How to Navigate a Negotiated Sales Process

acquisition-5-26-17.pngWhen a board of directors decides to explore a sale, one of its initial decisions is whether to use a public auction, a soft shop approach, or a negotiated sales process. A negotiated sales process with an individual buyer may be an attractive alternative approach when selling a bank. In a one-on-one negotiation with a buyer, social issues may be more easily navigated, day-to-day operations of the bank are less likely to be disrupted, and post-merger integration may be easier than in other approaches. There are instances where two banks fit so well financially and culturally that it may make sense to bypass a formal bidding process. In any private negotiation, however, the seller is subject to a much higher level of scrutiny relative to a soft-shop approach or a public auction. This is primarily because of a lack of competitive bids. The importance of board participation and proper documentation cannot be overemphasized. Before entering a negotiated sale, you must understand the importance of documenting the decision-making process: if it was not documented, it did not happen.

In order to evaluate whether a negotiated sales process is an appropriate option for a sale, it is first necessary to understand two alternative approaches:

  1. Public auction: A public announcement is made that the bank is for sale. If it decides to terminate the sale, it has publicized itself as a target in the market. This process is not frequently used.
  2. Soft-shop approach: The board identifies a pool of potential buyers to contact. The most important elements of a soft-shop approach are the board’s ability to select who gets invited into the process, and the element of confidentiality, which preserves the bank’s ability to remain independent if it decides to terminate the sale. This approach is generally the most common process encountered in community bank M&A.

The business judgement rule, which places a higher burden on the plaintiff in a lawsuit and takes some of the burden off the board, does not provide assurance that the bank will avoid litigation following announcement of a sale. It only takes one stockholder to initiate legal action against the bank and if the bank cannot produce consistent, formal documentation of its duties, the board has left itself completely unprotected. This is especially the case for publicly traded companies, which often have a larger shareholder base.

It is therefore critical for the board to demonstrate duty of care from start to finish and it is incumbent on the board and its legal and financial advisors to document the process. This means that a third-party fairness opinion at the end of the process is insufficient. The board must be able to demonstrate that prior to entering a negotiated sales process, it has met to evaluate its stand-alone value, discussed other potential buyers in the market, and analyzed all possible strategic paths. A capacity to pay analysis is a useful tool in determining if there are buyers that could, in a soft shop process, pay higher consideration than the buyer engaged in the one-on-one negotiations. In a cash transaction in particular, if there are buyers that could have potentially paid a higher price, the bank may be open to criticism if it cannot demonstrate a sound rationale for not undergoing a soft-shop process.

A pro forma analysis can also be used to ensure that the risk profile of the combined entity is likely clean from a regulatory perspective and can also be used to evaluate future upside potential to shareholders in the combined entity relative to future stand-alone value. Creating long-term value for shareholders should be at the forefront of considerations in any transaction, and is perhaps one of the most compelling reasons to enter a negotiated sale in a deal with a stock component. The combined entity should continue to thrive and build value long after the deal has closed, mitigating the weaknesses and enhancing the strengths of the two stand-alone entities.

Remember to always look at long-term value of the combined entity in a stock transaction. Documented board participation along with quality analytics will protect the board and allow the combined entity to prosper going forward. Above all else, have advisors that you can trust to tell you if a transaction is not in the best interest of your stockholders. Have a disciplined approach and know when to walk away from a deal. Strong corporate governance and sound understanding of value will be your greatest allies in any sales process and will ensure that a negotiated transaction is executed seamlessly and in a manner than unlocks value for your stockholders.

Making Smart Technology Decisions In M&A

Technology integration can prove painful for today’s acquirers, due in part to outdated legacy technology, complicated contracts and training challenges for bank staff. Eric Isham of Nymbus outlines key considerations that boards and executive teams should keep in mind when making technology decisions in an acquisition.

