How Blockchain Can Reimagine M&As..?

The year 2020 will go down in history as a year of unprecedented humanitarian crisis. The COVID-19 health crisis has amplified every other crisis one can imagine – economic, social and in some countries, even political. 

The first response to this crisis, world over, has been with a lockdown. State-enforced lockdown has brought people, businesses, and the economy, at large, to a standstill. There is a breakdown in supply chain of commodities, consumer consumption has come down, and businesses are shut for days, weeks and even months. This has led to the worst economic crisis in decades. The unpredictable nature of the COVID-19 outbreak is making it extremely difficult for businesses to evaluate the potential impact on their future prospects. 

In a few months or maybe a year, things will get better, and life will come back to normal. In order to recover from the aftermath of this crisis, businesses will be required to hand-hold each other and provide the support for survival. We will see a rise in the number of mergers and acquisitions (M&As) and a consolidation of markets in general, a typical post crisis scenario. 

The what, why, and how of mergers

Merger can happen for a variety of reasons, including: 

• Overcoming slow growth and profitability
• Limiting competition by increasing market share
• Combining strength of underutilized resources – human, physical and managerial
• Government bailout plans in times of economic crisis or pandemic like COVID-19

What do mergers achieve?

• Diversification of a company, for example, new products and services
• Economies of scale and increase in income in the longer run
• A reputation of being aggressive and strategic opportunism
• Enhanced profitability through operating efficiency and synergy
• Reduced tax liabilities and tax reliefs in case of government backed mergers

A typical merger is a four-step process. Figure 1 shows the merger of two banks as an example.

Figure 1: The merger of two banks

1. Infrastructure Scaling 

Acquiring Bank A needs to scale and provision for more infrastructure in order to support the people and processes of Bank B. For example – Hardware, Database, Storage, Cloud etc.

2. Functional Integration

Bank B’s line of products and services will have to be integrated with Bank A’s products and services for a complete suite of offerings. It may also require adopting Bank A’s ERP systems like a core banking solution.  

3. Data Migration

Customer and product data of Bank B are migrated to Bank A’s infrastructure once the above two steps are complete. 

4. Operating Model 

People and process i.e. operation teams are synergized at the end for business continuity. 

Why do mergers fail? 

• Legacy systems are difficult to integrate with complex processes 
• Tricky data migration with bad quality data that leads to discrepancies 
• Asset reconciliations are a challenge due to different software systems 
• Expensive and time consuming 

Can distributed ledger technologies address the challenges in a merger? 

M&A are long drawn which lasts for a few years and involves multiple parties at different stages of its lifecycle. For example – Lawyers, external advisors, auditors and tax consultants, each with their own people, processes and products.

The process usually starts with due diligence, asset evaluation, business valuation, legal /regulatory compliance, and process documentation. All this in order to establish Trust between the two parties. Today, blockchain technology or distributed ledger technologies (DLT), with its decentralized and irrefutable ledger of transactions maintained by the participants in the distributed system, can help establish this trust and share information far more effectively and securely.

In the example given in Figure 1, Bank A and Bank B can be merged into a single entity Bank AB. The front-end systems of one bank can be built to cater to the products and services of the other bank and vice-versa. And the front-end systems of the two banks can interact with individual back-end systems of Bank A and Bank B that is maintained on a distributed ledger.

This concept is not new. Many a times, when M&A integration doesn’t complete due to its people, processes and product complexity, businesses put up a new face i.e. of the new integrated entity but with older individual systems running at the back. This obviously is a face-saving strategy.

How does blockchain help?

1. Enables an effective and tamper-proof way of data sharing between organizations
2. Eliminates the need to provision additional infrastructure for data migration
3. Facilitates real-time reconciliation of transactions between the two systems and supports real-time audit/compliance checks that are quite frequent in M&As
4. Smart contracts can streamline the merger process from declaration to signing of the deal
5. Creates potential to reduce cost by 50 % and speed up the delivery of acquisition by eliminating unnecessary integration of people and processes