As banks contemplate future mergers and acquisitions, we are hearing a common question in our vendor contracts practice: “What should I do in my contracts to prepare for an acquisition opportunity?”
The truth is that whether buying or selling, there are many steps bankers can take to prepare for an acquisition, but they need to be taken well in advance. Here are some secrets from behind the curtain.
For banks that are serial acquirers:
1. Perform serious due diligence on the target’s technology contracts and your own.
Review the large technology agreements of the target bank using the 80/20 rule–80 percent of your spending is going to be in a handful of agreements. When you’re done reviewing the target’s contracts, review your own. This will provide a high-level view of your entire vendor relationship. Reviewing the target’s contracts will show your costs to exit their agreements. Looking at the target’s contracts in relation to your own will show opportunities for consolidating vendors and services at reduced rates.
2. Look for opportunities where you can take advantage of your vendor relationships.
If you use one vendor for core processing and you are buying a bank that uses another vendor, your onetime costs for the technology conversion and ongoing expenses will be entirely different than if you are both using the same vendor. Understand your leverage in these situations. If your target is using different systems than you are, an acquisition takes a competitor out of business. If your target is using the same systems as you are, then you are going to be paying for processing the same accounts twice for a period if you don’t negotiate differently.
3. Have pricing established that takes advantage of acquisition volume growth.
As the acquirer, you need to establish pricing that decreases on a per-customer basis as you grow. Negotiating tiers for your major pricing components is a basic requirement. Your goal should be to negotiate tiers that are market priced and are commensurate with the volume that will be loaded on during a five-year term. This could be substantial if you are in an aggressive growth mode.
4. Establish a firm understanding with your vendor about staffing conversions.
Moving quickly during acquisitions is par for the course. Your vendor’s ability to convert your target’s accounts to your system in a timely manner is vital. Best practice would be to negotiate with your vendor in advance for professional services to support your acquisition plan. This could include negotiating for a fixed number of conversions per year along with expectations for how long a conversion will take.
5. Manage your termination costs for acquired technology.
Smart buyers know that a vendor is due a fair share of its committed revenue and reasonable termination costs and no more. Negotiate with your current vendor for language that recognizes when you acquire a bank using their technology, you should only have to pay for any given account once. This can materially reduce your liquidated damages and termination penalties when you buy a bank using your vendor’s technology.
For banks that wish to be acquired:
6. Keep your contract terms to two or three years at most.
It’s never good to have long terms for your technology contracts if you are looking for a buyer. Even suitors using technology that is similar to yours will not want to pay for your commitments.
7. Keep your terms aligned.
I’ve seen a target bank’s contracts with a mix of long and short durations. This can look bad to a potential suitor.
8. Use standard technologies.
Buying a one-off solution or technology to get a competitive edge or save a few dollars is a non-starter if you are looking to sell. Software, services or equipment that can’t be reused or interfaced with the new bank’s core will run up your acquirer’s costs.
9. Negotiate decent pricing and known exit costs.
Keeping your costs in line is very important. Even if your contracts will be superseded by your buyer’s contracts, the liquidated damages to shut down your contracts are directly related to your pricing. If your pricing is three times market pricing, your buyer’s costs to get out of your agreement are going to be three times market. Your costs to de-convert from the system should be plainly laid out along with a clear and fair definition of what your liquidated damages will be.
Growth that comes to your vendors through acquisition increases their market share without the usual upfront costs associated with bringing on business. They want to see you succeed, so work closely with them to make it happen.