A recent poll of 10,000+ CEOs and CFOs uncovered a very interesting result: The majority agreed they would participate in M&A in some way however, very few sheepishly admitted (3%) to wanting to sell. But I think the die has been cast.
When the ice thaws on M&A, most contraction will come from institutions with less than $500 Million in assets. The reasons are numerous and go without much study. Some question weather it is possible, even with a Herculean effort, to be "relevant" under $500M in an industry where the U.S. administration refuses to do anything to help the smaller community bank and credit union prosper. Regulatory demands are not progressive - the same regulatory rigor is required for you as is for your larger cousins and potential future suitors. Greater efficiency, board fatigue and thin profit margins will drive a lot of deals.
The days of 2x - 3x book value are long gone. Most that sell hope to get out with the skin on their teeth to fight another day. Hope for a decent management earn-out package and a reasonable deal for shareholders that have little prospect of a long term ROI. Finding the right suitor can take years and the smallest issue can cause a deal to fall out of bed quite easily and after a long wait or dance with an acquirer it can be a real bummer.
There are some practical tips we like to provide institutions under $500M who are looking for creative, low-risk ways to improve their bottom line and lower risk for their shareholders when the time to exit comes. To follow these tips you have to be willing to set aside the old ways of preparing for merger (see other blog post) and focus on the new ways of doing things. No need to worry, a change to a different vendor is not necessary and it takes very little time away from running your institution:
Compare your current core and IT costs to Paladin's Blue Book to determine just how much you are overpaying these vendors nationally and test the overall M&A readiness of your contract. On average institutions pay about $906,000 too much over 5 years.
If eligible, restructure these costs and, yes, extend the agreement a few years so the vendor gets something in exchange for a lower monthly expense. After all, it will take years to complete a merger transaction and termination fees don't kick in when the merger is done but rather when the system is 'converted'.
Implement incentives (terms) into the renewal agreement for the vendor if a sale occurs so that a acquirer is compelled to give them a fair shot of survival.
Pre-define expenses for de-conversion and conversion or professional fees for deprogramming the system and moving data to another bank. This will lower acquisition costs and make the deal more accretive and beneficial to your shareholders.
Don't wait. If you approach your vendor for a concession after you have an LOI issued - there is NO incentive for them to help you. Most often they will just dig in their heels and make you pay for the exit.
Not all institutions qualify for a merger readiness program. Typically an institution needs to have less than 30 months remaining on their core and IT services contracts. This includes account processing, item processing, internet banking, bill payment, ATM and EFT services. Second you should be spending at least $25,000 per month "all in" (or pretty darn close). Third, and very important, you must be outsourcing these services to the likes of Fiserv, Fidelity, Jack Henry, OSI (Fiserv) and any of the other core companies out there.
In this instance, a pound of prevention may be worth a cool million in cost reduction and additional shareholder equity.