Dealing with a potential sale or acquisition can be a stressful time for a bank’s board. Bank Director asked speakers at its upcoming Acquire or Be Acquired conference in Phoenix, Arizona, to describe what bank boards understand the least about M&A transactions, with an eye toward improving a board’s readiness to deal with these issues.
What aspect of M&A transactions do bank boards understand the least?
The most misunderstood part of the M&A process, from a board perspective, is the difference between the current deal environment—where deals are priced as a function of tangible book value, and are measured by the earn-back period and the cost savings—versus deals in the ‘90s and early 2000s, which were priced based upon earnings and opportunity (growth). This leads to large disconnects on pricing, opportunity, etc.
— Mark Kanaly, partner, Alston & Bird LLP
Generally, boards struggle with the concepts related to relative valuation. In other words, how do you evaluate the currency you are receiving in return for the sale of the company? This involves much more than simply looking at the stock market trading values of both involved companies. In particular, the growth prospects and quality of earnings of an acquirer should be important considerations in the analysis of relative valuation.
— Ben A. Plotkin, executive vice president and KBW vice chairman, Stifel Financial Corp.
Shareholder value in an M&A transaction is more about what happens after closing than the multiple achieved at signing. For sellers, it means acquiring an attractively priced currency with upside potential, a strong dividend and liquidity. It means finding an experienced partner to navigate the regulatory approval process, access additional capital if necessary, and treat new customers, employees, shareholders and communities like their own. For buyers, it means setting, and then exceeding, reasonable financial expectations, executing the operational integration flawlessly, blending two cultures into one, and putting customers first. Many high multiple transactions have turned out poorly for the seller and low multiple transactions have turned out poorly for the buyer because of a lack of planning and execution.
— Richard L. Quad, senior managing director & co-head, Financial Institutions Group, Griffin Financial Group LLC
We often find that directors are surprised at the impact golden parachute provisions have for the bank and the executive. As boards continue to eliminate gross-up provisions, they often make decisions on how to handle change-in-control severance payments that would be subject to excise tax without any financial analysis or review of the other agreement provisions. We have found situations where the aggregate cost of all severance payments could be a barrier or that payments to certain executives are far lower than intended. Digging into the change-in-control provisions and running financial scenarios can help to avoid surprises that could derail a deal.
— Laura A. Hay, managing director, Pearl Meyer & Partners Comprehensive Compensation
I would have to believe that the aspect of M&A transactions that is truly least understood by most directors of bank boards is the accounting. Hopefully, the financial expert and lead director on the board understand the financial and accounting issues on any merger, but I doubt that most directors really grasp the nuances of merger accounting in a mark-to-market world. The impact that certain accounting assumptions can have on the pro forma balance sheet and the forward income statement are material and it is critical that board members grasp those issues if they want to understand how their shareholder constituency will react to an announced transaction.
— John Duffy, vice chairman, Keefe, Bruyette & Woods, Stifel Financial Corp.
Bank boards (and management) do not always appreciate the need to brief regulators early about a potential transaction, well before an agreement is signed and the transaction is announced. Post-financial crisis, regulators are taking a much more active role in scrutinizing transactions for issues, and it is far easier than it used to be for deals to get delayed or even scuttled based on regulatory concerns. In this climate it is much better to vet transactions early so that any regulatory concerns can be identified and addressed early—or, if the regulatory obstacles are insurmountable, to learn that early, before wasting time and resources.
— John C. Dugan, partner and Scott F. Smith, partner, Covington & Burling LLP
Many times, boards do not appreciate the level of capital required to make a transaction happen. In many deals, the mark-to-market adjustments and merger-related costs (including but not limited to management contracts, technology contract costs, balance sheet restructurings, severance, branch closure costs and professional fees) are too large, and a deal becomes prohibitive. Purchase price as a percentage of tangible book value (P/TBV) is sometimes misleading, as adjusted P/TBV may show a much higher net purchase price for a target.
— Mark R. McCollom, senior managing director & co-head, Financial Institutions Group, Griffin Financial Group LLC
M&A transactions invariably require decision making under uncertainty. The time available to buyers to evaluate target companies or lines of business is generally compressed. Sellers face analogous uncertainty as to whether markets are adequately valuing their business. A by-product, and an arguably unintended positive consequence of the current phase of regulatory scrutiny, is that banks are putting in place comprehensive, rigorous, and extensively tested and validated risk models. As these modeling regimes come on stream and become routinized, buyers and sellers alike (and their boards) will be armed with powerful new tools to make decision making far more transparent and efficient than in the past.
— Jared Murphy, managing director and Sam Coleman, managing director, BlackRock