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Mergers - The Day After. What to do when the dust settles.

PORTLAND, OR, Nov. 7, 2006 -- The day a merger is announced your company is hot news. Wall Street reacts. Competitors are asked to comment. Reporters want quotes.

But what happens the day after? After the lights from the news conference are dimmed; the press releases hit the wire services and the participants go home for their first good night's sleep in a while. In fact, everyone gets to go home. The legal team, the PR reps, the accountants and the C-suite execs all breathe a sigh of relief. They're done, but, if you're the CFO, the VP of Investment Accounting, or the VP of Investment Operations, you're not done. In fact, you've just begun.

The CEO knows the execution of the merger is going to be the real measure of whether or not it was a success. He or she also knows that the conversion of all the systems that make an insurance company work is so big that it has the potential to nullify any good that comes from the merger.

After a merger, it takes a surprisingly long time to understand all the data and systems that need to be integrated, and to create project plans to do the work. "You need a combination of top-down planning from the Chief Investment officer and his or her staff, and bottom-up planning from the systems and project management people to get a complete picture of what can be done when and by whom. And you need resources that have both business and systems knowledge," says Doug Sheehan, a principal in Investment Conversions & Consulting, Inc, a firm that has been responsible for the integration of the investment systems in some of the most high profile mergers in the industry.

Three criteria govern any project: time, cost and scope. You cannot change one without impacting the others. In a merger, time is number one. When does the integration have to be done? Once the Integrations Committee arrives at a date it is cast in concrete. Every other deadline must take this into account. Cost is the second thing governing the decision. How much will it cost to do it with the present resources and what will it cost if you don't make the deadline? The third criterion is scope. In order to control the first two criteria, the scope of the project must be limited. That means that you have to reduce deliverables. "Common knowledge is that you can't reduce the deliverables in a conversion. But our experience tells us that there are always some items that can be postponed until after the initial integration or simplified to be done more efficiently," says Sheehan.

And then there are the people issues. After a merger, companies almost always eliminate one investment department. "There is great pressure to pick a date when all systems will be moved to the surviving investment department, so the company can release the people from the other department at the right time," says Sheehan. "If you release them too early or lose them to attrition, you risk losing their knowledge when you need it desperately for the transition period. If you release them too late, you're paying for two departments when you only need one. This means that you have to pick a date and it cannot move."

When a merger is announced, the focus shifts to the integration of the systems of the two companies. "The problem is that they've probably never been through this sort of thing and they don't know what's ahead of them on the road," says Sheehan. "There could be a thousand systems to integrate company-wide." So which systems should be converted first?

"Our experience tells us that the first system to be converted should be in the Investment Department," says Sheehan. He explains reasons for this:

• Asset/Liability Management - It is necessary to get a handle on this early in the merger process because this is usually the way an insurance company manages its business. Investments change so quickly and have such a high potential risk, that it makes sense that the system to track them should be converted first.
• Credit Risk Management - "This is a huge issue," Sheehan says. "A lack of information in this area can hurt you faster than a lack of consolidated information on the insurance side. Suppose an Enron-type story hits the press about a particular issuer. The company needs to understand its exposure to this single issuer across the combined investments of the two organizations. They need that information in minutes, rather than hours."
• Schedule D - This NAIC-required filing has to be in place for a whole calendar year, so an investment system must be in place by December 31. "That is a magic date that cannot be avoided," points out Sheehan. "If you miss December 31, you could miss the conversion to the new system by a year. This could mean running two investment accounting systems with two staffs for the whole year, with all the associated costs and redundancies. It is possible to do a mid-year conversion, but that creates the need to run parallel systems for some period of time."
• The Volume of Data - When you compare the amount of data involved in converting the Investment Accounting System, it is probably smaller than any other department in the company (even though the dollars are much bigger). This means that this conversion can happen more quickly than other systems.
• The Number of People Involved- There are fewer employees in the Investment Department than most other departments within the company. This means that the conversion can be done by a small SWAT team, which makes it possible to convert investment systems faster.

Having been involved with mergers since 1993, Sheehan's company has been called the industry's "merger veterans." The firm has created and put into play many of the best practices used today in investment accounting systems integrations. "Our experience has taught us what works and what doesn't," says Sheehan. "The overwhelming lesson that we've taken away from these conversions is that the transfer of the Investment Accounting System is always harder than anyone forecasts," he observes. "There are four reasons for this. The first is that a conversion is a new thing or something that hasn't been done for several years. As a result, the people who did it the last time (if there was a last time) are in other departments, or no longer with the company. The second issue is that the complexity is hard to quantify before you start the project. As a result, the amount of work is also hard to forecast. Number three is that ongoing production in the investment department cannot be postponed while the conversion is being done. And finally, the fact that the complexity of the data from the other organization is unknown further complicates the issue."

Sheehan stresses that the complexity of the issue can make the process look close to impossible. He cautions managers not let this overwhelm them: "The process initially looks unmanageable. But it's not. It can be done. The key is having people with a combination of business and technology skills that can help do a combination of top-down and bottom up planning," he concludes.

Investment Conversion and Consulting, Inc. ® (ICC) helps institutional investors implement investment management back-office solutions. ICC has been called the financial industry's "merger veterans", having created and put into play many of the best practices used today in investment accounting systems integrations. Since 1993, they have integrated the investment systems in some of the most high profile mergers in the industry. The firm also offers systems' consulting services support for the investment accounting and operations functions of major insurance companies and other institutional investors. They provide business analysis, technical analysis, software solution recommendation, vendor selection, and improved processes for management and operations. The firm's proprietary software tool, IRDB®, enhances management and operations related reports for clients.

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