Mand AValue Creation

Creating Value in
Financial Services
M&A
Contact: Eric Aboaf
March, 2000
Copyright© 2001 Bain & Company, Inc.
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda
 Creating value in merger and

acquisitions
-Trends & Principles
-Revenue Synergy Opportunities
 Issues in financial services
 Examples
GXC
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M&A Activity
US and European M&A activity is
exploding.
Transaction Value (Billions of Dollars)
$1,789
$2000
$1,634
$1800 CAGR
$1,401
(1992-
$1600 1999)
Europe 39%
$1400
$1200 US 45%
$759
$1000
$641
$800
$520
$434
$600
$361
$343
$339
$295
$265
$241
$230
$220
$193
$163
$161
$157
$400
$145
$133
$137
$136
$112
$91
$52
$200
$0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: SDC
GXC
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PRINT TO READ
US M&A Activity by Seller Industry

(1992-99)
Value of transactions vary across industries, with
financial services being the largest area.
$1,500
$1,279
Aggregate Offered Value ($ BN) (92-99)
$1,000
$796
$582
$427
$500
$349
$319
$271
$229
$173
$154
$142
$119
$107
$99
$76
$70
$61
$0
Telecommunications
Financial
Retail
Medical
Leisure &
Entertainment
Electronic,
Measuring,
& Aircraft
Equipment
Broadcasting
Food
Processing
Aerospace
Office
Prepackaged
Software
Services
Business
Services
Chemicals
& Drugs
Health Services
Electric
Oil & Gas
Utilities
Miscellaneous
Source: SDC (March 98)
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M&A Value Creation Opportunities
M&A value can arise from generating the full value of an
undervalued entity or by adding value to underperforming assets.
Buy cheap Add value
Take advantage of Spot new market Generate

inefficiencies in the trends early synergies
market
Build on core or New focus on

closely related harnessing revenue
adjacency synergies
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Agenda

acquisitions
 Examples
GXC
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Primary Elements
Existing New customers

New markets
customers existing markets
Cross sell
Products
Retention
Resources
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Cross-Sell

New markets
Cross sell  Improving  Leveraging

share of wallet product/channel
 Insourcing combinations
Products
Retention
Resources
GXC
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Product

New markets

Products  Strengthening loyalty  Tailoring products  Creating offerings to

through value-added to beat competition enter new markets
products
Retention
Resources
GXC
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Retention

New markets


products
Retention  Combining capabilities

to address root
defection causes
Resources
GXC
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0
Resources

New markets


products
Retention  Combining capabilities

to address root
defection causes
Resources  Building  Establishing a

infrastructure for platform to launch
growth ventures
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1
Select Examples
Various players have taken advantage of revenue
synergies in their deal activity.
Existing Customers New Customers / New Markets
Cross sell  Chase/Hambrech & Quist  Mellon Bank/The Boston Company

 U.S. Bank Corp./Piper Jaffrey (forward integration into distribution)
 BB&T/Insurance companies
Products  Alliance Capital/Pimco  Putnam/T.H. Lee

 Merrill Lynch/ Mercury (distributor  Citistreet
buying product capabilities)
(product enhancement)
Retention  Charles Schwab/US Trust

(access to high-end brand)
Resources  BankOne/FUSA (direct mail capability)
GXC
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2
Industry Screen
Given your industry, this screen can be used to
help prioritize opportunities.
Value of Revenue
Industry CPRR Synergies
 Commercial Banking/Advisory
20-40% High opportunity for
C P R R revenue synergies
Medium opportunity for
revenue synergies
Low/no opportunity for
 Consumer Banking/ revenue synergies
Mutual Funds C P R R 15-30%
 Specialized Financing
Combinations
C P R R 10-20%
Source: Literature Searches; Competitor Analysis

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M&A Value Creation
M&A valuation encompasses three distinct steps to identify
the future financial performance of the target.
200%
Financial deal
Percent of Current 180% structure
Market Value
160%
(Debt and Equity)
Synergies
140%
120% Stand alone

