By Debra CopeBank mergers and acquisitions have been slowing down just a tick amid growing conviction that the economy can’t continue to expand indefinitely. But banks remain active deal-makers, and boards have a pressing need to understand how transactions come together, according to Greyson Tuck, a partner in the law and consulting firm Gerrish Smith Tuck.
By far the biggest driver of bank M&A today is the quest for scale, Tuck adds. “Everybody is of the belief that bigger is better and more efficient.”
Another factor is what he calls “the arms race for deposits. If you are deposit-heavy, there is probably somebody that will buy you and pay a nice premium.” Finally, banks with young but experienced CEOs and management teams are attracting a lot of attention from others that are hungry for talent and succession plans.
American Banker recently reported that although the pace of M&A has been slower in 2019 than prior years, more than 180 mergers were announced through the end of September.
Additionally, a survey of 571 bankers by the Conference of State Bank Supervisors conducted between April and July pointed to an eventual acceleration in merger activity. Almost a quarter of banks said they had made an acquisition bid to another bank in the past year, up from 20 percent in last year’s survey. More than 14 percent of banks said they had received an acquisition offer in the past year, up from 13 percent in 2018 and 11 percent in 2017.
Tuck identifies four areas where boards may wish to focus their energies when presented with an acquisition.
Understand financial assumptions and their limitations. It is relatively easy to paint a glowing picture of how a merged entity would perform. Directors should push for clear explanations of the assumptions and keep in mind the data processing adage, “garbage in, garbage out.” Projections are limited value if they don’t reflect reality.
Tease apart the social and financial issues. “It’s easier to recover from a financial misstep in an acquisition than to deal with a clash of cultures,” Tuck says. “If the cultures don’t mesh, it hardly matters what the financial metrics are, because we probably haven’t made a good deal.” Social issues can include matters of autonomy, such as whether employees can easily take time during the day to attend a child’s school performance or whether they need to schedule the absence two weeks in advance. Social issues can also include the credit culture, such as the degree of flexibility a loan officer has to accommodate a customer’s specific needs.
Keep front-line employees engaged. “Banking is a relationship-driven business, particularly in a community bank,” Tuck says. When customer-facing employees on both sides buy into the deal, their enthusiasm can be influential. But if a deal is announced and no work has gone into bringing tellers and other front-line employees on board, there is a potential that customers will hear a message of disappointment.
Evaluate the deal against the goal. The ultimate responsibility of an acquirer is to engage in a transaction that enhances shareholder value for the owners, Tuck notes. Does the deal increase earnings per share? Support the stock’s liquidity? Provide new talent? Expand the bank’s geographical area? A deal may not meet all these criteria, but it should meet some of them. “The acquirer needs to be very strategic and specific in identifying the reasons for the transaction,” Tuck says.
One of the key questions for directors to ask is: Who is getting what in this deal? The board of the acquiring bank should have a clear picture of what benefits the institution stands to realize, Tuck explains. Are there nonfinancial benefits as well as financial ones? Is the case clear that the bank should spend the time and effort to pursue the deal?
“Directors of the acquiring bank shouldn’t micro-manage the deal,” Tuck says. “But they should be very cognizant of the financial and social issues that arise in an acquisition and be prepared to offer sound advice to management.”