Enabler or blocker? How organisational culture can unlock the true value of Fintech M&A

The recent collapse of well-known fintech partner Silicon Valley Bank (SVB) sent ripples of panic through financial markets after customers withdrew deposits due to fears over its solvency. In response, HSBC, acquired the UK arm of SVB, and First Citizens Bank, a fast-growing American banking dynasty, acquired SVB’s US operations. Both moves were seen as strategic attempts by the purchasing banks to strengthen their respective positions in the market and enhance their ability to service innovative and fast-growing firms.

In recent years, other traditional banks have made similar fintech acquisitions to protect their market share, including the Goldman Sachs acquisition of Greensky in 2022, the Lloyds Banking Group acquisition of Embark and Cavendish Online in the same year, and the Capital One purchase of TripleTree in 2021.

A whopping 80%¹ of tech acquisitions end in failure, compared to 50% across non-tech sectors

While the narrative around HSBC’s rescue of SVB is optimistic, and there is potential for both companies to benefit from the acquisition, it is important to consider what happens afterwards, as many financial institutions struggle to unlock the true value of their acquisitions due to challenges in the post-acquisition integration process. Large traditional banks need to be aware of challenges they’re likely to face when acquiring smaller, dynamic companies.

As promising as they are, tech acquisitions are anything but easy – especially when it comes to merging fintech start-ups with more traditional financial institutions characterised by legacy business processes and systems.

Think about the integration of the target company’s culture early on

Acquisitions face many challenges including tech integration, talent retention, poor evaluation or overestimation of synergies, and unexpected costs. Yet while thorough due diligence efforts unearth most potential roadblocks pre-deal, it is during the integration period that the most critical components need to be properly understood, analysed and plans put in place to fully amalgamate, including organisational culture.

But what exactly is an organisation’s culture? At FTI Consulting, we examine culture by looking at the way it manifests in individuals (such as how a person expresses themselves at work, or what drives a person’s actions) and in the collective (such as how work and responsibilities are shared, or how people connect beyond formal structures). 

It is a common myth that organisational culture cannot be measured². But because culture encompasses many intangible factors, companies struggle to directly quantify the impact of their culture on their financial performance. This can be a costly mistake when it comes to M&A. Gartner research³ shows that two out of three planned changes lead to wasted resources, cost pressures, and reputational damage.  As M&As usually result in a series of changes across an organization, this disruption is often magnified during complex integrations. And in a study⁴ of over 4,500 M&A transactions globally, researchers found that it was the companies with greater cultural dichotomies who performed worse, with the average return on assets decreasing by 0.6 percentage points three years after the merger.

The message is clear: understanding the culture of the company being acquired and its compatibility with the acquirer’s isn’t just a nice-to-have – it’s business critical.

But what does the roadmap to successful cultural integration look like?

1. Ease the culture shock
   

   Gain a good understanding of the cultural compatibility between the companies before the acquisition by identifying core similarities and differences, and continue this effort throughout integration. In our experience of leading ‘cultural due diligence’ in the acquisition process we would advocate assessing the strengths and weaknesses of each company’s culture. By identifying possible friction points as well as areas of harmony between the two, you can create a cultural integration plan that outlines which parts of the culture would be preserved and which would need adjustments.

2. Agree on a communications strategy
   

   Clear and consistent communication is critical to ensuring both workforces understand the integration process and buy into it. In our experience of supporting businesses with this, we believe it is vital to share a vision for the combined business, including the benefits outlined in the equity story, reaffirm commitment to employees, and build excitement for the way forward.  Stakeholder-specific messaging can inspire and provide security, as well as outline key objectives of the acquisition, the opportunities it presents for people, the future employee value proposition and what to expect at each stage of the integration process.

3. Create cross-functional teams that have clear governance, goals and accountabilities
   

   When a large corporate client approached us in 2021 with the fear that the innovative drive of the more agile company they’d acquired would be lost in the integration process, we advised them to develop effective cross-functional teams with a mix of individuals from both companies. A newly merged financial institution should bring together skills and capabilities from different parts of the organisation, having newly acquired software engineers, data scientists and cyber security specialists collaborate with established in-house teams like marketing, IT and Finance.

4. Adjust and update talent management strategies
   

   It is important to note that the newly integrated fintech employees made the conscious decision to join a fintech over a more established financial institution for its dynamic environment and innovative solutions. To preserve this culture, we advise our clients to consider how they can craft new roles to cater to fintech talent. Some organisations we’ve supported established innovation labs or digital incubators where specialised cross-functional teams collaborated on cutting-edge projects.

Maximising the benefits of the acquisition

By understanding cultural compatibility, communicating clearly and openly with employees about the integration process, creating innovation-driven cross-functional teams, and reassessing its talent management strategy, the merged company is poised to maximise the mutually expected benefits of the acquisition.

How we can help

FTI’s People and Transformation practice works with business leaders to ensure their organisation can transition from the current to future state successfully and sustainably. Drawing on decades of experience across industries and in every major geographic market, we work with organisations to accelerate the future state of the business through targeted communications, change management and enablement activities. Our team has deep expertise in supporting corporate and financial clients execute the people side of growth deals and corporate transactions across the deal life cycle. This includes merger of equals, divestiture, spin-out, carve-out and bolt-on acquisition, as well as change in ownership structure.

References:

1. Finder (2019) Fintech acquisitions: Prone to failure?, FINDER. Available at: https://thefinderproject.eu/2019/03/27/fintech-acquisitions-prone-to-failure/ (Accessed: 24 May 2023).
2. Leadership, T.L. (2020) Organisational culture can and needs to be measured. Available at: https://tpcleadership.com/be-en/organisational-culture-can-and-needs-to-be-measured/ (Accessed: 24 May 2023).
3. Gartner (2018) Diagnosing cultural tensions in times of change. Available at: https://www.gartner.com/en/corporate-communications/trends/diagnosing-cultural-tensions (Accessed: 24 May 2023).
4. Gelfand, M. et al. (2021) One reason mergers fail: The two cultures aren’t compatible, Harvard Business Review. Available at: https://hbr.org/2018/10/one-reason-mergers-fail-the-two-cultures-arent-compatible (Accessed: 12 June 2023).