Premium operating
improvement
100%
80%
Market Current
60% value of operating
debt and value
40% equity
20%
0%
Current Maximum
market value potential value
Difference between purchase price and post-

integration value to client represents
value creation opportunity
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4
Agenda

acquisitions
 Examples
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5
Profit Pool Map
Financial services businesses represents a
larger and varied profit opportunity.
Consumer and Small Businesses
Pr
oc
e
($28B)
ss
($7B)
Annuities/Life ($7B)
($3B)
Transaction/ ($29B)
($6B) ing
pro tie cer

e
P&C insurance
rat
Liquid savings
Mutual funds
i
o ff
ng
rpo
ce s
brokerage
Securities
insurance
ssi
k
Lending
Co
n
uri
ba
Ca Sec
n/
a
Lo
rd
Mid-Market and Large Corporate

($10B)
Cash manage-
ment/deposits*
($16B)
Lending
Factoring ($2B)
($4B)
m Real estate
o m Equipment
c ($6B)
le Leasing
Te
($13B)
a re Insurance
ft w Investment
So banking ($6B)
GXC
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*Some deposits should be recategorized into consumer/small business n 1
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6
“Rebundling” Activity
Financial services is dominated by significant
cross-business deal activity.
Pr
oc
e ss
($28B)
($7B)
Annuities/Life ($7B)
($3B)
Transaction/ ($29B)
($6B)
Consumer and Small Businesses
ing
P&C insurance
te
er
Liquid savings
ora
ffic
Mutual funds
Banks
ng
rp
ko
brokerage
pro ties
Securities
insurance
Co
ssi
Non-bank financial
Lending
an
i
ce
r
cu
/b
Non-financial
an
Se
Lo
rd
Ca
 Mellon/  Fleet/Advanta  Amex/IDS
Dreyfus
 First Union/ Money
Mid-Market and Large Corporate

Store ($10B)
 Fleet/Quick Cash manage-
&
 State ment/deposits*
Remy
 US Bancorp/Jaffray Piper
Street ($16B)
 Dean Witter Discover/
Morgan Stanley Lending
 Cendant/PHH
Mortage Factoring ($2B)
Real estate ($4B)
m   GECC
BT/Alex
m Equipment ($6B)
co Brown
Leasing
le  BofA/
Te Robertson ($13B)
Stephens  AVIS/ Insurance
a re PHH Investment
ft w banking ($6B)
So
GXC
MandAValueCreatio
*Some deposits should be recategorized into consumer/small business n 1
Name of Toolkit
7
Issues in Financial Services
 Business definition
 Profit pool size and growth
 Sector P/E valuation
 Strategic intent
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Business Definition - Geographic
Boundaries
Sectors of financial services have different geographic
business definitions which will drive acquisition strategy.
Manufacturing Distribution
Retail Banking National Local National
MM & Large Corporate Global National

Finance
Asset Management Global National
Credit Cards and National National

Consumer Landing
Life Insurance National Local National
Personal P&C National Local National
Commercial P&C Global Global

(MM&Large)
Capital Markets Global National
GXC
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9
PRINT TO READ
Value Chain Shifts

Each sector’s business definition is shifting,
converging, or diverging.
Value Chain Shifts
Business Manufacturing Distribution
 Credit Cards and Transaction & Operations &

Consumer Lending Funding/ Risk Mgmt & Customer Customer
Merchant Issuer
Securitization Product Dev. Servicing Marketing
Processing Processing
 Asset Accumulation
- Brokerage/ Product
Product Dev.
Dev. & Sales &
Servicing Sales & Marketing
Marketing
Mutual Funds Processing & Settlement & Portfolio & Access
Access
- Insurance/Annuities Custody Clearing Management Sales &
Product Dev. Servicing Marketing
 Retail and Product

Private Banking Transaction Operations &
Treasury Customer Customer
Clearing Processing development/ Servicing Marketing
pricing
 Business Financing
- Business Lending Funding/ Structuring Servicing Sales
Operating & Risk
- Specialty Financing Secondary
Processing Underwriting Equipment
Markets Mgmt Servicing Sales
 Underwriting/ Trading/ Underwriting Customer

