Getting what you paid for: Winning customers through an acquisition

Financial markets typically react to news of a corporate acquisition by driving down the stock of the acquirer and bidding up the price of the target company. Why, if the acquisition is a smart move, should the markets drive down the stock of the acquirer?

The answer is that the old adage about second marriages often applies to corporate acquisitions as well, i.e. it represents the triumph of hope over experience. Most analyses show that acquisitions destroy rather than create shareholder value and investors are betting that history will repeat itself, despite management promises of synergy and savings.

It is possible to defy history by managing the post-merger process very carefully. Most companies focus on ensuring that internal processes and organizations are integrated smoothly. The greatest upside value, however, comes from identifying and retaining valuable customers and ensuring that their loyalty and commitment is sustained through a transition. In cases where the acquisition results in a broader range of products or services, the opportunity to sell these additional products to a bigger base of customers can produce significant value and incremental profits.

I learnt this lesson first hand some years ago. In a previous life, I headed up knowledge-based marketing for one of the top five banks in the United States. They got to that position not through organic growth but through a series of acquisitions in the '80s and '90s. When I joined them in the mid-'90s they had just finished acquiring 85 banks over a 10-year period to grow from $7 billion to $150 billion in assets.

By the time I left a few years later, they had doubled in size again, again through acquisitions, although this time around it was a few large banks, rather than many small banks. The nature of how customers were treated after the acquisitions were done also changed. In the earlier acquisitions, the focus was on streamlining the operational systems, mostly the IT infrastructure for maintaining the different types of accounts.

Branch consolidation, in situations where banks were acquired within the existing service territory, resulted in some cost savings as well. However, with all of this internal focus on operations and cost cutting, customers, both commercial and retail, often got the short end of the stick. It was no surprise that customers often voted with their feet and took their business to the competition. Customer attrition rates were extremely high; sometimes we lost as much as 20 per cent of our customers and volume within six months of an acquisition.

It did not take long to convince upper management, once we had the data, that if we proactively managed these customers and showed them that we cared, we could reduce attrition rates and even improve cross-sell ratios and customer profitability. This, in turn, could help justify the premium prices we were paying for these acquisitions in what was then a bull market.

Getting close to the customer
The challenge, however, was to identify the customers that were either most at risk of defecting or the most valuable to retain or both and then put in place mechanisms to communicate with them and ensure that they had a pleasant or, hopefully, a delightful experience through the transition. This had to be done so that we could focus our limited resources where it mattered most, rather than spreading it around and diffusing the impact. This ensured that we not only retained them, but had their ongoing loyalty and commitment.

We did this by getting our customer information team, from within marketing, involved at a very early stage in the due diligence process, even prior to the acquisition being finalised instead of getting that group involved after the fact. This gave us a head start in access to critical information about common customers between the two institutions, the nature of the relationships and what factors drove profitability.

Once we had this information, we could put together customised programmes, with bankers on the commercial side and with marketing and service reps (both in the branches and the call centre) on the retail side. As an example, we figured out which commercial bankers were most important to retain (as staff) and provided them with assurance about their own jobs and compensation but also with scripts and strategy for them to contact their most valued clients and assuage any concerns and provide positive reasons for them to maintain the relationships.

On the retail side, letters to individual customers, instead of being form letters that informed them of the change, were personalised and customised. They reflected the specific relationship the customer had with the bank and attempted to proactively address the kinds of concerns they may have had.

For example, for mortgage customers, they needed to be told that their monthly payments could still be mailed to the same address while ATM card holders were informed that they would now have a choice of a much broader network of ATMs to use without a fee and they could continue to use the same card and password for some period of time. They were also provided special phone numbers to call for merger related questions. This phone bank was staffed by operators specially trained for this purpose and also avoided our usual customer service folks being inundated with these questions.

This customised and personalised approach led to a significant reduction in customer attrition. We measured the incremental improvement; by having control groups of customers who did not get this personalised treatment and were treated the "old" way.

This ensured that the new approach got its proper credit and we could do return on investment calculations, since there was a cost involved with this approach. Otherwise we tended to get into inconclusive debates about how much of the improvement we would have gotten anyway and how much of it was truly due to the new approach.

The numbers were impressive. This has now become a common practice and is now followed by many companies, not just banks but also telecom companies and others, who want to get the most bang for their acquisition buck.