This Is Not Your Granddad’s M&A

Doing a bank M&A deal is nothing like it was just a few short years ago. The regulatory environment has changed substantially. The process takes longer and due diligence is much more involved than ever before, said speakers at Bank Director’s Acquire or Be Acquired Conference on Monday, an annual three-day conference in Scottsdale, Arizona, that attracted more than 800 attendees this year. 

While deal pricing has improved, as well as the sheer number of buyers and sellers in the market looking to do a deal, actually getting from transaction to completion is somewhat of a challenge, speakers said. For one, regulators are scrutinizing both buyers and sellers for any regulatory compliance issues. A few years ago, it wasn’t a big deal if a seller had some compliance problems.  It was assumed that the buyer would take care of them. That’s not always the case anymore, and sellers should try to clean up their problems, both from a regulatory standpoint and also to make themselves more valuable to potential buyers.

John Dugan, a partner at the law firm Covington & Burling LLP, and former comptroller of the currency from 2005 to 2010, said banks need to anticipate regulatory questions and potential delays as well as address with regulators how the bank will handle the increased compliance demands of becoming a larger institution, he said. Banks that reach the thresholds of $10 billion or $50 billion in assets following an acquisition will have adhere to  new sets of regulations. For example, at $10 billion in assets, banks must undergo stress testing and their debit fee income will be cut substantially due to a provision in the Dodd-Frank Act.

Dugan said his firm has seen an increase in Community Reinvestment Act protests following the announcement of a deal. Buyers and sellers should have at least a satisfactory rating on CRA exams.

 “It used to be larger institutions that were targeted, and now [advocacy] groups are going [after] smaller institutions,’’ Dugan said. Such challenges can delay the closing of an acquisition. Some compliance problems are especially serious.  “If there is a BSA (Bank Secrecy Act) issue at hand, it is almost certainly a deal killer,” Dugan said. 

Speakers at the conference emphasized the importance of talking to the bank’s regulators regularly to inform them of the bank’s plans to make acquisitions, and to inform them well in advance of a deal announcement to get a sense of whether the deal will be approved. Regulators will rarely say anything definitive, but could provide a good indication of potential problems.

“The days are gone of calling your regulator the night before a deal,’’ said Eric Luse, a partner at the law firm Luse Gorman PC, in Washington, D.C.

Regulators are less likely to share information with a buyer about a potential acquisition target than in years past, Dugan said. There was a time when  it was common for a buyer to send someone to attend board meetings of the seller after a deal had been signed, but regulators are increasingly asserting that practice is taking control over the organization before the deal is final, said John Freechack, a partner at Barack Ferrazzano Kirschbaum & Nagelberg LLP in Chicago. Regulators also are pushing back against deal language that protects a buyer by allowing a buyer to refuse the seller’s approval  of certain sized loans in advance of the closing of the deal.

The M&A process in general takes longer to complete. Al Laufenberg, a managing director at investment bank Keefe, Bruyette & Woods, said deals that took five to six months from announcement to closing a few years ago are now taking eight or nine months. Part of that is the longer timeframe to get regulatory approval. But buyers and sellers are spending more time on due diligence as well. Buyers are spending extra time scrutinizing other issues alongside credit quality, including cyber security policies and regulatory compliance, he said. Buyers may spend only two days on loan quality and 25 days reviewing cyber security and compliance with regulations, he said. 

Building in extra time to do a deal and ensure good regulatory relations could make a huge difference in successful deal-making.