The Board's Role in M&A Transactions
Ben Plotkin, chairman & CEO, Ryan Beck & Co.

What role should M&A play in a bank’s long-term growth plan?

Banking is a consolidating business.As a result, every bank must view itself as both buyer and seller at some point in its corporate life cycle. Frankly, by thinking that way, a bank’s board is better able to motivate and focus its management team. For example, if a board understands that, as a potential seller, growth from earnings and deposits is one of the most important factors in determining valuation, then it can focus its management team on the importance of growth in terms of running the company.At the same time, a high-growth community bank will have a higher trading valuation than its peers.And having a higher trading valuation means it’s less likely to be consolidated. So that’s just one example of how a bank that focuses on some of these parameters–ultimately toward being a valuable franchise from a potential seller’s standpoint–also focuses on creating good organic growth.

Every bank needs to understand that this is a build-and-buy business-that there are certain markets where you can build and can grow deposits organically. Some markets are very concentrated where there may not be an opportunity to buy, but there is an opportunity to take market share from some regional or national players.Other markets are very fragmented; therefore, having an acquisition strategy is essential. So banks need to focus on which hot markets they want to be in and then determine whether their strategy involves being a builder or a buyer.

What are the most important considerations that a bank board should keep in mind when acquiring another bank?

When a bank is an acquirer, it’s not any different than you or I looking at a piece of real estate or at another type of business. The most important consideration for that bank board is to understand the seller’s motivation.Why is the seller looking at consolidating its institution? Then how do you turn the seller’s challenge into an opportunity for you as a buyer? For example, let’s say a potential seller is a community bank with high expenses–this may create an opportunity for a buyer.However, a potential seller who’s very worried about asset-quality deterioration may not provide an opportunity for a buyer.

A second major component is looking at where you are in the valuation cycle. That is, are P/E multiples relatively high versus the trading multiples of the buyer’s stock? The question then becomes does it really make sense to trade currencies of banks or is it better to look at other financing mechanisms?

The third major point–and this is obviously a complicated subject that we are trying to summarize quickly–is the people. In real estate, you talk of “location, location, location.”M&A is about people, people, people-more so in banking than ever before.That is, can the current people adjust to the acquirer’s culture? Because if they can’t, you may not keep the people, and if you don’t keep the people, you won’t keep the customers.

When a board of directors is considering selling its bank to another institution, what central factors should it focus on?

There are lots of considerations, and we generally categorize them into financial and nonfinancial considerations.On the financial side, valuation is very important-that is, the purchase price. However, it’s not everything, because valuation and the form of consideration are closely connected. In many cases, a bank is better off taking less in total nominal valuation if it’s being paid in currency that is very attractive or if it is perhaps being afforded some taxdeferral advantages.Other times it’s much better for a bank to look simply at taking cash, because bank valuations are at, for example, a 10-year high, so taking someone else’s currency may not have the same kind of upside potential as a reinvestment of cash. So for a bank board, it often becomes a personal investment decision in terms of how long its members are locked up with the stock and the potential liquidity of the stock they take.

On the nonfinancial side, there are a number of issues, but they mostly focus on whether the community the bank serves and the people that have driven its value creation are being taken care of appropriately.These issues are not only driven by compassionate considerations, but also represent prudent risk control.

For at the end of the day, if you don’t address those things, the bank you thought you were going to sell six months after signing a definitive agreement may not be the same bank. And that can create problems in deal execution as well as transaction risk. So a principal component of looking at nonfinancial issues is looking at retention packages and incentives for management to keep their key producers and key customers.

What are the most important considerations for a bank board when selecting a financial adviser for an M&A transaction?

As we teach bankers, it’s not just about running models.The valuation and getting the right price is the number one thing for many boards, but there are also a number of nonfinancial issues that have a direct impact on whether a negotiation will be successful.At some critical juncture of the transaction, a buyer looks at the total price it’s paying. It’s not simply looking at the purchase price, but it is looking at the employment contracts and the retention costs and the one-time charges. So an investment banker who’s able to step back and look at the overall transaction has a lot of value to both a buyer and a seller. Stepping back and relating to the people and understanding the cultural issues and challenges of the transaction is important.Almost any well-recognized investment banker has quantitative skills. But the differentiating factor is the ability to take those nonfinancial issues and bridge the gaps that inevitably occur between buyers and sellers.

Finally, how much attention should bank boards be paying to M&A in today’s environment?

Understanding the relationship between growth and M&A is particularly important for banks.A bank that can grow its balance sheet and net income need never be a seller. Banks that are challenged in that regard, however,may ultimately realize that their highest value to their shareholders is as a seller.And finally,many banks will decide that buying other banks is a more efficient way to grow their income than building it on their own especially as organic growth decelerates.

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