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Issues : M&A

How to Find the Perfect Match and Make it Successful

March 9th, 2012 |

perfect-match-puzzle.jpgThe number of wealth management and insurance brokerages purchased by banks last year rose 40 percent to 48 acquisitions, according to SNL Financial. Banks are under considerable pressure with low margins to diversify and increase non-interest fee income. One way to do this is to buy a business that creates some synergies as well as new forms of income. Daniel Bass, managing director of investment banking for FBR Capital Markets & Co., talks about how to go about acquiring fee-based businesses.

What are the most popular fee-based businesses that banks buy?

Insurance brokerage is the first. Trust and wealth management and then specialty lending follow.  Insurance just makes sense because a lot of these smaller banks have clients that are small businesses and they need insurance as part of their business.

What should you consider when shopping around for a good fit?

You don’t buy a company just because it’s for sale. That’s the biggest mistake. When I worked in M&A at Compass Bank, I would call a company. If they said ‘we’re not for sale,’ that was the kind of company I wanted. I didn’t want a firm where someone is looking to retire. I needed someone who was going to work at it.  These deals are different than buying banks. All these deals have an upfront payment and an earn-out payment and you need that because these are people-based businesses. If the sellers don’t work at it and perform, they can’t get the earn-out payment. For example, if I felt a firm was worth $10 million, I’d be willing to pay $7 million upfront and give four years for them to earn $3 million, but give them an opportunity to earn another $3 million if they hit the ball out of the ballpark.

But you could have more problems with cultural fit than buying a bank, right? How do you deal with that?

People love M&A and they like the sexiness of doing deals, but you need to step back and create an internal plan from strategic planning. I’ve had clients decide they want this type of business but when they get to the table, they decide they don’t. 

You have to decide ahead of time the nuances of the business you want. Just in the investment advisory space, there a ton of different nuances. Do you want an asset allocator or do you want a stock picker? If they’re a large cap stock picker, and large caps go out of style, then they’ll lose a bunch of clients. At Compass, we wanted 80 percent of the insurance brokerage revenue in property and casualty (P&C) insurance. You need to figure out what your needs are. If you buy a wealth manager with a minimum $5 million net worth requirement, and all your banking clients are blue collar, than you haven’t done anything.

What kind of profitability should a bank look for? 

At Compass Bank, we didn’t want the business if it didn’t have a 30 percent pretax margin. It has to be better than the bank, otherwise why bother with the hassles?

What are some potential stumbling blocks?

It needs to have buy-in from the top levels of management. Look at the organization’s chart. If this entity reports way down on the organizational chart, it probably is not getting the attention it needs. Those agents will feel like they’re the step child and they will probably leave. If there’s stock ownership for loan officers at the bank, these entities need to be able to participate in that as well.

You need to keep the entrepreneurial spirit with these entities. When you consolidate, you need have a liaison for that business who will try to preserve the entrepreneurial spirit and not change their lives as much as possible. You need to keep these businesses because the more hooks you can put in your customers; the less likely they are to leave. So it’s an offensive and defensive strategy.

What should be done to minimize integration problems after the deal is done?

You need to give it time. Every deal I’ve done, you go through a honeymoon period and then you go through a remorseful period asking, ‘what have I done?’ And then you go through a period asking how are we going to make this work? You need at least two years to get to that third stage. It just takes time.

Dan Bass is a managing director and runs the Texas office for FBR Capital Markets & Co., a top-ranked, publicly-traded, full-service investment bank based in Arlington, Virginia.  He has more than 26 years of experience working in the banking sector.

 

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