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The Benefits (And Dangers) Of Bank Mergers And Acquisitions

By Michael Deely

bank mergers and acquisitionsNearly every middle-market bank in the industry is looking to either acquire another bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank acquisition is not without its drawbacks as well – particularly for the unprepared banking executive.

Amidst the complex paperwork, deals and logistics that come with all mergers and acquisitions (M&A), it’s easy to forget the chief reasons your bank should cash in (or purchase). Furthermore, it’s just as easy to forget the dangers that bank mergers pose to all involved. Below, we explore both the benefits and the dangers of an M&A event for your bank so that you’re aware before your bank loses its way.

BENEFITS OF BANK MERGERS AND ACQUISITIONS

Scale

A bank merger helps your institution scale up quickly and gain a large number of new customers instantly. Not only does an acquisition give your bank more capital to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which to operate. That way, you achieve your growth goals quicker.

Efficiency

Acquisitions also scale your bank more efficiently, not just in terms of your efficiency ratio, but also in terms of your banking operations. Every bank has an infrastructure in place for compliance, risk management, accounting, operations and IT – and now that two banks have become one, you’re able to more efficiently consolidate and administer those operational infrastructures. Financially, a larger bank has a lower aggregated risk profile since a larger number of similar-risk, complimentary loans decrease overall institutional risk.

Business Gaps Filled

Bank mergers and acquisitions empower your business to fill product or technology gaps. Acquiring a smaller bank that offers a unique revenue model or financial product is sometimes easier than building that business unit from scratch. And, from a technology perspective, being acquired by a larger bank might allow your institution to upgrade its technology platform significantly.

Talent And Team Upgrade

While not a factor on the balance sheet, every bank benefits from a merger or acquisition because of the increase in talent at leadership’s disposal. An acquisition presents the possibility of bolstering your sales team or strengthening your team of top managers, and this human element should not be ignored or downplayed.

DANGERS OF BANK MERGERS AND ACQUISITIONS

Poor Culture Fit

Plenty of prospective bank mergers and acquisitions only look at the two banks on paper – without taking their people or culture into account. Failure to assess cultural fit (not just financial fit) is one reason why many bank mergers ultimately fail. Throughout the merger and acquisition process, be sure to thoroughly communicate and double-check that employees are adapting to the change.

Not Enough Commitment

Execution risk is another major danger in bank mergers. In some cases, banking executives don’t commit enough time and resources into bringing the two banking platforms together – and the resulting impact on their customers causes the newly merged bank to fail completely. Avoid this mistake by dedicating enough resources for a full integration of the two financial institutions.

Customer Impact And Perception

While undergoing an M&A event at your bank, it’s critical that you pay attention to the impact it has on your customers. Especially with smaller community banks, customers often respond very emotionally to a bank acquisition – so it’s essential that you manage customer perception with regular, careful communication. And once the merger or acquisition is fully underway, remember to consider the impact on your customers at every stage: Anything from changing technology platforms to financial products could impact your customers negatively if you don’t pay attention.

Compliance And Risk Consistency

A final danger to consider during your next merger or acquisition is the risk and compliance culture of each bank involved. Every financial institution handles banking compliance and federal banking regulations differently, but it’s important that the two merging banks agree on their approach moving forward. When two mismatched risk cultures clash during a bank merger, it negatively affects the profitability of the business down the road if they haven’t come to a working solution.

Bank mergers and acquisitions are complex procedures with the possibility of extraordinary payoff – or extraordinary peril – so it’s important that you handle your upcoming M&A event with care. Keep these benefits and dangers in mind as you combine the processes of each different bank, and you’ll be on your way to a successful merger or acquisition.

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