Portfolio business evaluation in the M&A process
The consolidation of the credit industry has been a defining characteristic of the financial and banking environment in the last decade. The cause of this activity and the objectives intended to be met have been very different: striving for increased size and scale in the past, looking at preserving business integrity more recently.
Regardless of the objective, there is always one common element that plays a central role; the evaluation of the portfolios to be acquired from a business value perspective, and in particular, from both a credit risk and a marketing perspective.
Given the high complexity in managing large customer databases as well as the availability of tools, in most cases analysis carried out in the due diligence processes is at a high level, and in more sophisticated cases, at a segment level.
Experian’s approach always consists of a detailed analysis carried out at individual customer level.
The topic is more relevant than can appear at a first glance and some examples will help to draw a clearer picture:
- An evaluation of a credit portfolio based on the assessment of each individual customer’s probability of default represents a more accurate way to measure the overall portfolio credit risk. As well as obtaining a scenario analysis, estimating the impact of a given stressed condition for each individual also represents a more accurate way to estimate possible business impacts.
- From a marketing perspective, an evaluation of a customer portfolio based on the assessment of each individual’s new business potential verses their current product set, represents a more accurate way to assess marketing attractiveness and maturity of the portfolio. Also, in view of branch network rationalisation, a customer-level detailed catchment area analysis represents an advanced way to classify branches, rate the net potential and measure overlaps.
Without elaborating further, it is evident that the more accurate the analytical assessment is, the better the business evaluation and the decisions taken will be.
The approach requires a high quality mix of data availability, analytics tools, consulting capabilities, and of course, experience in the field. Experian has, over time, been able to develop this expertise by combining credit data (credit bureau data and scores), credit scoring expert models, customers segmentation (Mosaic), benchmarking comparisons and a best practice approach in credit risk management and marketing, leveraging on extensive experience in more than 60 countries worldwide.
All that experience and expertise adds value and can play a central role in the M&A process from the pre-completion phase, where the actors have an interest in understanding the new customer base and the new network in advance of the merger, to the post-completion when the newly-formed entity has to approach its new customer base, integrating and co-ordinating credit risk and customer relationship management processes and policies.
Luciano Bruccola
Director, Decision Analytics
Experian
Philippe Jaoui
EMEA Location Insight Director
Experian
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