Mergers and acquisitions in the banking industry historically have been relatively straight forward, but things are beginning to change.
Typically, there’s a familiar pattern: Bank A wants to sell. Banks B, C and D bid, and the winner moves forward with a merger at the bank or holding company level.
Over the past few years, there have been more instances where the buyer is not a traditional bank. Investor groups, fintech entities, credit unions and other nontraditional bank acquirers are becoming more interested in acquiring banks. There may be specific regulatory or operational challenges when the buyer is not a traditional bank or bank holding company.
Here are some factors that sellers should keep in mind at the beginning of the process.
The acquirer and transaction will need approval from regulators. If a buyer is not already “known” to banking, regulators may scrutinize the transaction more than if a traditional bank were involved.
Individual investors may need to submit Interagency Biographical and Financial Reports, or IBFRs, and that process may be more invasive and time consuming than a person not familiar with the banking industry would expect. If the buyer is forming an entity that will eventually control the bank, then the Federal Reserve will need to approve it as a bank holding company in connection with the change in control.
Ensure the buyer is prepared for the process. The sophistication and deal experience of nontraditional buyers varies broadly. Working through the process with investor groups and credit unions is important. Regulators may expect to see a detailed business plan regarding how the buyer plans to operate the bank following the transaction.
A seller should carefully review the business plan prior to committing to a transaction to ensure it is viable and to be comfortable regulators will approve the plan. In many instances, it may be appropriate to have pre-transaction conferences with the regulators to get their preliminary indication on any strengths and weaknesses of the proposed acquirers and their business plan.
The seller’s management team may be required post-closing. Many nontraditional buyers will not have their own, full management team in place to run the organization after closing. In those situations, the buyer may have additional pressure to deliver management along with the transaction.
Sellers should ensure management is on board with the transaction and that appropriate compensation tools like change-in-control agreements and stay-bonus arrangements are in place at the start of the process. Additionally, both parties should work early in the process to lock in any post-transaction employment arrangements.
Understand and negotiate the transaction structure. In a bank-to-bank transaction, the buffet of possible deal structures is fairly limited. The menu may expand with a nontraditional buyer, if it does not already have a holding company or existing entity formed. Depending on the situation, particularly the desired tax treatment by both parties, transactions can be structured as a stock purchase or merger at either the holding company or bank level. It is important to plan the transaction structure early, as it will impact what regulatory and corporate approvals are needed to complete the transaction.
Be sure the board is aware of, and understands, alternative strategies. There is enhanced risk that it will be more difficult to obtain regulatory approval for a transaction with a nontraditional buyer, and it may take longer to close the transaction. Therefore, it is that much more important that the board understands the process. For a potential seller, the board should be aware of the alternatives, so the company can change gears and execute a different strategy if the nontraditional buyer ends up not being a viable partner.
Every potential bank deal should be approached with the realization that the process can be lengthy. When a nontraditional buyer is involved, both the buyer and seller should work closely with one another in the beginning to help ensure that it will go as smoothly as possible. Fully understanding in the beginning what the resulting entity will look like at the end of the transaction (financially, structurally and operationally) is critical to being able to properly plan the transaction and to receive regulatory approval.