Mergers and Acquisitions -- Common Questions
By: KAREN L. GRANDSTRAND
March 2007
Are There More Bank Deals and Why?
Bank deals are on the rise and everyone is asking why. From my vantage point, there are several reasons why banks are being put on the market -- prices are good; margins are tight and banks face stiff competition from bank and nonbank competitors; bank ownership has determined that the bank can no longer compete without acquiring others, or being acquired; the family no longer wants to be in banking; expiration of the ten-year milestone for banks that elected Subchapter S as soon as it was available (which means additional tax advantages on transactions); or the bank needs additional capital, and selling appears to be the best way to address this need.
Bank buyers have been a diverse group. Some consist of investment funds formed for the purpose of acquiring community banks. Others are investors that originally intended to charter a new bank but decided to acquire an existing bank given the capital requirements and timeframes associated with forming a new bank. Other buyers are larger banks that have determined that they need to rely on more than organic growth to meet their profit goals. Some buyers are “the bank next door” that has an opportunity to grow and keep out a new competitor, while others are out-of-state banks who want to enter or expand into a new market.
What Is the General Process?
Once a seller has decided to sell, an accounting firm or investment banking firm typically issues a confidential memorandum. The memorandum provides a summary of the proposal; current ownership; corporate structure; financial information; information on bank facilities, employees, and technology; and information on the bidding process. The memorandum is provided to prospective bidders upon receipt of a signed confidentiality agreement and asks prospective buyers to provide certain information in the form of a nonbinding letter of interest. The letter of interest typically addresses the proposed structure and pricing of the deal, whether the buyer intends to retain staff, whether the buyer will need financing, the buyer’s ability to obtain regulatory approval, and the buyer’s CRA rating and general financial condition. Based on the letters of interest, the seller typically selects one or more potential buyers to conduct due diligence. The chosen buyer or buyers then conduct due diligence and provide their final offers. If the seller chooses to accept one of these offers, a definitive purchase agreement is negotiated and executed. Regulatory applications are typically filed within 30 to 45 days, and the deal is consummated after receipt of regulatory approvals and expiration of waiting periods.
What Are Some Things to Consider If You Are the Buyer?
As a buyer (i) do not sign seemingly “standard” documents such as confidentiality agreements or letters of intent without consulting your advisors; (ii) carefully consider the structure of your acquisition, taking into account applicable accounting, tax and regulatory considerations, and do not assume that merging an acquired bank into your existing bank is the only or the best way to proceed; (iii) be diplomatic when discussing due diligence results with the seller; (iv) base your price on economics, not emotions; (v) in negotiating the purchase agreement, focus on the big issues; and (vi) retain legal and financial advisors early in the process.
What Are Some Things to Think About If You Are the Seller?
As a seller (i) conduct your own due diligence and, if necessary, conduct some clean-up before putting your bank on the market; (ii) have a thoughtful communications plan which includes how and when you will inform your employees, regulators, and customers; (iii) determine when you should place the bank on the market, taking into consideration the condition of your bank, tax issues, the timing of regulatory examinations, examination findings, retirements, computer contract renewals, etc.; and (iv) retain legal and financial advisors early in the process.