Traditional M&A activity has started to increase in certain geographies, albeit more slowly than anticipated in some states. Due to the tough economic and regulatory climate, organic top-line growth is proving to be quite difficult. In this regard, mergers are becoming one of the more popular strategies to increase earnings with cost-saving synergies as a key driver.
Molly Curl, a bank regulatory national advisory partner at Grant Thornton LLP, lays out the key considerations in an M&A transaction for both buyers and sellers.
Factors that come into play when deciding whether to buy or sell
1. Take stock of your goals and hone your strategy going forward. Work with your key stakeholders to clearly define your organizational goals. Ask critical questions like:
- Are we focused on being a community bank, willing to accept lower current returns?
- Are we working toward a liquidity event for our owners?
- Are we striving to move from a midsize bank to a large regional or national bank?
2. Make sure to consider what is attractive in a bank (or acquisition/sale) when mapping out strategy. Consider factors such as core deposits, loan portfolio, asset quality, franchise value and tangible book value.
Keys for success for sellers
1. Understand the needs of the stakeholders.
Set realistic expectations. Ensure your board and other key stakeholders understand the current M&A market, the risks and rewards, all communications from interested acquirers and views of third parties and advisers.
2. Clearly communicate the M&A process to your organization.
A clear and honest communication of the M&A process to your organization will help pave the road to a smoother and more successful transaction. This should include confidentiality agreements, a full deal information package and all related contracts.
3. Understand general transaction pricing and the mechanics.
Consider how your organization fits into the buyer’s profile, including cost of funds, deposit profile, customer base, loan quality, operating costs and growth projections.
4. Optimize your financial picture based on M&A.
- Clean up the balance sheet to the best extent possible.
- Understand and assess potential contingent liabilities.
- Develop pro forma financials for interested buyers.
5. Consider your interactions with potential buyers.
- Does the buyer’s motivation align with your organizational goals?
- Measure and understand levels of interest—keep lines of communication open.
- Understand the financial and operational strengths and weaknesses of potential buyers.
Keys for success for buyers
1. Tie transactions to strategy.
Review your overall business and acquisition strategy and goals, including acquisition criteria. Will the transaction help you achieve your end strategy?
2. Communicate with regulators.
It’s critical in today’s climate to keep regulators top of mind. Keep the lines of communication open and honest, such as where you want to expand. Share all aspects of your strategy.
3. Assess your systems.
Your systems must be scalable to handle the onslaught of new data and must be flexible to handle different data in different forms.
4. Have an acquisition team in place.
Designate a project manager or M&A leader to coordinate all facets of the transaction; your team must be multidisciplinary. Form a due diligence team that will be prepared to strike at a moment’s notice and set forth a communications strategy to keep your existing and soon-to-be acquired customers as well as your employees informed.
5. Identify your target “wish list.”
Consider what your organization should look like in a few years. Use this long-term vision to define your overall strategy and incorporate it into how you identify the right targets.
6. Prioritize customers and human capital. Prioritization comes down to these three processes:
- Stabilize continuing customer relationship and business continuity by establishing a customer management process during the transition to protect existing relationships and revenues.
- Reduce workforce with stability and efficiency by setting performance metrics during the transition, and eliminate costs from duplicative processes and positions.
- Integrate senior executive and key sales leaders by remaining customer and business-focused during the transition.