Acquiring another bank will be one of the most important decisions that a board of directors ever makes. A well-played acquisition can be a transformational event for a bank, strengthening its market presence or expanding it into new markets, and enhancing its profitability.
But an acquisition is not without risk, and a poorly conceived or poorly executed transaction could also result in a significant setback for your bank. Failing to deliver on promises that have been made to the bank’s shareholders and other stakeholders could preclude you from making additional acquisitions in the future. Banking is a consolidating industry, and acquisitive banks earn the opportunity to participate one deal at a time.
When a board is considering a potential acquisition, there are five critical assessments of the target institution that it should make.
When you are acquiring a bank, you’re getting more than just a balance sheet and branches; you’re also acquiring talent, and it is critical that you assess the quality of that asset. If your bank has a more expansive product set than the target, or has a more aggressive sales culture, how willing and able will the target’s people be to adapt to these changes in strategy and operations? Who are the really talented people in the target’s organization you want to keep? It’s important to identify these individuals in advance and have a plan for retaining them after the deal closes. Does the target have executives at certain positions who are stronger than members of your team? Let’s say your bank’s chief financial officer is nearing retirement age and you haven’t identified a clear successor. Could the target bank’s CFO eventually take his or her place?
Making a thorough technology assessment is crucial, and it begins with the target’s core processing arrangement. If the target uses a different third-party processor, how much would it cost to get out of that contract, and how would that affect the purchase price from your perspective? Can the target’s systems easily accommodate your products if some of them are more advanced, or will significant investments have to be made to offer their customers your products?
It can be difficult to assess another bank’s culture because you’re often dealing with things that are less tangible, like attitudes and values. But cultural incompatibility between two merger partners can prevent a deal from reaching its full potential. Cultural differences can be expressed in many different ways. For example, how do the target’s compensation philosophy and practices align with yours? Does one organization place more emphasis on incentive compensation that the other? Board culture is also important if you’re planning on inviting members of the target’s board to join yours as part of the deal. How do the target’s directors see the roles of management and the board compared to yours? Unless the transaction has been structured as a merger of equals, the acquirer often assumes that its culture will have primacy going forward, but there might be aspects of the target’s culture that are superior, and the acquirer would do well to consider how to inculcate those values or practices in the new organization.
Return on Investment
A bank board may have various motivations for doing an acquisition, but usually there is only one thing most investors care about – how long before the acquisition is accretive to earnings per share? Generally, most investors expect an acquisition to begin making a positive contribution to earnings within one or two years. There are a number of factors that help determine this, beginning with the purchase price. If the acquirer is paying a significant premium, it may take longer for the transaction to become accretive. Other factors that will influence this include duplicative overhead (two CFOs, two corporate secretaries) and overlapping operations (two data centers, branches on opposite corners of the same intersection) that can be eliminated to save costs, as well as revenue enhancements (selling a new product into the target’s customer base) that can help drive earnings.
Capabilities of Your M&A Team
A well-conceived acquisition can still stumble if the integration is handled poorly. If this is your bank’s first acquisition, take the time to identify which executives in your organization will be in charge of combining the two banks into a single, smoothly functioning organization, and honestly assess whether they are equal to the task. Many successful banks find they don’t possess the necessary internal talent and need to engage third parties to ensure a successful integration. In any case, the acquiring bank’s CEO should not be in charge of the integration project. While the CEO may feel it’s imperative that they take control of the process to ensure its success, the greater danger is that it distracts them from running the wider organization to its detriment.
Any acquisition comes with a certain amount of risk. However, proactive consideration toward talent, technology, culture, ROI and a thoughtful selection of the integration team will help enable the board to evaluate the opportunity and positions the acquiring institution for a smooth and successful transition.