The vast majority of the banking industry is composed of privately owned stock banks. Of the 794 non-FDIC assisted bank M&A deals that were announced in 2013 through 2015, almost two-thirds involved a non-exchange traded buyer. Non-publicly traded banks are clearly getting deals done. There are several key facets that FinPro Capital Advisors (FCA) works on with its non-exchange traded bank clients in order to get an M&A transaction done.
1. Know Your Value
Value for a bank is driven by earnings per share (EPS) and tangible book value per share (TBVS). A bank’s stock price is equal to TBVS multiplied by a TBVS market multiple and EPS multiplied by an EPS market multiple. Those market multiples are the market’s perception of the risk profile of the bank, and a bank can influence that market multiple by changing its risk profile and communicating the appropriate risk profile to the public. As seen below in the table, a lower risk profile bank will likely have a higher TBVS market multiple, resulting in a much higher value.
|Tangible Book Value Per Share – Range of Market Multiples 2016Q1|
|High Risk||Average Risk||Low Risk|
|A||Tangible Common Equity||$150,000||$150,000||$150,000|
|B||Common Shares Outstanding||$5,000||$5,000||$5,000|
|C=A/B||Tangible Book Value Per Share||$30.00||$30.00||$30.00|
|C x D||Stock Price||$24.00||$30.00||$36.00|
Value is measured primarily by stock price, which means that for both potential nonpublic buyers and sellers it is critical to conduct a quarterly valuation. A private bank can actually have more control over its valuation and the communication around the bank’s value proposition. A private bank controls its message, whereas a publicly traded bank’s message is heavily influenced by the market. FCA believes banks must continue to fix their risk profile, enhance value creators and reduce value detractors in order to increase inherent value. Then, this inherent value must be conveyed to the potential partner involved in the transaction.
2. Know Your Opportunities
In order to reflect all strategic options available, FCA periodically analyzes for each of its clients a full range of buy-side and sell-side options to reflect the full universe of options available to the institution. The detailed process includes:
- Comprehensive screening based on strategy
- Prioritizing the initial screen to approximately 10 potential targets (or buyers/strategic partners)
- Modeling to ensure appropriate assumptions with pro forma financials
- Rankings reflecting long-term strategy and multiple pro forma analyses
Once this preliminary list is established, further refinement and prioritization of both buyers and targets can be conducted based on M&A parameters, strategic rationale, and market knowledge as established by your institution’s board of directors. Once you have a prioritized list of strategic partners, be active in staying in contact with those institutions. You can never be sure when another institution on your list will seek a strategic partner.
3. Model Transactions Based On Quantitative and Qualitative Factors
After a short-list is established, comprehensive pro forma financials can be modeled. A buy-side institution needs defined parameters before modeling to maintain discipline. Exceptions to parameters require a strong qualitative rationale behind the deal. Whether you are a buyer or target, a more sophisticated understanding of modeling assumptions directly relates to unlocking greater value in the transaction and recognizing synergies. Regardless of whether you are a buyer or a seller, remember that banking is a people business so make sure to lock up key people as part of the transaction.
4. Understand Key Issues for Consideration
Though a deal must work financially, it is not just about the numbers. FCA spends a great deal of time working with its clients on nonfinancial aspects of the deal:
- Choosing the correct legal, corporate and operating structure
- Maintaining or reducing the risk profile of the combined entity
- Understanding the regulatory view of the transaction
- Understanding synergies (not just financial synergies) for the combined entity
- Establishing the branding and marketing of the combined entity
- Recruiting and retaining key talent is vital to any transaction
- Establishing the corporate culture going forward
- Effectively integrating the target to ensure future value
Just because an institution doesn’t trade on a national exchange, doesn’t mean it can’t be involved in M&A. Know your value, know your opportunities and understand the process. Whether you engage in a transaction or not, the organizations which move the quickest to capitalize on these opportunities are the ones which follow these four steps on a regular basis. Just make sure to choose your strategic M&A partner based upon the long term value of the combined entity.