The processes of bank mergers and acquisitions (M&A) are complex, with a long number of intricate steps that all must be completed correctly or the deal doesn’t go through.
However, the high risk also comes with high reward: A bank acquisition (whether you’re the purchaser or the target) has the ability to dramatically increase your level of business – and your profit margin.
Amidst all the paperwork, counteroffers and legal logistics, it’s easy to forget the basic principles, practices, benefits and dangers of making the merger or acquisition worth your while as a middle-market banker and as a business leader.
Before diving into more in-depth, advanced strategies, you need to remember three basic tactics to ensure your efforts aren’t wasted in your next middle-market bank acquisition or merger:
Tactic #1: Know The Difference Between A Bank Acquisition And Merger
The primary difference in whether a purchase is considered a bank acquisition or merger is whether or not it maintains its branded corporate identity to its customers and other stakeholders.
When a purchase erases the target bank’s identity, it’s a merger. With a merger, the target bank is absorbed into the buying bank and then converted into a branch office. The target bank loses its bank charter, its CEO and its board of directors. A merger expands the corporate brand of the buying bank while diminishing the identity of the target bank.
Conversely, a bank acquisition is usually “invisible” to outside customers or stakeholders, since the target bank is incorporated into a larger bank holding company. The target bank still retains its outward-facing brand identity and is technically still a separate bank. The only formal difference is the ownership of the target bank by the acquiring bank holding group.
Tactic #2: Keep Strategy And Synergy As Priorities
There are two core reasons why middle-market banks are open to M&A events (either as the purchasing or target company): strategy and synergy.
Strategically, a merger or acquisition helps two banks become a more competitive and cost-effective business as a whole. Not only do you gain a greater market share, but a merger or acquisition might also mean eliminating a current competitor. And in tough times, target banks often agree to be acquired because, strategically, they know they won’t survive on their own. When executed correctly, a strategic merger or acquisition ensures the long-term prosperity of both original institutions for years to come.
A merger or acquisition also allows your middle-market bank to synergize your combined efforts and more effectively scale your investments and efficiency ratio. If the M&A is a good fit for both banks, the value of the newly merged institution is greater than the sum of its two formerly individual parts. This potential for synergy is a major reason why M&As are so lucrative and desirable to shareholders.
Master The Acquisition Offer – And The ResponseThe M&A process starts when top leaders at the purchasing bank tender an offer to the target institution. Working alongside financial advisors and investment coaches, the acquiring bank should calculate an overall price (in cash, shares or both) and offer a deadline by which the target bank is expected to reply.
The target bank then has a few options to choose from once an offer has been made:
- Accept: If the offer and its terms are advantageous and the target bank’s leaders agree, then the acquisition moves forward.
- Negotiate: A target bank may not find the offer’s price or terms agreeable, and they may attempt to negotiate with the purchasing bank for a better deal. Middle-market banks that are highly sought after may have multiple bidders in an M&A offer and therefore have a greater degree of negotiation.
- Find A White Knight: If an acquisition contains unfriendly or unagreeable terms for the target bank, it might find a different potential purchaser (or “white knight”) to offer a more friendly acquisition deal. If the white knight purchaser acquires the target bank, the initial unfriendly bidder can be avoided.
Throughout the bank acquisition or merger process, you need to keep your profitability as healthy as possible. Click below to download a free whitepaper from Big Sky Associates and discover how process improvement directly benefits your bottom line.