By J. Marc Ward
Bank acquisitions and the number of banks for sale have shown an uptick in activity in the first half of 2014. The twin pressures of succession planning and increased regulatory burdens have caused many bank owners to consider selling their banks.
What is the best way to sell your bank? Often a buyer is found from long-standing relationships and shared visions for community banking. A desire to keep a bank or at least a branch in a community weighs heavily in the decision, and a wish to protect employees is also a factor. This might lead to one-on-one negotiations with another bank, but an auction or bidding process has become very popular in recent years. In many ways, this is the best means to find the best price for your bank. A classic auction from years gone by illustrates how an auction can generate the best price.
Over twenty years ago, I was involved in a unique auction process that has withstood the test of time. Even so, to my knowledge this process has been used only once. The sale was conducted at a time when bank prices were not as rosy as they are today. Because of the dearth of banks for sale, the auction attracted a lot of interest. A number of banks were selected to participate, sent bid packages, and invited to attend a bid meeting.
At the bid meeting, approximately a dozen bidders were assembled in a large conference room at a number of small tables. Some bankers came alone, others brought along their outside accountants or lawyers. The bidding was conducted in rounds. Each bidder was asked to express its bid in terms of a multiple of the stated book value. If a bidder did not want to bid (and this turned out to be the key), it was asked to simply write “pass” on the bid card and turn it in.
For the first round, a minimum bid of just over 1x book value was set. Each bidder completed a bid card and turned it in. All of the bids were reviewed, and no one had made a bid! All had passed. The results were not announced, and for the second round, no minimum bid was set. The second round produced a number of bids and many passes. At the end of the second round, the high bid was announced and the next round commenced.
As round followed round, more bidders passed. Because of the phantom bidders, those still in the bidding had no idea how many competitors there were for the bank. After several rounds, the highest bidder had offered a multiple of book greater than the minimum set at the beginning of the first round. If this process were to be duplicated today, perhaps a better course would be to announce that the seller has an undisclosed minimum that must be met.
An example of how not to conduct an auction comes from more recent events. After a more traditional auction process, the winning bidder began nit-picking the loans and the investment portfolio. It wanted certain securities sold prior to closing and escrows set up for undesirable loans. The result was, after months of finagling, the deal died and negotiations were initiated with the runner-up in the bidding. The lesson here is to know your weaknesses and be prepared to deal with them. Be strategic in the months leading up to the auction to eliminate loans or investments that may cause potential buyers to request price adjustments or reserves for risky loans or aggressive investments.
Today a bank that is interested in selling will typically consult with its lawyer or accountant, and an investment banking firm may be engaged to identify a list of possible candidates and inquire of them whether they would be interested in making a bid. Those who respond positively will be asked to sign a nondisclosure agreement and then be given a bid package. Initial bids will be due within two to four weeks.
From this initial round of bids, the top ones will be invited to conduct due diligence. This might be on-site, at on off-site location such as a lawyer’s office, or increasingly through access to a data room on the internet. The opportunity to speak directly to bank personnel is allowed only late in the bidding process or prohibited altogether.
After the finalists have their due diligence opportunity, a second round of bids is requested. From these bids the successful bidder is chosen, although it is not unheard of to request a third and final round. From that point the typical selling process takes over with the signing of a letter of intent followed by the negotiation and signing of the acquisition agreement, the filing of regulatory applications, and finally the closing. The whole process can take six to nine months. The unsuccessful bidders will be told to stand by, just in case an agreement with the finalist is not reached or the deal otherwise falls through.
The selling bank will not disclose the bids, but likely keep the bidders in the dark as to where they stand relative to the other bidders, only telling bidders whether they are still in the running or out of luck. Even when the two or three finalists are chosen to submit final bids, they will not know who has the highest bid.
I’m not convinced that this secrecy generates the best bid. Before submitting a final bid, there is a lot of speculation by the finalists as to the strength of their bid, who might still be in the running, and whether they should just sit on their bid or bid more. If they knew where they stood, higher bids might be generated from those who see the acquisition from a strategic point of view or those trailing behind who only need to push their bid a little bit to come out on top. High bidders may still sit on their bids or bid a little higher to keep themselves above the rest. However, there is also a risk that a high bidder will see that it bid way too much, based on the bids of its peers, and withdraw its bid. Given the aggressive pricing climate we have today, that risk is probably low, and transparency may very well be the best route to take.
Almost invariably the question comes up whether a bidder should make a preemptive bid, a bid so high that the seller agrees to stop the auction (a right always reserved to the seller) and agree to the preemptive bid. From the perspective of the bidder, so long as there are strategic reasons to make this bid and the pricing won’t put too much strain on capital, go ahead and try it, but don’t expect to succeed. Sellers know that even a preemptive bid may not be the highest bid because a buyer may be reluctant to bid too much for fear of leaving money on the table. From the seller’s perspective, unless the preemptive bid is certainly higher than anything that can be expected from the auction, there is no reason to accept the bid, and the seller will know what at least one bidder is willing to pay. This could be useful information when promoting the bank before the beginning of future rounds.
If you are thinking of selling your bank, carefully consider whether an auction or bidding process will best address your concerns and provide the best outcome.