Do you remember the feeling you had when you first began dating your spouse? The butterflies in your stomach when he or she was around…hoping it was that special someone every time the phone rang… feeling like you were constantly on Cloud 9. Then, it happened – a year into the relationship and you quickly realized that it was not all sunshine and fairy dust. You started to doubt your sanity and think “man, it’s going to take a lot to make this work” OR, even worse, “what the heck was I thinking – this was the biggest mistake ever!” Either way, whenever you leap into relationships, you are opening yourself up for risk. In fact, getting into a new relationship is very similar to the going through a merger or acquisition. It begins with an attractive opportunity, escalates into a rocky transition period, and – before you know it – you’re sharing assets and liabilities.
In the last quarter of 2015, acquisition announcements filled the breaking-news sections of several banking industry media. After a Great Recession-inspired lull, the bank M&A market is swinging again, although it may never again move as briskly as it did before the recession. Opportunities are opening up but, much like individuals in relationships, you have to wonder whether acquisitions are a good fit for every community bank and credit union?
Acquisitions are seen as a key route to growth, and a significant majority of bankers surveyed late last year for Bank Director’s 2016 M&A survey are feeling the pressure to grow. In fact, 67% said their banks need to grow significantly, and $1 billion seems to be the magic number they’re shooting for in order to remain viable.
Will acquiring a competitor or a complementary entity increase shareholder value? Or, would you be doing it simply because everyone else is (51% of those surveyed by Bank Director said they planned to acquire another bank within the next 12 months), and you fear not getting into the acquisition game will jeopardize your financial institution’s competitive edge? It may seem a singularly foolish reason to undertake such a momentous action as an acquisition, but the truth is that kind of thinking has driven acquisition decisions in the past. Sometimes, it still does.
Is Acquisition Always a Win?
Of course, for some financial institutions, acquiring another bank is a valuable route to growth. Still, more than one study has shown that an acquisition can dilute, rather than enhance, shareholder value — especially if a financial institution has failed to conduct thorough and effective due diligence (and many do fail in this manner). Acting precipitously or impetuously can lead to costly mistakes.
Should you engage in an acquisition? Perhaps … if one (or more) of these valid considerations drive your decision:
- You need to gain market share and the acquisition will achieve that.
- The acquisition will indeed increase shareholder value and you have done the due diligence to prove it.
- Acquiring another entity will allow you to increase your bank’s assets and remain independent.
- An acquisition will help your organization to better cope with escalating regulatory costs.
- The acquisition will allow your FI to expand into new geographical and demographic markets.
- The acquired bank will be a new source of revenue.
Win Some, Lose Some
When an acquisition occurs for the right reasons, it delivers a range of benefits beyond the main objective of the acquisition. You may grow your account holder base as well as your market share, or strengthen technological capabilities in addition to enhancing your ability to meet regulatory obligations.
However, there can be disadvantages to acquisition as well, including:
- Transition issues and customer dissatisfaction may actually cause your account holder base to shrink through attrition.
- The merging of your brand with another may dilute the strength of your brand identity in the eyes of current and potential customers.
- You may discover serious problems that went unnoticed during due diligence.
- You may need to make a significant — potentially prohibitive — time investment to convince the seller that acquisition is to their advantage.
- You may overpay for the acquired FI, or overestimate revenue synergies.
A surprising 41% of the financial institutions surveyed by Bank Director in late 2015 said their institutions had never merged with or acquired another. Nearly a quarter had made an M&A move in 2015, and 51% of them said it was a positive move for both the bank and its customers. M&A activity is likely to continue in 2016; 62% felt the environment was favorable for M&A activity, with more opportunities opening up.
Ultimately, deciding if an acquisition is right for your financial institution requires you to consider a number of factors — including the likelihood that your competitors have an acquisition in the works, too. Regardless, these relationships definitely aren’t something you should jump into on a whim. A little more due diligence in the beginning and clear communication on how you’ll work through the growing pains as you move past the honeymoon period will position you on the path to celebrating many happy anniversaries together.