DISCOVERY PATHS: EXPLORING

EMERGENCE AND IT EVOLUTIONARY

DESIGN IN M&A

Analysing the Grupo Santander’s acquisition of Abbey (2004-2009)

Javier Busquets, PhD

ESADE Business School

California, USA, September the 30th 2015

1

Agenda

• Introduction

•The evidences

•The gap between theory and reality

•Method

•Findings

• Insights

2

Introduction

• The merger and acquisition (M&A) between Grupo Santander (GS) and Abbey National from 2004 to 2009 was the first cross-border operation to take place in the history of European banking.

• During the M&A, GS transferred its Information and Communication Technology (ICT) platform, Partenón, in an unprecedented strategy in global banking

• By the end of the process, the results exceeded the forecast synergies by 35% Santander became the most efficient bank in the world in 2012

• We argue that the synergies obtained represent a sign of how organizations are more and different than the simple ‘addition’ of the parts (two banks)

• Therefore this research is an investigation of how this evidence (efficiency) is a sign of emergence (a radical novelty) of a new banking system

3

The Evidence

4

0

1

2

3

4

5

6

7

8

9

10

0 20 40 60 80 100

Wells Fargo

Santander BBVA

BNP Paribas

HSBC

Standard

Chartered

ING Group

Nordea

JP Morgan Chase

Itaú

Intesa

Sanpaolo

Royal Bank of

Canada

Credit

Suisse

Mitsubishi

UBS

Unicredito

Number of countries where

banks have some presence

Number of countries

where banks reach a

leadership position

(ranked between 1 and 5)

Global banks with some

presence in other countries

Banks focused on one

market

Banks with strong

orientation towards

private and

corporate banking

(between 40 and

60% of revenue)

Citi

3.331

1.435

2.838

2.977

2.6202.456

2.3352.319

1.997

1.4381.492

1.5001.6481.615

2004* 2005 2006 2007 2008 2009

-15%

-6%

Income

Costs

25% during two first years

Income Without model

Costs without model

Income

Costs

Efficiency

Ratio

Real

No Model

86,1 70,6 61,1 56,9 48,3 43,1

59,7 58,3 56,9

Aprox 14 ppt.

Efficiency to the

model

The Gap

7

Evolution (1) • In the long run more than 70% of M&A fail due to

technology integration; culture gaps and differences in

regulation

• Main problems

• Synergies are a metaphor of short term efficiencies

• Normally scholars consider technology as a “single artifact” that

enables organizational processes ignoring the nature of different

components of digital technologies

• In fact M&A do not scale-up since we assume organizations fail to

manage complexity

8

Evolution (2) in M&A literature –

replication and “dynamic” transfers

9

Evolution and Modularity (3)

• In contrast, evolutionary theories see firms as systems

formed by a set of subsystems (or modules) with a

specific function and a set of relationships between them

(Simon, 1996; Aldrich & Mueller, 1982; Miller & Page,

2007).

• In fact modules are the result of problem-solving to frame

complexity (Simon, 1996)

• For the purposes of our research, we can view these

modules as

• organisational task systems (Zhou, 2013) and

• technological components (Arthur, 2011)

10

Evolution and Modularity (4)

• design principles (Baldwin & Clarke, 2000) (Modularity)

• system governance and coordination (Arrow, 1972; Aldrich & Mueller, 1982)

• Setting the conditions (Holland, 1972; Stacey, 1992; 2011)

11

• Emergent properties using the following generic processes

• Variation arises as different strategic initiatives.

• Selection works through market-based, “programmes”, “processes”, “culture” and “algorithms” that regulate the allocation of resources to these different strategic initiatives.

• Retention determines the initiatives that survive in the external environment and ultimately become important.

• Competition (at internal level between different strategic initiatives) and (at external level to set selection principles in the industry or organizational ecology)

The Method

12

Deduction

Induction

Problem-Solving

Law

Case

Case

Results

Unforeseen

Results

Laws

Result

Law

Case

Research method

Research sources Sources

Interviews and focus groups Documents disclosed and reviewed

Interviews with top executives

First interviews (April 2009 and July

2009).

The second interview in June 2010

focused primarily on obstacles and

contingencies.

The third interview in April 2011,

May 2012 and October 2012

(Madrid and London) were related

to scalability and understanding the

role of technology in planned and

emergent synergies.

The fourth set of interviews in May-

June 2013 and April-July 2014,

(Madrid and London) were related

to IT factories and their functions.

Focus groups: 1) April 2009 and

July 2009 in UK and Spain (through

Telepresence) with Spanish

Management and UK management

analysing cultural gaps; and 2)

October 2012 to analyse the impact

of Partenón on cultural gaps

The Jack Project (2004), a document for investors explaining

the M&A strategy (*).

Analysis of Abbey in 2004, Citigroup.

Information for investors regarding Santander’s bid in 2004 (*).

Consultant report (2004) validating the M&A strategy (*).

Presentations and reports for Santander’s internal use

regarding the M&A’s progress and ICT platform transfer from

Spain to UK during the M&A (2006, 2007, 2008 and 2009) (*).

Indirect sources: Reports from Data Monitor, Oliver Wyman,

The Banker, The Economist, press releases and other sources

regarding the bid and its progress from 2004 to 2009.

(*) Following a NDA (non-disclosure agreement) signed with the

bank during the research process, we were allowed to study and

review these documents for six months and return them after this

period. No copies were allowed or retained in our hands after the

research period. All empirical data that appears in this paper has

been approved for publication by Grupo Santander.

