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EACH WEEK BRINGS news of another financial services acquisition and serves as a reminder that this massive and diverse industry is in the midst of unprecedented change, consolidation, and convergence. Unstoppable market forces, such as changing customer demands, rapidly advancing technology, and increasing globalization, are spurring mergers and acquisitions and negating the impact of old rules that were designed originally to restrict both intraindustry and cross-industry M&A. In banking alone, enough excess capital is available to fund up to $1 trillion in deals. If a company's stock, i.e., its acquisition currency, is highly valued, then it is often cheaper to acquire another company to get access to high-value customers, a choice distribution network, or markettested skills, rather than build these survival requirements over time.
THE ENDGAME IS FAST APPROACHING
The pace of consolidation is accelerating. The next five years will make the past five look tame as a new industry structure locks into place. Playersjockey for position as this new structure takes shape and solidifies. Because M&A is the most effective way to stake out territory, it is a critical issue on any management agenda today. Consequently, managers must seek brutally honest answers to a series of tough questions about their company's future:
1. What is our view of the likely end game? What role are we going to play in the new industry structure? How do we get there from here?
2. Do we have the management talent, the market position, and world class productivity to be a buyer in the consolidation game?
3. What kind of companies should we buy, and how should we value them?
4. What embedded options exist, and what is their likely value? Do we need to sell part of our traditional business and refocus?
5. Finally, perhaps the most difficult question of all: Should we take advantage of the rich valuations and sell our company to the highest bidder?
In just a few years, the financial services landscape will be transformed unlike any time in the past halfcentury (Figure 1). Although there still will be thousands of small community banks and credit unions as well as multiple specialists in businesses like credit card processing or mutual funds, the financial services business will be more like the airline and...