Probably one of the worst moments for a bank board and management team is to make an acquisition and find out it was a bad one. Over the past few years, it strikes me that three pitfalls typically upend deals that, on paper, looked promising:
- Loss of key talent/integration problems;
- Due diligence and regulatory minefields; and
- Bad timing/market conditions.
While timing is everything, I thought to address the first two pitfalls here.
Losing Key Talent
A CEO with experience selling a bank tells me that number one on her list is to “personally reach out to top revenue generators ASAP and let them know they are going to have a great future in the combined company. It always amazes me how key leaders think they can wait on that while they talk to staff folks.”
But don’t stop there. If the merger is designed to significantly reduce costs and there is a lot of overlap, your staff will know that there are going to be significant job losses. “My advice, be honest,’’ the CEO says. “If you have a plan or process, tell them what it is. If you don't tell them, you will let them know the second you do. Don't sugar coat it. Call the key ones you know you will need with a retention offer ASAP.”
This advice had me seeking the counsel of Todd Leone, a principal with the management consulting firm of McLagan. Leone suggests those in key positions with change-in-control contracts usually stay as they are going to get paid. Also, those in true key positions negotiate at the time of the deal to stay on after the merger. However, it can be complicated to retain the next level of staff. As Todd says, “[It’s best to] negotiate at time of deal."
Regulatory and Due Diligence Minefields
Now, as much as the drain of talent threatens the long-term success of a deal, there are other minefields to navigate. Bill Hickey, principal and co-head of the Investment Banking Group at Sandler O'Neill + Partners, cautions me that in today’s interest rate environment, significant loan pay-downs could be looming.
Another due diligence matter is an IT contract that requires large termination fees. Aaron Silva, the president and CEO of Paladin fs, says that banks need to implement terms and conditions into their agreements ahead of time that protect shareholders from unreasonable termination risk, separation expense and other obligations that may impact any M&A strategy.
Building on these talent and technology risks, John Dugan and Rusty Conner, both partners at the law firm of Covington & Burling, say that in today’s bank M&A market, “all of the historical issues related to pricing, diligence, and integration remain very relevant, but there are three issues that have taken on new prominence thereby impacting execution and certainty of closing.” They are:
- The reaction of the regulators to the proposed transaction—particularly if the acquiring institution is approaching a designated size threshold;
- Protests by community groups—which can materially delay a transaction even if the complaint is without merit—especially [since] these groups are now targeting much smaller deals than ever before; and
- Shareholder suits by the acquired institution’s shareholders—which are also increasingly making their way to smaller deals.
As Dugan opines, “parties need to anticipate and build into their pricing and timing the impact of these factors.”
Their views complement those of Curtis Carpenter, managing director of Sheshunoff & Co. He’s of the opinion that in today’s market, “regulatory and compliance matters have become critical components for both the seller and buyer. It is more important than ever for sellers to put in place generous pay-to-stay bonuses for key personnel who are in positions likely to be eliminated in the merger. The heightened regulatory scrutiny surrounding the merger process can result in long approval periods—sometimes many months.”
Where most bank mergers fail isn’t in the transaction itself. No two deals are alike, but addressing these challenges is simply good business.