In today’s banking environment, new challenges surfacing with the slowly improving interest rates are requiring more focus on interest rate and liquidity risks.These challenges, coupled with the uncertainty of new regulations and added scrutiny from regulators, are heightening the importance of well thought-out growth strategies. Achieving this growth organically can be an uphill battle for most banks, and therefore more and more banks are turning to mergers and acquisitions (“M&A”).
The M&A activity that began to increase during 2013 has not slowed. In fact, the first quarter of 2014 saw 59 transactions, an 18% increase over the same period a year ago. Purchase-price multiples are starting to increase, dormant acquirers are starting to return to the acquisition market, and strategic Mergers-of-Equals are becoming more prominent. All of these signs point to the fact that M&A is rapidly becoming a de facto option for banks seeking significant, expedient growth.
In order to consider M&A as a viable option, however, it is absolutely imperative to put focus first on who you are and what got you to where you are today. Is geography or industry specialization part of your legacy or leadership? Do you have an ideal customer? Before you seriously contemplate entering the M&A market, consider these three points:
1) What is my strategic vision for what this transaction will mean to each institution?
The success of a merger or acquisition is greater if both parties fully understand each other’s specialization, customer base and culture – and use that knowledge to identify synergies before the transaction. Understand and define how success will be measured in the merged bank. Will it be in growth, cost savings or strategic synergies? Be aware that seamless integrations don’t just appear after you complete the transaction.
2) Do I have (or want) to function in a particular market, and do I understand the customer base?
All banks have a “sweet spot” that drives their strategic vision. You might be a small town bank or a large regional; a traditional brick and mortar bank or a modern bank with a digital focus; or you might be a bank focused on a specific demographic. Whatever the case, you have to understand the current and future state of the market you’ll enter through an M&A deal. Does it hit your “sweet spot?” For instance, an urban bank largely driven by its digital presence will have a very different value proposition and client base than a legacy brick-and-mortar teller-based bank. Do you fully understand the products of the market and the differences in the customer base?
3) Am I paying too much for this deal?
If you’re the acquiring bank, perform the appropriate due diligence so you understand exactly what assets you’re buying and what liabilities you are assuming. Ensure that the valuation estimate of the target bank makes sense. Don’t rely on industry “rules of thumb” or a list of other recent acquisitions because if the market is overpaying for banks, there’s a very good chance that you will end up overpaying as well. Keep in mind that each M&A transaction is unique.
M&A can be the best of both worlds if you do it right. These questions are just a part of ensuring you retain what makes your bank special and important to the community you serve. Are you at risk of sacrificing your identity for the sake of short-term growth?