What are some attributes of successful acquirers, that is, companies that have executed successful transactions?
The best and most successful acquirers are well prepared, disciplined and patient. To these acquirers, M&A has become almost a line of business, and they are ready to undertake a potentially arduous M&A process (or multiple processes at once). Being prepared means understanding how a transaction fits into your overall business strategy and how it will add to shareholder value. In which markets do you want to grow, what targets are worth approaching and what is their value? Management teams interested in M&A need to develop procedures with their boards to determine how deals are sourced, the key factors to be considered and how the transaction should fit within the overall corporate strategy. When a potential deal presents itself, it can then be examined through that existing structural framework. If a target doesn’t fit the parameters or the required price is too steep, good buyers will walk away. They have due diligence and integration teams in place, as well as trusted advisors ready to assist. A full M&A process, going from negotiation to integration, can take up to a year or longer, so management needs to be deep enough and strong enough to run the existing bank throughout the merger and integration process. Successful buyers are also typically well-capitalized, have excellent regulatory relations and trade at a premium valuation.
What mistakes do acquirers commonly make?
Being reactionary when it comes to M&A will lead to problems. If your game plan is to wait for an invitation into an auction process, you’re putting yourself at a disadvantage. If management and boards aren’t prepared, there is potential to overpay and mismanage the integration process. Also, if you are out courting M&A targets, you need to be tactful in your approach. Telling another bank that they have limited future prospects, weak management or no ability to pay off the Troubled Asset Relief Program (TARP) money won’t make them want to do a deal with you.
If you could pick a few things that are very important in any transaction, what would they be?
On the front end, understanding the merger math is most important. Using realistic assumptions about future earnings because the deal really needs to be nicely accretive to the buyer’s earnings per share (EPS) and not cause long-term dilution to its tangible book value per share. The buyer needs to accurately quantify the synergies and aggressively achieve those cost saves after the close. That said, high performing employees need to be retained. If you lose the people with the best customer relationships, making the deal work will be a challenge. Ultimately, successful integration of employees and customers is the key to any acquisition.
What questions should the board ask to make sure due diligence is done well?
Asset quality remains the key due diligence focal point. Boards need to ask about the review process on the target’s loans and how the accounting marks were calculated. In addition, boards must consider all other strategic alternatives and whether a particular acquisition will enhance shareholder value versus pursuing a different course of action.
What aspects of investor reaction do companies sometimes fail to understand?
Investors won’t always applaud M&A transactions. Good investors will do their own math and if they calculate low/no EPS accretion and significant tangible book value dilution, they are likely to sell their shares. A bad deal, no matter how small, can have a long-lasting impact on a company’s share price.