Am I Paying Too Much for This Deal?

Mergers and acquisitions (M&A’s) represent a great opportunity to increase the value of your bank and to achieve quick growth. For those reasons, there continues to be a rise in the number of M&A deals. In truth, a successful M&A deal can be a great way to help your bank realize its full potential. Yet, there are probably as many instances in which a M&A deal quickly became a (difficult) learning opportunity.

We’re not telling you something you don’t know. Every M&A deal means some risk. But if the appropriate steps are taken during the beginning stages of the process, risk can be minimized. As we have discussed, one of the most important risks to address is overpayment, and there are three key steps involved.

1. “Diligence is the mother of good luck.”

Performing adequate due diligence is imperative to knowing exactly what you are buying or inheriting, but due diligence is not limited to numbers. Other important factors include entering into new business lines, regulatory compliance issues, lawsuits, and competence and capability of key management. Understanding these aspects is as important as understanding the balance sheet. There are plenty of examples in which companies didn’t fully understand all aspects of a deal, and something that looked great on paper ended up costing shareholders millions.

2. “Price is what you pay; value is what you get.”

When analyzing the ultimate value of a M&A deal, you will have many resources at your fingertips, including investment banker reports, recent M&A transaction data, data of the target bank, etc. These are all essential to fully understanding the deal. But keep in mind that each M&A has “soft” points that can make or break the deal. In fact, organizational culture may be one of the most important considerations when assessing the ultimate value of a deal. You want to make sure that the culture of the target closely resembles your culture. 

3. ”Rules of Thumb”

In community banking, there seems to be an obsession with using multiples of earnings or multiples of book value (among others) when considering a bank's purchase price. We can’t overstate the fact that these metrics are not indicators of true value. Each M&A transaction is unique based on your strategic focus. Some purchases might bring more (or less) value to you than they would to different banks. Bottom line, you need to focus on the value of the M&A deal to your bank – not on the commonly used metrics and ratios. 

Today’s marketplace offers tremendous M&A opportunity. Try to resist getting “deal fever.” Properly analyze all of your opportunities and make the most of them. And always remember, it’s okay to walk away!