Bank Acquisitions - A Common Sense Framework

As the classic toast goes, “May you live in interesting times.” Bank executives today clearly are able to state that yes, indeed, they live in interesting times. From a merger or acquisition perspective (“M&A”), this may be a unique time in our country’s history. An acquisitive financial institution has the option of following the “traditional” route and acquiring a healthy bank or financial services player. This could be driven by a geographic strategy; an “economies of scale” strategy; or a number of other strategies. Our acquisitive bank could also have a number of opportunities that surface as a result of the FDIC’s failed institution process. These opportunities represent (in many cases) an attractive balance between potential reward and potential risk sharing with the government. Finally, today’s bank also has a number of opportunities to acquire a specific product or service line that will bolster existing operations, expand market capabilities or provide new internal expertise. Examples of these areas include asset management, securities processing and payment processing (among a spectrum of others).

In any event, a bank that pursues an acquisition strategy (and hopes to do so successfully) must have a clearly defined process, consisting of:

A definition of the bank’s strategic objectives, both the return expected, the “bandwidth” to accomplish it and the tolerance for risk they wish to undertake;
A “Tactical Team” or department that is tasked with the evaluation, pursuit and processing of acquisition opportunities. The make-up of this team should be geared toward execution and provides a great opportunity to utilize professionals from outside the company (a shameless plug for Silverstone!);
An ANALYTICAL FRAMEWORK for evaluating opportunities. This would encompass financial modeling, a comprehensive due diligence framework, an effective integration plan, and a regulatory communications and execution plan. I will delve into the due diligence aspects in more detail below;
A first level of review and identification. This process should cull clearly unacceptable candidates from the “target” list; identify high potential “targets” and provide a documentation trail for all of these decisions…things change quickly in the financial services field and understanding the logic you used to make initial, preliminary decisions is critical.
A “Transactional Process” which covers the negotiations, closing and integrations of deals (this topic can be the subject of a multi-volume book, but not this introductory article!)

I believe that the Due Diligence Framework that an institution employs (in a disciplined manner) is critical to long term success of their acquisition program. Any such framework should include a review of the “basic” information, including (but not limited to):

Loan quality
Allowance for Loan and Lease Loss (“ALLL”) issues
Investment Impairment (exposure to derivatives, sub-prime, etc.)
Long Term Contracts
Financial Performance
Board Composition
Regulatory Profile

The most difficult, and perhaps most important fit, for any due diligence framework is how to evaluate culture and the ability to integrate and effectively leverage the core attractiveness of any acquisition. In addition, the framework must be capable of producing (and in fact does produce) “no go” decisions in appropriate instances.

I believe a real corollary to the “interesting time” toast is the knowing phrase uttered often by knowledgeable M&A practitioners…sometimes the best deal is the one that you DON’T do.

If you would like any help in navigating the perilous M&A waters, please contact Silverstone Advisors, LLC at 513-298-1950.

Silverstone is a boutique business strategy consultancy and investment banking firm serving senior management, boards of directors and company stakeholders. Our clients include high growth venture-backed companies, companies in the middle market and in the Fortune 1000. Silverstone’s unique capabilities provide a platform to work on a continuum of business issues for any single client; from competitive strategy, business model development, capital sourcing and formation, to mergers, acquisitions, divestitures and all the services and analytical requirements in between.

All of the Silverstone partners have been CEO's. Our executive and advisory experience includes technology based venture-backed companies, middle market companies, and the Fortune 500.

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