Capco Blog

Divestments: Breaking Up is Hard to Do – Good Planning Makes it Easier

It’s not so much the parting of the ways as the ways of parting that make the crucial difference. The “wedding plans” of mergers are challenging enough. But the “divorce” of divestment, if badly handled, can prove much more complex.

Pressure is mounting on many financial institutions to divest parts of their business. The regulatory demand to make divestments has two principal causes: either it is one of the consequences of receiving state aid during the depths of the credit crunch, or it stems from a general desire to see a reduction in the size and complexity of large banking groups.

Divestment - It’s happening, and it will keep happening
Divestment is a real and present feature of the European financial landscape. Radical changes are underway, as organizations are forced to pay the price for receiving state aid. These range from offloading of hundreds of branches from retail networks, sale of specialist operations, disposal of high-profile sub-brands, major surgery to risk-weighted assets, to slimmer (in some cases approaching 50% smaller) balance sheets.

The trend also extends to North America. President Obama has proposed new curbs on banks to try to prevent future crises. The 'Volcker Rule' - like Glass-Steagall - may ultimately force proprietary trading activities to be undertaken outside mainstream banking.

As well as regulatory influences, there is a barrage of commercial drivers forcing financial services businesses to reassess their organizational models. This is likely to lead to further business unit divestments and reshaping of the industry.

If staying together was complicated, then life apart (handled badly) could be a nightmare
Large financial services groups, particularly the global and systemically significant kind, are immensely complex. Extracting any part of the existing structure will be a multi-layered challenge, requiring changes to legal entity structure, systems, and processes, to ensure the survival of both the parent and the divested business.

The closer you were, the harder it is to split up
The greater the detailed focus on the divestment process, the more a transaction can be de-risked. Any divestment executed without in-depth consideration of the divestment process itself is likely to result in value dilution, or even destruction.

In recent years, financial institutions have streamlined their costs, simplified and centralized their operations in the interests of efficiency and savings. This makes it more difficult to achieve separation of individual operating businesses in practice.

There are still things we have to sort out
Systems issues are likely to be among the most challenging. Disentangling common centralized platforms can be very time-consuming and costly. It may be necessary, during a transition period, for the seller to continue to offer operational and technology services to the buyer under a transaction services (or separation) agreement. This will bring its own challenges: operating such a service on an arm’s length contractual basis is typically not a core business for the seller. Issues of compliance, service levels, confidentiality, and competitiveness are also sure to arise. They need careful and active management.

As the readers can appreciate, these are challenges that need careful analysis. In our latest white paper we try to highlight the major issues that divestments face and provide prescriptive advice on how the process can best be managed. View the article.

Comments

Great Interview KASB has some great team members with a lot enpireexce and their CIO has made a significant impact on the business methodologies. Consolidation by the Banking is True and has made a tremendous impact on the vendor side of the business. Comments on the Mobile Banking were very insightful.

banks neither loan nor cerate money, people do(an obligor does) with a promissory obligation, which banks steal on conception obfuscating into a debt owed to itself just for publishing evidence of our promissory obligations into existencetheyre artificial debts to banks, the purported banking system gives up no lawful consideration in any loan efbbbf banks have no claim to the principle(it should be retired from circulation) or any justification in charging people interest(their 2nd crime)

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