There is a lot of talk right now about merger transactions becoming more expensive. As prices to acquire a bank rise, so too do the short and long-term risks incurred by the board of an acquiring institution. Today’s column, based on feedback from bank directors and officers, looks at the ingredients for a successful M&A deal three years down the road.
Deal Activity on the Rise
The year is shaping up to be the strongest since 1998 in terms of M&A deal flow activity as a percentage of institutions in the market, according to investment bank Raymond James. Investment bankers tout this as a wonderful development, with the Darwinian spirit of “only the strong survive” cited frequently. Efficiency and productivity continue to appear as key elements in positioning a bank for continued success. Not surprisingly, most industry insiders agree that mergers and acquisitions remain the principal growth strategy for banks today.
While we have had a few notable transactions this year, the majority of deals have been relatively small in size. Nonetheless, “it seems as though valuations have increased nicely, with the average Price to Tangible Book Value multiple standing at 1.8x today versus just 1.1x at the end of June last year. The increase in both deal multiples, and volume, is likely driven by stronger buyer currencies, improving economic conditions, and increased need for scale,” according to a research report by investment banking firm Keefe, Bruyette & Woods.
What Not to Do
This is all well and good, but what positions a deal today to look smart a few years after it closes? If you are a frequent flier, I think you might agree on what an airline merger should not look like. To see for yourself, go sit in any airport and observe the integration of American Airlines and US Airways. You will find demoralized gate agents, technologies that do not sync, marketing messages that look similar, but not the same. Does this reflect a deal done right?
Did You Know
In the first half of 2014, there were 136 acquisitions announced versus 115 announced in the first half of 2013. Moreover, total deal value is reported at $6.1 billion versus $4.6 billion in the first half of 2013.
Source: Raymond James
In many ways, the answer to what makes a good buy depends on the acquiring board’s intent. For those looking to consolidate operations, efficiencies should provide immediate benefit and remain sustainable over time. If the transaction dilutes tangible book value, investors expect that earn back within three to five years. However, some boards may want to transform their business (for instance, a private bank selling to a public bank) and those boards should consider more than just the immediate liquidity afforded shareholders and consider certain cultural issues that might swing a deal from OK to excellent.
Retaining Key Employees
Regardless, what is clear for a long-term win is the absolute need to keep a strong, committed and cohesive team in place. Living in Washington, D.C., I have seen repeated examples of a bank announcing an in-market acquisition that precipitates an almost immediate departure of key staff. Be it a star employee or an entire lending team, retention of the most valuable team members is the number one characteristic, in my opinion, of a well-done deal. These can be accomplished with retention measures and contracts for key employees, but those employees must be identified ahead of time. A close second is the ability of the newly combined leadership team to successfully balance “new” products, platforms, distribution, funding and asset generation capabilities.
Yes, the need and desire to grow exists at virtually every bank, so I anticipate more deals in the coming months. But what if you lose the staff you just paid for, right out of the gate? That is a recipe for disaster.