After a year of caution, C-Suite leaders appear to have finally reacquired a healthy appetite for merger and acquisition activity. Look no further than the $35 billion acquisition of Discover Financials by Capital One. This investment by one of the ten largest banks in the United States reflects revived confidence in the market’s trajectory and could have a cascading effect that strengthens the economy.
What’s causing the increased confidence? Moreover, how does the proper data and due diligence contribute to successful M&A activity? We’ll explore both questions and provide further insights financial institutions on both sides of the desk need to know.
Why is Banking Merger & Acquisition Activity Surging in 2024?
Following on McKinsey & Company’s prediction of high M&A activity in 2024, NASDAQ shows global Q1 2024 M&A activity up 30% YOY & 15% from Q4 2023. Though dealmakers have not yet recreated pre-pandemic heights, the burst of investment is encouraging.
According to Brian Levy, Global Deals Industries Partner for PwC, three main factors are driving this acceleration. “First, the recent improvement in financial markets, spurred by decelerating inflation and expected reductions in interest rates; second, the pent-up demand for (and supply of) deals; and third, the pressing strategic need for many companies to adapt and transform business models that is the very essence of dealmaking.”
Specifically for banking and finance leaders, concerns around potential bank failures have eased, a key ingredient in a healthy M&A environment. On the other hand, the Fed seems less likely to cut interest rates, and recent losses among major bank stocks has the potential to temper buying enthusiasm among acquiring institutions.
Still, financial institutions must meet high demands for scalability, which requires some expansion through M&A. OceanFirst Financial Corp. Chairman & CEO Christopher Maher says, “There are these very significant forces around scale and efficiency. A wider asset base is a very helpful thing…you can get a lot of scale from mergers and acquisitions.”
Why Data Quality & Governance Is a Core Part of Due Diligence
While historically most banking M&A due diligence dealt primarily with financial data, that scope has expanded in recent years. Data is not only a tool to measure the performance of an acquired company but can function as a value-generating business asset once the ink has dried on the deal.
Poor data quality and governance can lead to problems not only during M&A due diligence, but can expose the merged entity to significant post-acquisition risk. Here are three reasons why.
Financial Loss
If a company leverages and maintains its data as a value-driving asset, that should increase the valuation of the acquired company. With high quality data, stakeholders and the C-Suite can better anticipate emerging trends, effectively optimize services, and boost customer satisfaction.
On the flip side, poor data practices expose businesses to heightened risk and liability, which have the potential to decrease its valuation during thorough due diligence. Failure to account for either case can lead to over- or under-valuation.
What’s more, the Citigroup example from just two years ago shows how poor data management can result in reputational damage, which the Federal Reserve and FDIC said, “could hurt its ability to produce accurate reports in times of duress, and that could hamper its ability to successfully execute resolution planning.”
Acquisition Quality & Completion
Despite the increase in M&A activity this year, deal completion rates have fallen slightly. Datasite tracks a decrease from 49% in 2023 to 45% in 2024. Across all sectors, businesses are treating acquisitions with greater scrutiny.
Financial institutions seeking acquisition should build and streamline their merger and acquisition data strategy now. Likewise, acquiring companies should carefully examine data quality and governance during due diligence. If you don’t, you’ll likely fall behind your competitors before you can implement proper accuracy, availability, and hygiene or invest time and resources in doomed-to-fail deals.
Post-Acquisition Value Creation
Ultimately, M&A involves synergizing resources—including data—to increase business value. However, it’s only possible to realize this value if the acquired company has the people, processes, and systems in place to properly govern that data.
If you acquire an organization with bad data practices, you risk exposing the rest of the merged entity to those bad practices. This can result in the inverse of your original intention—destroying value rather than creating it.
What Are the Key Factors in Building a Merger and Acquisition Data Strategy?
A robust merger and acquisition data strategy should focus on two areas: integrating physical and virtual components and ensuring consistent data management—adherence to best practices, regulations and compliance standards, and security protocols—to ensure all data meets the merged entity’s needs.
During the due diligence process, it’s important to evaluate these specific data governance practices.
Sourcing & Acquisition
Strategic data sourcing & acquisition helps to minimize risk exposure only capturing the information you need when you need it. Additionally, data sourcing should involve getting as close to the data source as possible, ideally early in the data supply chain. This reduces the risk of manually (and incorrectly) prepared data influencing the process.
Consistency & Standardization
Misspelling, abbreviations, typos, miscategorizations: these small errors can significantly impact broader data accuracy, especially if they’re used to train AI/ML models. By implementing data standardization best practices, you can ensure all information is in an acceptable and usable form. This process includes:
- Defending the standard against which all data will be conformed.
- Testing records against that standard using parsing, data profile reports, data dictionaries, etc.
- Transforming non-standardized data to match the data standard.
- Retesting against the standard until all data has been properly conformed.
Metadata Management
Just as important as the data itself is the story behind the data, from initial creation to the point of consumption. This metadata is critical for financial institutions who want to optimize and improve the efficiency of the data’s present state.
Metadata management is particularly important for M&A in financial services. As companies grow in organic ways, acquiring assets or entities wholesale, inconsistency in metadata can arise due to the amalgamation of different naming conventions. Ensuring uniformity across metadata can promote reliable reporting and prevent lopsided customer experiences.
Access, Security & Compliance
The average data breach costs financial services organizations a staggering $6 million. Maintaining data security best practices, regulatory compliance, and controlled access is critical for acquired companies to have prior to acquisition—otherwise, the acquiring company will expose itself to undue risk.
Proper data governance and hygiene are central to overcoming this challenge. Acquiring companies should have a sense of whether privilege creep has occurred, regulatory compliance has been upheld, and cybersecurity practices have been prioritized. Otherwise, the acquisition might create a backdoor for hackers or a ticking time bomb of regulatory penalties.
Building a Lasting Merger and Acquisition Data Strategy
When given appropriate attention, the due diligence process is not only a time to verify and value business assets, but a chance to create a robust roadmap to seamlessly combine two distinct entities into a superior single one. Data can and should always be integral to that process.
Prioritizing data quality and governance across two organizations can be a challenging prospect, but it’s not impossible with the right partner. Here’s where w3r Consulting can help. Our data and digital enablement solutions can help you evaluate whether you’re prepared for rigorous data evaluation during the M&A process, whatever side of the desk you’re on.
Ready to elevate your merger and acquisition data strategy and stay current with the latest trends? Learn more about our data and digital enablement solutions here.
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