With high interest rates bolstering banks’ top-line growth at the same time as fintech valuations flounder, FinServs have a unique opportunity for M&A this year. But careful due diligence and a specialized approach to retaining talent are crucial to making a purchase successful instead of a flop, according to Bain analysts.
While banking M&A activity stalled in 2022, Bain predicts in a new report that it will rachet back up this year, as healthy institutions look to “buy new capabilities to deliver their portfolio strategy faster, cheaper, and more effectively than they could on their own.”
These so-called “growth engine” deals can drive real success: For example, JPMorgan bought Nutmeg in 2021 to complement its brand in the UK and was subsequently recognized last year as the region’s fastest growing fintech app. For such acquisitions to work out – unlike another recent JPMorgan tie-up with now-defunct startup Frank – banks need to focus on two key factors, according to Bain:
First, their due diligence should focus on ensuring “the quality and distinctiveness of digital components,” as well as planning for how the acquired firm will be integrated. Poor integration plans can be a killer: A 2019 BCG survey found that the top reason acquisitions failed to deliver value was a poor integration approach.
The biggest risk is when “the acquirer lacks a clear view of what to integrate versus what to keep separate,” Bain partner Katrina Cuthell told Insights Distilled. Successful acquirers should have a “clear integration thesis linked to the sources of value” which “guides their decision making from day one,” she added.
Second, they need a specialized approach to retaining talent after the acquisition closes. For example, they should treat key acquired workers like entrepreneurs, “with independence and tailored compensation.” If banks aren’t deliberate about creating the right environment, top tier talent could get a taste of big-company bureaucracy and fly the coop.
Read the full Bain report.