The Acquisition: A Leap of Faith

In January 2003, when State Street spent $US1.5 billion acquiring the business unit of Deutsche Bank that serviced global stocks and bonds for institutional clients, it wasn't because State Street wanted Deutsche Bank's technology. State Street had its own technology that it believed was superior to the 900 applications it would inherit. And it didn't necessarily want Deutsche Bank's employees. About 1000 of the 3000 Deutsche Bank employees transferred to State Street were soon retrenched.

No, the prize for State Street was Deutsche Bank's more than 600 global securities clients. The acquisition would instantly nearly double State Street's business in most of the major European markets, and once it took over those portfolios, State Street executives were confident they would be able to cross-sell other services.

Analysts, however, were sceptical. The acquisition's success was predicated upon State Street retaining 90 percent of the revenue of the acquired business, even though typical revenue retention rates in a customer acquisition are closer to 80 percent, according to Guillermo Kopp of Tower Group, a financial services consultancy. And all this was happening during an extremely difficult time for the normally placid, two-century-old company sometimes called "Staid Street". After a 24-year run of double-digit profits, State Street's earnings had come to a screeching halt in 2001. Soon after the acquisition, the company posted its first quarterly loss in 26 years.

The company would have to build capacity to absorb the 11,000 portfolios of Deutsche Bank's 600-plus clients, migrate the new client data and shut down the Deutsche Bank systems - and do so swiftly, before too many clients decided to go with competitors who offered them a better deal.

This strategy of quick data migration is a best practice, says Kopp, who is Tower Group's vice president of financial services strategies and IT investments. "You put a little more effort up front in doing that migration, but then you don't have to maintain duplicate systems," he explains.

Along the way, any stalled decision could have slammed the project into a wall.

"Not being able to get decisions made is probably the single biggest risk to not having a successful merger. You have to get decisions made by certain deadlines, or you're dead," says John Petrey, executive vice president and CIO of Banknorth, which has made dozens of acquisitions in the past several years

But it wouldn't take a miracle for State Street to make its decisions on time.

It would take good IT governance.