Putting Together the System Integration Puzzle
Insurance Networking News, September 1, 2008
Belgium-based InBev NV acquires U.S. brewer Anheuser-Busch Cos. Inc. and Delta Air Lines and Northwest Airlines merge. When announced, mergers and acquisitions (M&A) always grab headlines. The news causes a variety of initial thoughts and reactions-excitement about the opportunities, concerns about job loss, questions about service changes, etc.
The insurance industry has seen its share of M&A activity over the past few years and experienced the same thoughts and reactions. Some succeed; some fail, and this could depend on how well the merging companies integrate their systems.
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The history of M&A in any industry is not really great, says Jim Dean, principal with True Course Consulting, a Palm Beach, Fla.-based consulting and advisory firm focusing on the reinsurance, direct property/casualty and consumer-directed healthcare markets. "Generally, shareholders do not get the full return of that investment. Many times, on paper, the financials of combining the two companies look good, but the cost and the effort to integrate the companies from an operational standpoint-getting the same systems, duplicate overhead-becomes much more difficult than what they originally thought."
"Typically, in an acquisition, you get only 15% or 20% efficiencies by merging back office systems from two companies, but you may not realize that in an insurance merger because of the complexity, or you may realize it five years later than you actually planned," Dean says.
A study, "The Big Exit: Executive Churn in the Wake of M&As," from Virginia Commonwealth University, finds that poor post-merger performance and unrealized synergies cause more than half of all M&As to fail, and that up to one-half of all target firms are subsequently divested.
The study analyzed the turnover patterns at more than 1,000 firms, and examined the employment of more than 23,000 executives. It concluded that target companies lose 21% of their executives each year for at least 10 years following an acquisition, more than double the turnover experienced in non-merged firms.
A COMPLEX PROCESS
With all the mounting evidence of mergers failing to meet expectations, M&A activity could take on even more controversy.
"Going forward, CEOs and presidents are going to be much more highly scrutinized by the shareholders in terms of proposed acquisitions as to whether the merger will actually work-not look at just the assets on the balance sheets or the total sales numbers-but whether the two companies can become one organization in the future," Dean says.
Jim Dean
Bob Alban, director-mergers & acquisitions at Stevens Point, Wis.-based Sentry Insurance, knows how much work it takes to make two companies one. "Consolidation of platforms and systems is the largest (most resources, cost, time) integration task when acquiring an insurance company and probably the second most important activity that you need to get right in order to create value through M&A," he says. "The most important activity would be communication to stakeholders-employees, policyholders, shareholders, vendors, etc."
Consolidation of platforms isn't unique to the insurance industry, but it may be more complex than other industries. "The insurance industry typically has more legacy systems than most other industries. So, oftentimes you'll find systems that are 15 or 20 years old," True Course's Dean says. "This means the systems have 15 or 20 years worth of corporate intellectual knowledge built into them and when you merge two different companies, in order to gain the efficiencies, you need to merge those two systems into one processing system."
IT DUE DILIGENCE
Dean, who previously served as a senior manager with BearingPoint, co-authored a report, "Insurance M&A: Examining the Operational Considerations." The report states financial due diligence may take 30 days, but figuring out how to merge two companies by traditional means can take months. Companies should employ a tailored due diligence framework to accelerate the defining of steps needed to align existing operations, processes and systems with the target company, according to the report.
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