It is increasingly possible that the banking industry could see an increase in merger-of-equals transactions.
Industry insiders have discussed the pending rise of low-premium merger-of-equals transactions over the last several years, including whether they will become more common. They have debated the pros and cons of MOEs, such as the financial attributes and the ability to overcome the social and governance issues after the transaction.
But given that four of the five largest transactions in 2019 have been MOEs (along with several between traditional community banks), our experience indicates that parties seem more willing to find a middle ground that benefits everyone.
The financial, legal and social aspects of MOEs are radically different compared to more traditional acquisitions. These factors can lead to MOEs being more difficult to negotiate in the beginning of the process, taking longer to integrate and subjecting the resulting company to more risk compared to traditional acquisitions.
Organizations contemplating an MOE transaction should consider these important factors at the beginning of the negotiations:
Executive team. It should come as no surprise that the makeup of the pro forma management team can be one of the most critical decisions for the transaction. Early in the process, the two sides need to work together and be realistic on a fair mix of post-transaction positions, and set expectations for the current executive teams of their roles going forward. This will help convince shareholders of the rationales of the transaction, as well as provide continuity in the resulting company.
Board members. In our experience, it is important to have key members of both boards interacting with one another before the parties get too far in discussions. This helps solidify the other governance and social decisions that will need to be made, or will demonstrate that the two companies are not ready to combine. The comfort level of key directors with one another at the outset will help lay the groundwork for a better-functioning and knowledgeable board post-transaction.
The resulting board’s size, mix and makeup is critically important from the governance side. These items are generally agreed upon in the merger agreement, as well as in any needed changes to the surviving entity’s governance documents. We’ve been involved in MOEs over the years and applaud the recent increase in director involvement.
Structure. Generally, MOEs are all-stock transactions. Financial advisors need to carefully model the transaction based on which party survives as the legal entity. The parties need to understand that as low-premium transactions, even small movements in the stock price of either bank prior to announcement may complicate the exchange rate that would be acceptable to shareholders. This must be carefully monitored; it is imperative that the parties move as efficiently as possible.
Marketing/branding. In some MOEs, the parties rebrand with a new name and logo at closing. We’ve found that this generally turns out to be more time consuming and complicated than originally expected. Consultants may be hired, names need to be cleared for intellectual property rights, and both parties need to agree on the best name — which is easier said than done.
Lags in the process can complicate the necessary conversions to close the deal, and the parties may need to operate under their existing names for a period of time after closing. This can be cumbersome operationally, confusing to customers and not provide the initial marketing effect originally planned.
Employment arrangements. In MOEs, there are employees from both sides who will not be offered employment post-transaction. It is important to evaluate early on how the transaction will affect the equity plans, employment arrangements and general benefit plans for both parties. Decisions will need to be made regarding how employees from the two sides will be treated in the transaction, regardless of what the current agreements provide and whether employees remain after the transaction.
Operating contracts. Since the parties in an MOE tend to be similarly sized, the parties need to review their contracts closely to determine if there are change-in-control provisions that may be triggered — even on the acquirer’s side. This is also an opportunity to choose preferred providers for services and negotiate new arrangements.
Merger agreement. The merger agreement for MOEs can actually be easier for both parties. The social and governance issues are already agreed to, and the legal provisions for each side are reciprocal — so don’t ask for something you would not expect to give!