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Article
TARP Puts M&A Back on the Banking Industry Strategic Agenda:
Not Just for Growth - but for Survival
By
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.
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| 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.
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| 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. |
| Leverage your strong cash position if you can. Especially with today's market conditions, going to the capital markets for funding will slow you down and you may end up ceding returns which would otherwise be better passed on to current shareholders.
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| 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.
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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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