The countless graphs that appear in industry materials depict the relative consistency in the number of banks that sell or merge each year. Have you considered participating in this M&A market? Do you know others who have? Have you ever wondered whether participants share common characteristics that might help you in identifying your next opportunity? After all, if you are a potential buyer, you may be able to reduce the uncertainty associated with an auction process if you can approach a potential seller early in the sales process (perhaps even years in advance). On the other hand, a seller will likely increase its odds of ensuring continued service to the community, looking after its employees, and obtaining the best price on fair terms if it can identify a motivated buyer or pool of potential buyers. The following provides a summary of common buyer and seller characteristics designed to help you identify potential M&A partners and capitalize on opportunities.
Common Characteristics of Sellers
No Obvious Management Succession: This factor will likely be the largest contributor to changes in bank control over the next few years. The regulatory agencies often emphasize the need for succession planning, and a number of institutions devote resources to this process. However, the reality is that a number of financial institutions have not successfully developed a realistic succession plan.
No Source of Additional Capital: There are times when a bank requires additional capital, such as following an increase to loan reserves, or when an institution in need of capital finds itself unable to raise additional capital from its existing shareholder base. Although bank owners may be willing to hold on for a while as capital evaporates, they may ultimately seek to sell their holdings, especially as the regulators continue to exert pressure.
Ownership Need for Liquidity: Investment in a community bank is long term, and bank stocks are relatively illiquid investments. Sometimes shareholders in need of liquidity will be looking for an exit strategy. Common examples include situations where a major shareholder is in the process of estate planning or experiences a decline in another investment.
The Price is Right: A number of owners will say that they could be either a buyer or seller, depending on the price. Often such an individual is of the opinion that the institution needs to create synergies through growth in order to thrive but is not entirely confident the growth can happen without a partner.
Although sellers make the decision to approach the market for a variety of reasons, the list above presents some of the most common factors based on our experience. A buyer in the market might want to consider whether any competitors within their target area exhibit any of the above characteristics. If so, the potential buyer may be able to approach the potential seller early in an effort to negotiate a change in control. Of course a buyer will not want to overpay, but through early conversations, might be able to provide additional comfort regarding the future of the employees and community. Additionally, potential buyers may have the ability to emphasize a continued partnership through a stock merger rather than a cash-out acquisition. Such a transaction structure would allow the seller to receive at least a portion of future gains while preserving capital for the buyer. In any event, approaching a potential seller early can provide a strategic benefit for a potential buyer.
Common Characteristics of Buyers
Potential buyers often exhibit the opposite characteristics of potential sellers:
Defined Succession Plan: Banks looking to make an acquisition often have an energized management team. Further, the next generation of managers is identified and committed.
Shareholders not seeking liquidity: The shareholder base is relatively stable and committed to bank ownership. Perhaps the shareholders have undertaken estate planning efforts and are in a position to own the bank over the long haul.
Excess Capital and/or Shareholders Willing to Contribute: Institutions with excess capital reserves may be seeking an opportunity to buy.
Opportunist: Banks in a stable position may be willing to make an acquisition if the selling institution, and its assets, location, employees, and customers would fit within the buyer’s business plan and objectives.
Like sellers, buyers seek opportunities for a variety of reasons. A good first step for potential sellers in approaching the sales process is to create a list of institutions within seller’s reasonable geographic scope that exhibit the characteristics above. Concentrating on characteristics may result in a viable list of potential buyers. Of course, professional advisors can provide valuable insight into identifying potential acquisition partners, but it is always good to generate your own list for comparison purposes. A potential seller can then decide whether it is more advantageous to approach the identified potential buyers individually or through an auction process.