  • Key Technology Issues for Acquirers
  • Legacy Core Concerns
  • Integration Challenges

When Things Go Sideways: Managing Deal Crises

A deal may be great on paper, but not all deals are a success. At Bank Director’s 2016 Acquire or Be Acquired Conference, Scott Anderson and Joe Berry of Keefe, Bruyette & Woods moderate a panel discussion with three successful and experienced acquirers: Scott Custer, CEO of Yadkin Financial Corp., James Ryan, EVP and director of corporate strategy at Old National Bancorp and Kirk Wycoff, founder and managing partner of Patriot Financial Partners. Even the best-laid plans don’t always work out, and these seasoned M&A veterans share the lessons they’ve learned.

Highlights from this video:

  • Getting the Opportunity
  • Negotiating the Deal & Managing Expectations
  • Announcement Pitfalls
  • Avoiding Execution Gaffs

Five Key Steps to Integration Success

When it comes to the completion of a merger or acquisition, whether you view the glass as half full or half empty will likely depend on your planned approach to integration. After all, there’s no shortage of statistics on the failure rate of mergers and acquisitions due to post-deal integration issues. And it’s easy to see why. The challenge of integrating the people, processes and technology of two organizations into one is a daunting exercise whose success depends on a variety of factors, many of which can be subtle, yet complex.

Still, such challenges are not deterring bankers from the pursuit. Through November of 2015, there were 306 M&A banking deals. With the December numbers not yet available, we would expect the total for 2015 to be about the same as the total for 2014. And, according to recent KPMG community banking survey, nearly two-thirds of the 100 bank executives surveyed anticipate being involved in a merger or acquisition as either buyer or seller during the next year. Moreover, one out of three of those community bank executives foresee integrating information technology systems as the most difficult integration challenge, followed closely by talent management.

While such challenges are undeniable, directors must play a key role in helping management achieve positive results. These five key steps can help directors guide management in driving a successful integration.

Step 1: Set the Tone at the Top
Prior to signing the deal, establish a set of goals that cascade a vision of the deal into high-level, practical operating objectives for the combined organization. Directors should review and provide input in these operating objectives to ensure they align with the bank’s overall strategy, risk appetite and the strategic rationale for the deal. With a strong set of operating objectives in place, executives can develop guiding principles which clearly define the key fundamentals that stakeholders should follow as they begin the planning phase of the integration.

Step 2: Assess the Integration Plan and Roadmap
An integration plan and roadmap needs to be established early in the deal lifecycle. Anchor the plan with a well-understood methodology and a clear, high-level and continuously monitored timeline that identifies key activities and milestones throughout the course of the integration. Develop an integration playbook that details the governance structure, scope of the work streams and activities in addition to well defined roles and responsibilities. Directors must fully understand the integration plan so they can provide valuable feedback, effectively challenge timelines, and have the requisite knowledge to determine if there is a prudent methodology for each phase of the integration. Key disclosures about the transaction should be reviewed to ensure communications to regulators and shareholders set realistic expectations for closing the deal, converting customers, and capturing synergies.

Step 3: Effectively Challenge and Monitor Synergy Targets
Operating cost and revenue efficiencies are identified as part of the deal model, factored into the valuation, and play a critical role in determining the potential success of a merger. Executive management should establish synergy targets at the line-of-business level to promote accountability. Directors should foster effective challenge of expected synergies and provide oversight of the process for establishing the baseline and tracking performance against targets over the course of the integration.

Step 4: Promote Senior Leadership Involvement and Strong Governance Oversight
The program structure and governance oversight is established during the initial planning phase to control the integration program and drive effective decision making. Executive management should identify an “integration leadership team’’ with sufficient decision-making authority and a combination of merger and operating experience to effectively identify risks, resolve issues and integrate the business. Directors should examine the team’s experience, track progress against goals, and closely monitor key risks to assess management’s ability to execute the integration activities.