Capital Markets Settlement Risk
PlacementReinsurance
& RiskMarket Underwriting
& Product &
Servicing/Sales &
Instrument
Distribution & Clearing Holding Management
MakingDevelopment
Structuring Marketing
Fulfillment
Design
 Protection
- Consumer/Corporate
- P&C/Term Life Underwriting Customer
Reinsurance Risk Risk & Product Servicing/ Customer
Holding Management Development Fulfillment Acquisition
GXC
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= Common Infrastructure n 2
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0
U.S. Profit Pools
Understanding “where the profits are” focus
thinking on which businesses to build.
Securities brokerage
Money market funds Card processing
Total =
$81B $47B $20B $148B
100%
Consumer loans
Insurance
Percent of Total Profit Pool
Mortgage
80% Securities
Credit card
Investment banking Loan
60% Life insurance/Annuities servicing/
P&C insurance Bank
Specialty finance processing
40% Mutual funds
Corporate
20% Traditional banking
Transaction/Liquid savings
Bank deposits
0%
Consumer Commercial Processing
and
Market Size: Outsourcing
Assets: $17.6B $2.6B
NPW: $0.4 T $0.2 T
Revenue: $65.0B
Note: Insurance market size based on NPW; all other markets based on total assets
Source: Investment Company Institute; FRC Monitor; American Banker; Pension and Investments; Best Policy Reports;
Life Insurance Fact Book; OneSource; U.S. Statistical Abstract; ICI; CBA; Best’s Aggregates and Averages; U.S. GXC
MandAValueCreatio
Bureau of the Census; American Automobile Manufacturer’s Association; U.S. Department of Transportation; Federal n 2
Name of Toolkit
Reserve Reports; National Real Estate Investor; Analyst Reports; Literature Searches 1
Middle Market and Large Corporate
Profit Pool
The commercial profit pool is relatively segmented.
$
60
0B$
1,5 00 B$
80B $24 4B$ 1 8
1B $
18
B $
12
4B $
26
B$ 32B
S
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P
r
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: $
16
B $
12
B $
13
B $
6B
Note: Insurance market size based on NPW; securities underwriting based on revenues; all other markets based on total assets
GXC
Source: American Banker; Best’s Aggregates and Averages; Life Insurance Fact Book; U.S. Bureau of the Census; American MandAValueCreatio
Automobile Manufacturer’s Association; U.S. Department of Transportation; Federal Reserve Reports; National Real Estate n 2
Name of Toolkit
Investor; Analyst Reports; Literature Searches 2
Consumer Profit Pool
In addition it is valuable to understand where in the
value chain profit is generated.
Total Operating Profit = $63B
20 18%
17%
16%
Operating Margin (Percent of Total)
Specialists
15
10
5 Banks
0
Servicing Product Manufacturing Distribution
Revenue
Total Revenue = $364B
GXC
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3
P/E Impact
Acquisitions in different sectors can have
significantly different impact on overall P/E.
Hi 25%
Leasing Investment
Management
20% P/E 2.0X
Credit Card
Securities Processing
P/E 1.5x
15%
Growth
P/E x Commercial Lending
10%
Retail Banking
5%
Small Business Deposit
Low 0%
0% 25% 50% 75% 100% 100%
% Fee Revenue*
Low High
* Corresponds often to low capital intensity

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4
Strategic Intent
There are four broadly defined options in financial services.
Operations/ Product/ Origination/ Customers

Support Manufacturing Distribution
Operations Focus Product Focus Distribution Focus Relationship Focus

 Identify and invest in areas of  Focus on a set of individual  Leverage strengths in  Develop relationship with
differential and sustainable products (e.g., credit cards, distribution (i.e., coverage, customers and use these
competitive advantage mortgages) where the bank can be
points of distribution, relationships as core element
- full products (branded or successful and earn sustainable
differential returns customer access) of strategic advantage
unbranded)
 For each product identify those  Invest to strengthen this  Provide products, distribution
- back-office operations
- systems/ technologies areas of the product value chain distribution network channels, and operations
 Offer these products or services to
that should be controlled in order  Push product (third party and systems as required to support
earn differential profits customer relationship on a
third parties as an outsources,
 Share customer data for cross- propriety) and volume through
potentially with franchise network to maximize returns propriety or third part basis
relationship selling programs
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Strategic Intent
Competitors are “picking their spots” and
developing/buying focused capabilities to win.
Relationship Merrill Operational

with customers Lynch & advantages
(cost,
Co., Inc. First Data technology)
Corporation
American Total System
Express Bisys Group, Inc. Services
Company
Citigroup
Fidelity Inc.
Investments
Bank of Chase
America
Corp.
Manhattan
Corp.
GE Capital
Corp
Wells Fargo & Company MBNA
Intuit, Inc.
Corporation
Charles
Schwab
Corp. Country-Wide Insurance CO
Distribution Product
strength performance/
pricing
GXC
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6
Agenda

acquisitions
 Examples
GXC
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7
Retail Banking
Processing/ Product Origination/

