It certainly sets up the post-merger integration phase very well.

For any company, it seems that culture is one of those terms that gets thrown around a lot, but it’s also a slippery term in the sense that it doesn’t have a single, universally accepted definition. It can mean different things to different companies. How do you define culture so that it can be seen as more of a tangible corporate asset?

There are probably as many definitions of culture as there are people trying to define it. At Gallup, we define culture simply as the way things get done in an organization. It’s more of a functional approach to culture. There’s no good or bad culture. Culture just is. It’s emergent, it’s ever evolving, and it’s unique to each company because each company or each bank has its history, its legacies, its unique ways of working and goals for the future and so on. That is exactly what makes culture integration all the more complex. The question would be, how can banks harmonize different unique cultural perspectives, a fully aligned ways of working through a merger? Perhaps a non-banking example that comes to mind is Amazon’s acquisition of Zappos, the online shoe retailer. When the acquisition happened, (Zappos CEO) Tony Hsieh said, “I made it very clear that Zappos’ unique culture must be preserved,” which Amazon did. They knew that the special ways of getting things done need to be understood and sustained. Let me give you a recent banking example. Your listeners, I’m sure, are familiar with Umpqua Bank up in the Pacific Northwest. It’s a brand and a bank, solid brand known for its customer obsession and innovation. It was just bought by Columbia Banking System, a company Incidentally lower in valuation than them. Now the company is retaining the name Umpqua for its strong brand recall and differentiated value proposition, and the holding company will be called Columbia Banking System. I think this is a great example of reorganization, of synergy and appreciation of the strategic brand assets of two different banks that together will create one of the biggest banking systems here in the West. What I’m saying is that M&A due diligence needs to deeply and intentionally look at culture to find that secret sauce of the bank being acquired. Gallup works with banks that are merging through very careful brand purpose and culture reviews. We use multiple diagnostics tools, so qualitative focus groups or quantitative research, ethnographic service observations. We can understand ways of working and behaviors. We also do audits of how information and communication flows using social network mapping and a review of how decisions are made and so on. All that intelligence is really worth its weight in gold, not only during the merger process, but, of course, post-merger integration and ongoing M&A strategy as well. Those are important elements for M&A sustainability.

You mentioned talent earlier in our conversation. We keep hearing about the war for talent now and how at banks in particular, there’s a lot of poaching going on. It’s happening bank to bank. There’s also a lot of bank people being lured away by other industries, most notably on the tech side. This more competitive talent environment, how does that affect the culture component of M&A?

For as long as we remember, banks were the ones who always paid top dollar for great talent. Not as much today. In fact, there’s some research I’ve seen that many millennials are rejecting a career in banking. There’s a massive brain drain from banks as well. I really think a big shift driving that is changing customer needs. As customers evolve and become increasingly digitally savvy, the old conventional banking skills are likely to come to have a lower value. Future skills will matter more. Digital competence and future fluency will matter more than traditional banking know-how. We recently did a study last year on upskilling. We found out that almost 30 percent value and want technological digital skills, but only about 15 percent participate in any form of upskilling that is digitally oriented. For M&As, research has also shown that things like retention bonuses to attract talent matter less than investments in personal development, growth and capability-building after the merger. I really think banks need to overinvest in these future skills if they are to retain top talent. This has important M&A implications in banking as well, knowing that many future-focused banks are making strategic acquisitions to bolster their digital competencies. Banks also need, I think, a way of identifying key talents within the acquired company – not just using subjective assessments by leaders in the acquired company, but predictive and scientific talent assessments. I think it really is about building trust. You have to build trust among what I call the “super keepers” and key talent in the acquired company – trust that they can have a well-defined, fruitful career in that merged entity.

There’s a trust factor for customers, too, right? That likely ties back, at least in part, to culture. People think about trust with their banks differently than they think about it in their other retail relationships. The acquiring bank probably wants to keep the acquired bank’s customers, so how should we think about the culture integration in terms of creating or maintaining that crucial customer trust?

Yeah. I think a culture of due diligence must critically include customer feedback. You’re right, banks can have a more long-term relationship with customers compared to other industries, where the relationship might be more transactional, like consumer goods, for instance. That’s because customers kind of get used to the bank’s products, locations and channels, and ways of doing business, and so on. A merger can be a highly disruptive event for customers, especially for fully engaged and loyal customers because these customers see the bank as a crucial part of their overall financial well-being. Dramatic changes in the bank’s structure, service or offering after a merger, without good communication, without good rationale, can, I think, lead to uncontrollable customer churn, and particularly of your most valuable, most engaged customers. We did a major retail banking study late in 2021, and we found out that only 17 percent of banking customers trust their banks – that is, their preferred financial institutions – to look out for their financial well-being. When the customers strongly agreed with that statement, 68 percent were fully engaged with their banks. These numbers are much better for credit unions, by the way. Really focusing on financial well-being is important. Acquiring banks must understand what customers at acquired banks really want – again, the brand assets you must protect, preserve and enhance. They must overtly and explicitly communicate to all customers being acquired as a result of the merger about those elements of the brand and so on. This is what will build customer trust after a merger. I really feel a comprehensive, unifying, financial well-being strategy is key to any banking merger.

Some culture clash is probably inevitable any time one bank buys another, but what if acquiring Bank A gets in there and discovers that acquired Bank B has a significantly different culture from their own, and that these differences, no matter how hard they try, they really do seem to be unbridgeable. Do you see that much? And when you do, what do Bank A and Bank B do then?

But hopefully, a culture due diligence can provide that as an early warning sign. Wouldn’t it be great if culture, compatibility and integration potential were critical determinants of strategic fit in kind of a go/no go for acquisitions? But a lot of that surprise can be avoided through a well-designed cultural due diligence process. I’d say that Bank A must understand why they feel the differences are unbridgeable, like you mentioned. This is where there might be multiple perspectives and potential biases with Bank A. It’s like the in-group and out-group bias. Bank A might consider Bank B to be radically different from them because of their own narrow view of what a good culture is. But a deeper reflection of cultural characteristics and a mapping of collective strengths might reveal to Bank A that they actually have a lot more in common than they think. Then amplifying those areas of compatibility and respecting those valuable differences might be the way to go. Beyond the signs and the rigor and discipline of a due diligence process, I really feel the success of a great merger is reliant on good leadership, inclusive leadership – leaders who are open, transparent, those who deal with their own biases effectively. One of the first steps in our culture due diligence process at Gallup is getting leaders on both sides to engage in conversations about their unique strengths. That first meeting, where leaders across both organizations, across the table, see the merged entities’ collective strengths and potential is such a powerful kickoff to a long-term partnership and journey.

You’re right that no one organization has cornered the market on good ideas, so keeping an open mind about ways to improve their business is critical for bank leadership teams involved in an acquisition. So Vibhas Ratanjee, senior practice expert at Gallup, thanks again for making time to share your insights with us on the BAI Banking Strategies podcast.

Thank you, Terry.

Terry Badger is the managing editor at BAI.