Gearing Up for a M&A Resurgence

Phase 1: Strategic Development
Directors should determine if their M&A teams are capable and fully prepared to perform critical, early, strategic steps by:

• Defining the deal thesis, goals and performance metrics. A proposed acquisition should be evaluated to determine how it aligns with the bank’s strategic and growth objectives, and how it can contribute long-term, sustainable value.
• Evaluating readiness and resources. Possible gaps, internal issues and lessons learned from previous transactions should be identified, and the M&A team’s responsibilities, key functions and reporting structure should be clearly established.
• Identifying candidates and fit. Teams should consider strategic fit, credit quality, compliance or regulatory concerns and the status of the target organization’s technology as well as overall cultural fit.
• Analyzing and communicating. Preliminary financial estimates, pricing considerations, key performance indicators (KPIs) and the proposed deal structure should be established prior to issuing a formal indication of interest. Communicating and relationship building with top candidates and meeting with regulatory connections to understand regulatory concerns are also key to a successful deal.

Phase 2: Due Diligence and Integration Planning
Before any M&A initiative, bank leadership should be sure it has resources and advisers who can address a broad range of due diligence concerns and integration preparation matters, including:

• Financial health. Before evaluating preliminary assumptions and preparing pro forma financials, banks should review general accounting policies and treatments, profit margins, loan yields, potential losses and asset quality. Benchmarking analyses should be used to validate synergy assumptions and balance them against anticipated merger and system conversion expenses.
• Credit quality. Advanced data analytics and robust loan review can enable a careful examination of credit concentrations and risk ratings.
• Compliance and risk management. In addition to capital requirements, the due diligence team must review consumer protections, Bank Secrecy Act, anti-money laundering, fair lending and other compliance issues. Early and open communication with regulators can mitigate potential obstacles.
• Preliminary estimates. The team should model the combined, post-close pro forma balance sheet and income statement, including key metrics and capital ratios of the combined entity, preliminary valuation and purchase accounting estimates and estimated cost savings and merger expenses.
• Integration road map. Integrating systems, processes, people, and cultures requires careful planning, with particular focus on cultural issues and communication with employees and other stakeholders.
• Communication. Thoughtful communication to employees, customers, integration team leaders and other key stakeholders from announcement to integration is critical.

Phase 3: Closing Execution
Prior to closing, the acquiring organization or merger partners must finalize all financial models, negotiate and draft the final agreement, complete needed regulatory applications and secure approval. Adequate resources should be in place to complete these critical elements, including:

• An accounting workbook. This is a valuable tool for determining purchase considerations and terms and establishing purchase price allocation and the day-one balance sheet.
• Final transaction review. M&A team leaders should identify and confirm accounting and tax ramifications and assess the financial reporting implications of the deal structure, purchase agreement and timing.
• Final valuations and estimates. Final valuations include the loan portfolio, core deposits, securities, real estate, intangibles and all other assets and liabilities as of the closing day, along with risk rating updates and reserve estimates for the loan portfolio.
• Controls and documentation. Closing will require audit-ready documentation and internal controls for reconciling acquired balances, confirming and tracing key attributes to source documents, documenting decisions and assumptions, and preparing required financial reporting policies, memos and disclosures.

Phase 4: Integration and Value Realization
Once the transaction closes, the bank should be ready to begin executing the integration road map. Important steps include:

• Operational integration. Teams should establish the target operating model for the combined organization. They should pay special attention to cybersecurity issues, process and product gap analyses, plans for system conversions and the integration of customer and employee accounts.
• Regulatory compliance integration. Updating control frameworks, integrating risk and control taxonomy, and combining compliance programs should be completed early.
• Integration accountability. Appropriate and usable metrics, reporting dashboards, risks, actions, issues and decisions (RAID) logs and integration timelines with assigned responsibilities are essential.
• Investment realization. Timely tracking of KPIs, synergies and costs is critical to implement response plans and to identify additional opportunities for post-integration value capture.

Banks must develop and fine-tune their M&A methodology. By assessing their ability to address critical milestones, bank directors and executive teams will be better prepared to explore M&A opportunities as part of their long-term growth strategy.