Consolidating The CEO’s Ego

Why does most market “consolidation” in the insurance and financial services sectors rarely leave existing shareholders with a smile on their face? If the objective, is to rapidly improve top and bottom line performance shouldn’t we first start from a position of strength not

1. Timing – with rare exception consolidation accelerates when convergent forces (capital, technology and distribution) and perceived wisdom infer it is the only viable option for profitable growth. The amount of uncertainty and competitive threat is sufficiently high that the very survival of the acquired firm is at stake (JP Morgan / Bear Stearns).

2. Re-Invention in A Tough Market – the very reason for consolidation is many businesses and top management have run out of other ideas. Faced with heightened pressure on operating margins in core parts of the business, there is a belief that top management can “buy time” slashing overheads in the combined businesses before conditions improve. What if those market assumptions are incorrect? A protracted period of sluggish demand continues or indeed customers have become more tolerant of managing greater levels of risk on their own balance sheet (reinsurance).

3. Cultures Clash – the deal logic is largely predicated on a new growth strategy, tactics and execution and the CEO’s ego without regard to changing operating beliefs and all employees behaviour in the newly combined entity. Individual teams become fiercely defensive about their client banks, unwilling to embrace new ideas or working habits, which they don’t see in their own best interest. Competitors prey on top performers’ frustration giving them the promise of an unfettered focus on what they love to do best and they are great at.

These are but three key factors you can readily apply to any sub sector in a period of intense consolidation. The loser in many cases is the existing shareholder of the acquiring businesses, their customers and their best employees.

Is there another option? Of course. Strong and dynamic businesses don’t need to play actively in the market consolidation. Sure they can pick off disenchanted and talented people.

This presumes that the CEO has a high level of self-worth and a trusting relationship with his Board and shareholders. He is willing to subordinate his own ego for the improved health and well-being of his firm in the long-term. You would be surprised how few CEO’s possess those traits in abundance.

Copyright James Berkeley 2015. All Rights Reserved.

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