Operations Manufacturing Distribution Customer
U.S.  Acquire other  N/A  Acquire other  Alliances/JV
bank, build banks, build with adjacent
internal scale, high local products (life)
and spinoff? RMS branch - distribution
 Acquire networks profit only
outsourced  Acquire for
(Bisys), fold manufacturin
in internal, g profits
grow
separately
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8
Insurance
Operations Manufacturing/ Product Distribution/ Origination Customer
 Spin out  Acquire  Acquire new  Acquire

processing and competitors to distribution adjacent
acquire other build scale channels product
life companies - costs - IFP’s capabilities
back offices - brand (planning,
mutual funds)
P&C Life
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9
Credit Card
Operations Manufacturing/ Product Distribution/ Origination Customer

 U.S. - N/A  Acquire  Acquire web-  Acquire web-
 Europe - portfolios based based financial
Acquire in - cost scale - origination super-market,
house U.S. capabilities link customer
processing - growth - base
(create U.S. ROW
structure)
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0
Strategic Intent
Competitors are “picking their spots” and
developing/buying focused capabilities to win.
Relationship Merrill Operational

with Lynch & advantages
customers (cost,
Co., Inc. First Data technology)
Corporation
American Total System
Express Bisys Group, Inc. Services
Company
Citigroup
Fidelity Inc.
Investments
Bank of Chase
America
Corp.
Manhattan
Corp.
GE Capital
Corp
Wells Fargo & Company MBNA
Intuit, Inc.
Corporation
Charles
Schwab
Corp. Country-Wide Insurance CO
Distribution Product
strength performance/
pricing
GXC
MandAValueCreatio
n 3
Name of Toolkit
1

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Creating Value in

 Creating value in merger and

-Revenue Synergy Opportunities

 Issues in financial services

US M&A Activity by Seller Industry

Oil & Gas

Buy cheap Add value

Take advantage of Spot new market Generate

Build on core or New focus on

 Creating value in merger and

-Revenue Synergy Opportunities

 Issues in financial services

Existing New customers

Existing New customers

Cross sell  Improving  Leveraging

Existing New customers

Cross sell  Improving  Leveraging

Products  Strengthening loyalty  Tailoring products  Creating offerings to

Existing New customers

Cross sell  Improving  Leveraging

Products  Strengthening loyalty  Tailoring products  Creating offerings to

Retention  Combining capabilities

Existing New customers

Cross sell  Improving  Leveraging

Products  Strengthening loyalty  Tailoring products  Creating offerings to

Retention  Combining capabilities

Resources  Building  Establishing a

Cross sell  Chase/Hambrech & Quist  Mellon Bank/The Boston Company

Products  Alliance Capital/Pimco  Putnam/T.H. Lee

Retention  Charles Schwab/US Trust

Resources  BankOne/FUSA (direct mail capability)

Source: Literature Searches; Competitor Analysis

120% Stand alone

Difference between purchase price and post-

 Creating value in merger and

-Revenue Synergy Opportunities

 Issues in financial services

pro tie cer

Mid-Market and Large Corporate

Mid-Market and Large Corporate

 Profit pool size and growth

 Sector P/E valuation

MM & Large Corporate Global National

Credit Cards and National National

Personal P&C National Local National

Commercial P&C Global Global

Value Chain Shifts

 Credit Cards and Transaction & Operations &

 Retail and Product

 Underwriting/ Trading/ Underwriting Customer

P/E x Commercial Lending

* Corresponds often to low capital intensity

Operations/ Product/ Origination/ Customers

Operations Focus Product Focus Distribution Focus Relationship Focus

Relationship Merrill Operational

 Creating value in merger and

-Revenue Synergy Opportunities

 Issues in financial services