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The Nolan Company is pleased
to bring our readers a special series of new articles covering the
surprising opportunities and the risks of these turbulent times.
In each of the coming weeks, we will share our insights and
experiences in managing toward the upside during a time of unique
market dynamics.
TARP Puts M&A Back on the Banking
Industry Strategic Agenda: Not Just for Growth - but for
Survival
Bob
Grasing
President
With a few exceptions, there has been a relatively modest
level of mergers and acquisitions (M&A) in the U.S. banking
industry the past two years and we have certainly not seen the
flurry of activity experienced in the '90s. This is all about to
change as the Treasury has set the agenda for phase two of TARP
(troubled asset relief program), placing an emphasis on banks
applying for funds expressly to acquire other banks. This is a
loosely veiled program targeting industry consolidation to lighten
the load on the FDIC with the 120 or so banks that they are worried
about.
A 40 percent drop in the Dow Jones U.S. bank index from the
beginning of 2007 to today, and the massive deleveraging that is
still impacting the industry, has changed the game. Investments are
worth far less right now and banks are going to struggle to match
the income and keep their operating ratios close to what they have
in the recent past. For that reason–and due to the insistence of the
Treasury to use the Capital Purchase Program funds to compress the
industry–mergers and acquisitions are at the top of the executive
management agenda, not just as a way to grow but as a way to
survive. In fact, there is speculation that if you do not apply, you
are a target. This is putting more banks into the M&A game then
would have been there otherwise.
For those banks that are quickly being thrown into the deep
end of the M&A pool, we have a few suggestions and lessons
learned from our long history of advising clients in evaluating,
selecting, and implementing merger and acquisition opportunities.
These include:
- When evaluating potential opportunities, stick with your
core business. Many banks may see opportunity to add lines of
business or functionality that they have not invested in or
managed. It may include lines of business which require
dramatically different understanding of risk, channel management,
and business development. Experimenting with diversification can
be a good thing, but take a carefully measured approach in
deciding how much you are willing to put at risk.
- Prepare to move quickly. Many of your peers and
competitors are reviewing the same opportunities. Those who can
act quickly, accurately, and decisively will win. Those who
over-analyze M&A options may find themselves watching
opportunities pass them by–especially now that liquidity is so
important to survival.
- Don't be afraid to give serious consideration to banks with
seemingly unattractive operations. Banks with performance not
up to your standards are often the greatest opportunities for
profit improvement.
- Be thorough in your due diligence. The need to act
quickly can also lead to overlooking key reviews. This is not
limited to just deal evaluation but also final terms and
conditions.
- Consider IT integration issues carefully before,
during, and after the deal. Before a deal can be struck, accurate
and timely financial, HR, and operational data is needed. IT
compatibility and dependency issues can slow business integration
efforts and possibly reduce longer-term integration benefits. The
capacity of your platform and the pricing may play into the
potential net gains.
- Line up the right team to execute with speed and
precision. Integration is hard work and requires experienced,
dedicated resources to realize the benefits expected from a merger
or acquisition.
- Finally, don't underestimate the challenges of cultural
integration. There is substantial evidence which points to why
mergers and acquisitions fail. The #1 reason most noted is the
failure to integrate company cultures. Analytically speaking, you
can pick the best target but if you don't have the right end-state
culture you won't integrate and the projected benefits will not
materialize as expected.
These are a few of the key issues
you should consider as today's market dynamics put M&A back in
play. And these aren't just hypothetical. These are the very issues
we are helping our clients work through right now as they pursue
merger and acquisition opportunities. The need for speed blended
with diligence is critical right now. Adding an experienced
temporary resource is often the best solution to add the talent
necessary to examine the M&A landscape. I welcome the
opportunity to discuss these key issues with you as you confront
them. Please email me at bob_grasing@renolan.com or contact me at
800–653–1941.
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