Step 5: Evaluate Customer and Employee Impacts and Communication Plans
The objective of customer and employee experience programs is to take a proactive approach to help ensure that significant impacts are identified, analyzed and managed with the goal of minimizing attrition. Integrated and effective communication plans are established to address concerns of customer and employee groups to reduce uncertainty, rumors and resistance to change. Directors should scrutinize customer and employee impacts in an attempt to ensure management has an effective mitigation plan for negative impacts through communication, training and target operating model design. Planning for employee retention should include the identification of critical talent to mitigate risks to the integration while ensuring business continuity.

By taking these five steps, directors can provide management with the guidance and support needed for a successful integration.

Merger Integration: The Hardest Part of Any Deal

2-23-15-Dinsmore.pngThe closing documents are signed, and the merger certificates have been filed. Some may think that’s when the hard work of integrating the deal really begins for a financial institution, but hopefully that is not the case. The best results happen when management envisioned this day from the beginning and began implementing a well-thought-out strategy as soon as the deal was announced. Although full integration will take two to three years to complete, here are five factors to help ease the pain of transition and integration.

Integration Team
First and foremost, the buyer must carefully select its integration team
, preferably before or early in the acquisition process. Individuals chosen should be some of the acquiring institution’s best employees in their areas of expertise, including human resources, IT, compliance, business development, marketing, training personnel, and member(s) of senior management. This team will be responsible not only for the conversion of systems, but the conversion of culture and the branding of the target. Accordingly, this front line must understand its own institution. Because the team will have access to the target between sign and close, they also will be in the best position to head off issues prior to closing, particularly with regard to employee and customer retention. The team should include employees from the target once an agreement is signed and both sides are working towards closing.

Integration Planning
As early as possible, the integration team should start meeting to detail and schedule every task necessary to integrate the institutions. By creating a plan and assigning team members to tasks, issues should be identified and rectified more quickly.  Management must stay involved to make sure no area of the planning is getting bogged down or slighted.

One element of planning that is both difficult and critical is integration into the buyer’s culture. Plans for ongoing training and management leadership efforts to bring new employees into the fold should not be overlooked as part of the overall strategy. Top management should budget time with the target employees prior to the consummation of the transaction and then be visible for a substantial period of time following closing. Open communication will help lessen target employees’ fear of the unknown and help educate them on the culture, brand and retail strategy of their new organization. Time spent planning and implementing the integration of people will be nothing but beneficial to the merged institution.

Employees of the target bank are usually very nervous about the changes and the future. It is important to the success of the transaction that the buyer identifies the employees it wants to retain. This means addressing personnel and position uncertainties early in the process and paying attention to employee emotions. The buyer wants to avoid losing the best employees, and their loyal customers, or having them poached by other institutions. Avoiding the distractions of water cooler speculation will help smooth the process. In order to try to maintain some stability at the target pending closing, stay bonuses can be a useful tool, along with severance arrangements for those who stay through closing but might not continue as employees post-closing.

Data Conversion
Another important aspect of integration planning is the scheduling of the data conversion. Upon execution of a letter of intent, the buyer should be in contact with their data processor to discuss and schedule the conversion. If there are concerns about discretion, have them sign a confidentiality agreement. Knowing the conversion date may drive numerous deal terms and set a goal for a closing date. Be aware also that many processing companies will not schedule a conversion in November or December, so you may need to factor that into the plan. Though most financial institutions hope not to run dual systems, sometimes it is unavoidable due to conversion scheduling.

The hope in any acquisition is that good customers remain with the new, combined institution, and branding the new entity is essential to that effort. Customers need to believe that the new brand is as good as or better than the previous one. In order to achieve that, a marketing and branding strategy must be prepared early in the integration process and retail employees, both old and new, should be included in the implementation. The retail front line is integral to maintaining customer loyalty. Again, robust and consistent communication is the key to success.

Keeping these considerations in mind when creating an integration plan can help address issues before they overshadow the deal and create a smooth transition to the new institution.