Research & Thoughts

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 merger are challenging enough. But the “divorce” of divestment, if badly handled, can prove much more complex. Find out more.

The pressure is mounting - commercial and regulatory - 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.

The State has never let the banking sector forget that its emergency support during the dark days came at the price of a right to subsequent intervention. For example, the Future of Banking Commission in the UK recently published a list of recommendations urging the Government to consider a break-up of the big “integrated” banks.

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.

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. No divestment decision should be taken without a basis of detailed understanding of the current business, right down to accurate segmentation and attribution of revenue, costs and profits. Defining an achievable target operating model depends on this degree of clarity at the outset. But the fact remains that many financial institutions lack the basic data and the management information systems necessary to undertake such analysis with confidence.

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