3 Risk and Reward Considerations for a Successful Bank M&A Deal

The past three years have seen healthy M&A activity. 2015 set a record for banking and securities M&A. In 2016, activity slowed slightly in the early part of the year but picked up again in the second half, and concluded strong. With the current post-election uncertainty, an unsettled regulatory landscape, and new capital requirements related to Basel III, however, analysts expect a slight pause.[1]

Financial institutions are assessing the environment and weighing the risks and rewards of this growth strategy. Analysts expect that large national banks will continue to use M&A to shed non-core businesses as a way to cut expenses and footprint, and that large regional banks ($50B+) conversely will look to make strategic acquisitions to build scale and manage costs of regulatory compliance and operations.

For community banks, it seems that the thrust of M&A activity likely will continue to be centered on consolidation. These entities also have the potential to take advantage of new opportunities as a result of regional bank activity.[2] Specifically, employees and customers of newly expanded regional banks whose community bank was acquired and who are seeking the more personal relationship that community banks are known to offer.

Three Considerations for Banks Assessing the M&A Landscape

The current slight slowdown in the M&A environment provides an opportunity for banks to look carefully at potential deals with an eye on return and risk. As the pace picks up, participants on the buyer and seller sides will be better prepared to understand the value propositions and steps necessary to optimize the long-term value of an acquisition, consolidation, or sale.

Even before performing due diligence on a potential M&A deal, take the time to perform three assessments on your own institution. These steps will help you to lay a baseline for where your bank is regarding M&A preparedness, to put measures in place for correction if necessary, and to have points to reassess in the coming months. [3]

Know your value and how to correct value detractors.

Every bank has core competencies and offerings that add value (e.g., deep relationships in the community, high-quality personal service) and that need correction (e.g., a lack of a competitive omnichannel structure). Understand where your pros/cons lie and focus on correcting value detractors. As you do, it will improve your risk profile and likely, your market profile and valuation multiples. Your institution will be better positioned in the marketplace, comparatively, and more organized for a potential partnership or acquisition.

Map and consider current and future risk and rewards in an M&A decision tree.

With a clear understanding of your institutional value and where M&A fits into your growth planning, create a strategic decision tree. Each possible path should illustrate present value and potential resulting value based on the M&A activity. Include possible risks and returns in your calculations, focusing on deal factors like:

  • Price 
  • Form of Consideration
  • Cost Savings
  • Synergies
  • Transaction Expenses
  • Mark-to-Market Assumptions

A good deal in the numbers is not a guarantee of the resiliency of the new entity.

Once you’re at the point of the deal, remind yourself that even carefully documented measurable and intangible risks and returns won’t guarantee that outcomes will be entirely predictable, nor that they will be successful. We’ve written in the past about the fact that the real work begins once the deal is signed.

How you go about integrating the banks can make or break the value of the transaction over the long term. Make sure to consider how well the other entity manages risk, how their associated vendors assure compliance with cyber policies, and how the cultures of the banks and employee expectations line up – these non-financial considerations may be the final nails in a coffin or the accelerators that move the deal forward into a healthy future.

Inherent risk versus return tradeoff exists in every M&A transaction. The HORNE team of bank-focused M&A specialists can help you to assess your value, risk, and return, and build a plan for readiness. Contact our team of growth specialists. 


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Topics: M&A, Risk and Reward

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