Consolidation has become a common theme in the American banking industry, and for good reason. Many financial institutions seek consolidation, in the form of mergers and acquisitions, in order to scale as a result of increased regulatory scrutiny and to reap the fruits of new lines of business. However, the methodology that many institutions use when deciding to acquire smaller institutions often is faulty, and in some cases, even damaging.
Take a look at this simple list of Do’s and Don’ts before seriously considering a merger deal.
The Do’s
- Define your criteria: The decision to acquire stems from a broad business strategy. But, far too often, that broad strategy does not articulate the granular details of what makes good sense for your institution. Before a list of candidates is considered, understand what sort of institution needs to be targeted, including what attributes are most attractive to you and what size is desirable.
- Actively look for suitable targets: Don’t rely solely on third-party consultants to provide you with targets. Actively seek out candidates that fit your desired criteria.
- Prioritize adjacent markets: Acquiring institutions geographically adjacent to your market simplifies the transition process and simultaneously boosts your established brand recognition in the region.
- Research key attributes: Once suitable targets are identified, get more granular. Educate yourself on the population growth of the area, the population-to-branch ratio, the percentage of your asset size, etc.
- Understand the culture: Understand that the management and culture of the target institution are enormous elements of its success—and what makes it attractive (or unattractive). It is imperative that, as the acquiring bank, you incorporate the strengths of the target’s management into your operations and use it to their advantage.
The Don’ts
- Be reactive: Do not react to the market. Instead, know the type of target acquisition that would most benefit your institution, and be proactive in your search.
- Waste time looking at targets that don’t fit: This is a mistake that acquiring banks make far too often—a product of poorly defined criteria. Though an institution might look attractive on paper, ask yourself if it truly fits the scope of your strategy before dedicating an exorbitant amount of time to the vetting process.
- Assume a poor deal simply from earnings: A target institution might fit your criteria, but report poor numbers or other components that are initially unattractive. Do not write these institutions off! Instead, assess the “why” and dig deeper to find out if the issue is fundamentally embedded or something that can easily be changed.
- Force your culture: Never impose your organization’s culture onto the acquired institution. This harbors resentment, inefficiency, and above all, a lack of unification.
Banks seeking mergers can use this list of dos and don’ts as a general guideline for a successful merger process. To learn more, check out our on-demand webinar, The Anatomy of Successful Bank Mergers and Acquisitions.