The 2020 Mid-Year Economic Update_long

Culture Clash: Acquisitions of Distressed Rivals May Make Integrations More Challenging

My bank was recently acquired, out of collapse, by one of the largest banks in the country. The transition from one to the other was going pretty smoothly, and I hadn't noticed any changes - for the most part - in how they did business with me. Until now.

I received a letter last week telling me that I had gone beyond the limited transactions" my account allowed online and via check (three!), and that I had been charged an over-activity fee for this transgression. I am getting married this month, so I have been writing more than the usual number of checks and conducting more than the usual number of online transactions. Still, this has never been an issue before. Clearly in the merger of the two banks, my free checking account had been downgraded, so to speak, to a category that had ...

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My bank was recently acquired, out of collapse, by one of the largest banks in the country. The transition from one to the other was going pretty smoothly, and I hadn’t noticed any changes – for the most part – in how they did business with me. Until now.

I received a letter last week telling me that I had gone beyond the limited transactions" my account allowed online and via check (three!), and that I had been charged an over-activity fee for this transgression. I am getting married this month, so I have been writing more than the usual number of checks and conducting more than the usual number of online transactions. Still, this has never been an issue before. Clearly in the merger of the two banks, my free checking account had been downgraded, so to speak, to a category that had not existed before. It was a way to try to get me to upgrade to an account that would allow unlimited transactions. And no doubt a way for them to make more money off of me.

Most importantly – to me – it was a sharp digression from my old bank’s strong customer service and communication model. Though I had planned to change banks post-marriage anyway, this has made my move more pressing and confirmed my decision to go with a local credit union. I do not want to find out what other fees and limitations are on their way as the integration between the two banks is completed.

This small event brought home to me the importance of cultural alignment in M&A; small changes in how you do business can push away the customers of the acquired business. Clearly, the two banks in my example – one a regional, and one a large national – have different models. Perhaps the risk of poor alignment and integration is higher when a company is bought out of collapse or bankruptcy.

A recent study supports this idea. As reported here by Reuters, the study by a London business school says that companies who bought distressed or insolvent rivals in the past 25 years saw lower returns on equity and underperformed buyers of healthier firms.

One of the study’s authors, quoted in the Reuters article, says: "Even though acquisitions of distressed firms are viewed as value-enhancing by the market – no doubt driven by low valuations – the integration process of a distressed target proves challenging for many acquirers." It is something to keep in mind for companies making moves on distressed targets.Many recent transactions in distribution have been out of bankruptcy: Stock Building Supply (Stock: A Casualty of the Housing Crisis), for example, and ORCO Construction Supply (ORCO Construction Supply’s Deal with HD Supply).

On the flip side: Distributors often think that when competitors in their local markets are acquired by a larger national or multinational company, they automatically get stronger – with additional inventory, marketing resources and backing. But this is not always the case. Customer service often suffers, at least initially, and there will be opportunities for the local distributor to meet the needs of customers looking for an experience they may feel they are no longer getting from the acquired business.

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