Much of the $700 billion financial rescue package, originally intended to buy toxic assets, seems to be destined instead to finance a financial industry consolidation.  An article in today’s Wall Street Journal highlights one of the dangers awaiting consolidators: the complexity of integration.

The article is replete with examples of how “the job of combining two banks is notoriously expensive, complicated and risky.”

Combining branch networks and consolidating back-office systems seems straightforward conceptually. The work can even seem trivial when it’s summarized as a bullet point or two in a PowerPoint deck.

But, as the WSJ says and as our research shows, consolidation can cause so many problems that customers defect, that reputations are tarnished and that the financial goals that justified the combinations aren’t met.

The 1999 merger of disability insurers Unum and Provident, for example, was in large part justified by the efficiencies to be gained by integrating 34 separate information systems.  After six years, just four of those 34 systems had been eliminated. The stock of the combined companies has declined by two-thirds since the merger even though the company has been hurt only moderately by the current recession and even though the market as a whole is only a few percentage points below its 1999 levels.

Financial industry consolidation is certainly necessary.  Poor strategy, inept execution and just plain bad luck have yielded a bumper crop of weakened companies.  It is an opportune time, with perhaps game-changing opportunities, for those with the capacity and wherewithal to advance their competitive positions.

But companies need to go into the consolidation with their eyes wide open. Executives need to look at history, both theirs and others’, to enumerate all the potential problems so they can be discussed ahead of time and evaluated, to see if they should be deal-breakers. It isn’t enough to have a couple of bullet points that acknowledge possible problems and to then count on having stellar execution keep you out of the traps. Bad strategies can doom a company, no matter how good the execution—as the wreckage in the financial world reminds us on a daily basis.