14

The Findings

15

50% 62% Efficiency Ratio

13%

15,5

33%

6-9% % IT / Margin

8 Employees per branch

6-9% % Sales Opp’s (back office)

Gap Abbey

2004

Santander

“Elevator pitch”

Britannia (2005-2006)

• Mortgages and cards were in-sourced, and outsourcing contracts were re-negotiated.

Gain control over the business

• Some 1000 IT staff were made redundant

• Reduction of back office staff: some 5,600 people.

• Consolidation to one call centre in UK (1,000 agents) and one call centre in India (1,200 agents): cut of 100 staff.

IT staff and customer operations (€286m)

• From five data centres to just two centres

• Hardware and software maintenance contract re-negotiation

• Cancellation of new 127 IT initiatives. Re-negotiation of IBM, BT and EDS

IT consolidation (€114m)

• Only ten people were maintaining the system The critical resource was staff.

• (1) replacing the cables of the old data centre with fibre optic cables

• (2) although Abbey’s UNISYS system was practically obsolete,

A programme of IT infrastructure investments:

€50 million:

3.331

1.435

2.838

2.977

2.6202.456

2.3352.319

1.997

1.4381.492

1.5001.6481.615

2004* 2005 2006 2007 2008 2009

-15%

-6%

Income

Costs

25% during two first years

Income Without model

Costs without model

Income

Costs

Efficiency

Ratio

Real

No Model

86,1 70,6 61,1 56,9 48,3 43,1

59,7 58,3 56,9

Aprox 14 ppt.

Efficiency to the

model

Pitch to analysts

Translating into analyst

language the

transformational project

Short and Long term

A new Hybrid organization

for the strategic interaction

between IT and the

organization

Technology cycles, culture

and Regulation

The limits of “system

integration” – Isban UK

The limits of IT internal

dynamics (infrastructure;

sofware and administration)

Business model optimization,

not cost cutting plans

Task systems

Technology

Rules of design

- Production

- Use

Runtime

User

Experience

Data Quality

Assurance

and Global

Automation

IT infrastructures

Software and

programming

languages

Core banking

systems

IT automation Software R&D

Produban Isban HQ

“local Isbans”

System

administration

Geoban

Main Process

Evolution as Imitation

(Planned Synergies)

Evolution as problem solving

(Emergent Synergies)

Modular

Architectures

Scale & Scope (Dialectical Variations between

existing components and new processes)

(1) Re-Use of some core bankking components,

routines and algorythms into new taks systems

(2) Integrative capabilities : Sales portal to “connect”

new commercial policies and information

presentation with old system

Eficiency through cost-effective re-use of

components

Morphogenesis (variations through system design)

(1) Media Management: translating business-technology

knowledge domains

(2) New IT organizational organs: Isban, Produban anb

Geoban and new IT governance

(3) Capabilities: encapsulating complexity by the use of

technology

Eficiency through increasing returns (customer

level) and avoiding dis-economies of scale by

encapsulating complexity

Indivisible

Architectures

Economies of Scale (No variations)

(1) Automation: flat-back office procedures

(2) Consolidations and elimination of redundancies at IT

and back office personnel

(3) De-investments in resources, business lines and

assets

Eficiency through decreasing unit costs

Learning (Dialectical variations as synthesis between IT

knowledge and “emergent” knowledge)

(1) Hybrid temporal structures : Sales Portal and IT

integrations between old and new IT architecture

(2) Capabilities: (a) Experiments, improvisations,

prototyping and learning by doing ; and (b) translation

between different paradigms

Eficiency through cost-effectiveness and “rapid

integrations”

(a)

(b)

Geoban

Isban

Software

R&D

Software Project

Governance

Global

Infrastructure

Management

IT/IS

Manufacturing

Global

Telecom

Produban

Media Management

Business

Processes

Architecture

Driven

Demand

User Experience and

Productivity

Bank`s business model and

efficiency ratio

Global

Back office

Operations

Customer

Data

Management

Global

Automation Regulation

Compliance

Local Isban

(Local Adaptations and

Innovations)

Bank’s Regulators IT Infrastructure

Vendors

Sofware Vendors

Consulting Firms

Adaptation control

for “selectiion”

variables

Constant variable

The Insights

22

Emergence as radical novelty (1) Variations through system design (1)Hybrid Organizations as paradigm translation: Media

Management: translating business-technology knowledge domains (“system integration”) and business needs

(2)Morphogenesis: New IT organizational organs: Isban, Produban anb Geoban and new IT governance (1)Reduction of software dis-economies of scale (2)Substitution of costly expatrations by the use of technology

(Portals and Front-Office applications ,e.g.) (3)Sofware as engines for growth at customer level (externalities)

(3)Organizational Learning and Capabilities: (a) short and long term (b) encapsulating complexity by endogenizing technology

23

Emergence as radical novelty (2) • Organizations have been studied mainly as “functions of

production” but there is a large path to better understand functions of innovation – in fact new digital firms are different species

• Technology has been studied largely as an enabler for business design, we suggest that technologies are the backbone of organizations, where (1) business models emerge from systems of technology and (2) where the strategic interaction between tecnology and the organization produces new organs

• We suggest that more research is needed to better understand coordination and the costs of adaptation (more than costs of transactions) in systems

24