Second of two parts

OVER recent times, institutions have streamlined costs, simplified and centralized operations in the interests of efficiency and savings. This can make it all the more difficult to achieve separation of individual operating centers in practice.

In particular, 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, for a transitional period, for the seller to continue to offer backroom services to the buyer under a transaction services agreement. But this can bring its own challenges: operating such a service on an arms-length contractual basis is not core business for the seller. Issues of compliance, service levels, confidentiality and competitiveness are almost sure to arise and need careful and active management.

There are likely to be significant people issues also. New contracts, terms and conditions will be needed. Many companies have group-shared services centers. Once again the challenges of separation, determining who goes and who stays should not be underestimated. In our firms’ experience, CEOs and CFOs should consider carefully three critical issues:

·         Does the company have the management and leadership in place to survive the divestment journey?

·         Does it possess the “craft skills” necessary to manage the process of change—project management, technology, systems, book closures, runoffs—and how will it cope with those skills becoming redundant at the end of a separation project?

·         Does senior management have the depth of industry expertise to get the right answer and make sure it happens? In many large multinational banks, this may well be so, but in the insurance sector, expertise can often be more shallow.

Regulation and impact

MANY regulators in both banking and insurance are likely to be taking a close interest in the impact of proposed separation and divestment. While not as pronounced, regulatory pressures on fund managers are also expected with regulators drafting new rules, most notably these target alternative-investment managers.

Also, the fact that real estate and infrastructure funds, for example, are exposed to the banking sector could lead to heightened regulatory scrutiny in the future.

Although pressure from regulators may be a driving factor in encouraging divestment, often overlooked are its potential effects on the regulatory capital requirements of the newly configured seller and buyer alike. Divestment of a specific operation may rob the remaining business of regulatory capital benefits previously enjoyed by the group as a whole. The capital-adequacy position should also be well-understood, well in advance, and the consideration for a deal struck on the basis of an accurate understanding of its overall economic value.

Brand and reputation

FINALLY, there are brand issues to consider. Few complex financial institutions outside pure holding companies maintain a multibrand strategy. It is expensive, and unless different brand offerings are aimed at distinct market sectors, brand synergies cannot be maximized. But where an institution decides to divest part of its operations, there can be significant challenges in brand separation. And if the purchasing entity decides to rebrand some or all of the acquired offerings, then there may be considerable brand and goodwill impairment to be factored into the deal.

Major change, major challenge

FOR very many reasons, divestment and separation are going to be high on many institutions’ agendas in the next couple of years. But the scale and complexity of the task should not be underestimated. Divestment may be a strategic imperative. But that seems to make the challenges of getting it right more difficult, not less.

A divestment decision should be taken on the basis of a detailed understanding of the current business, accurate segmentation and fine-grained attribution of revenue, costs and profits.

(This article is an excerpt from a thought-leadership document entitled “Frontiers in Finance Supplements,” October 2009, by KPMG International.

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For comments or inquiries, e-mail Roberto G. Manabat at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .)