Average cost savings of 30 percent to 40 percent in a bank acquisition are tantalizing to many potential buyers. However, potential acquisitions should always be evaluated both for near-term and long-term potential. The acquirer needs to ensure the deal makes sense not only as a combination of assets, liabilities, income and expenses on Day One, but also as two institutions with distinct markets, customers, employees and cultures that can work together in the long run.
There are multiple important factors when considering a potential merger or acquisition target—growth opportunities, geography, business lines, asset quality, regulatory issues, due diligence, key employees, technology and integration. Significant issues in any of these areas can derail an acquisition. However, planning to effectively address personnel considerations is one area where community bank acquirers should spend significant time.
In community bank acquisitions, growth often is driven by retaining key people—and the valuable relationships they bring. Many transactions that look foolproof on paper have failed to achieve the stated acquisition goals because of personnel issues. Compensation is a critical component of retaining the best people, so the buyer should carefully examine pay and benefits and consider the artful deployment of retention bonuses. However, once compensation has been effectively addressed, communication becomes the key to employee retention and engagement.
Transaction communication starts with the buyer’s initial interactions with the seller’s board and executive management team. If handled properly, these initial open and honest conversations build a strong foundation for successful communication throughout the entire process. However, communication with employees starts in earnest with employee meetings the day the transaction is announced.
This employee meeting is critical to presenting a united vision for the combined institution and sharing details of what’s to come. People on both sides of the transaction will have questions: What does this mean to me? What’s expected of me? How will this affect my job? These questions should be addressed quickly and comprehensively. Even communicating with employees about when they can expect answers is important.
Along with the effort to reduce uncertainty, buyer and seller should work together to present a vision for the combined institution. If you share a vision of two banks coming together in a partnership that benefits everyone involved, employees will likely give the acquiring institution an opportunity to earn their trust. If a buyer can retain employees through the unsettling period between the announcement of the acquisition and completion of integration, it has an outstanding opportunity to keep those employees for the long term.
After speaking to the broader group of employees, the buyer should make its executive team available for one-on-one meetings with employees. Meetings with key employees should be blocked out in advance. This additional time with key employees will let them know they’re valued and will allow time to address their individual concerns. However, announcing available time for additional one-on-one employee meetings provides an opening to quickly address topics or concerns of the broader employee group, building trust between the institutions and helping lay a solid foundation for future communications.
The list of issues that can develop if employee communications are handled incorrectly is harrowing: Valuable customer relationships may be lost, revenue growth potential can quickly evaporate, cost savings may not be realized, processes and policies might not be integrated quickly, synergies may be missed, the work environment can degrade and an “us-versus-them” mentality can develop.
The importance of finding acquisition targets with outstanding employees and strong customer relationships is one of the significant reasons many successful acquirers are proactively initiating discussions with potential targets. Acquirers know some community banks will not go through a full auction process when deciding to sell, and successful acquirers don’t want to miss an opportunity to pursue an institution with a roster of outstanding talent.
Pricing and deal volume in bank mergers and acquisitions were mostly steady during 2015. However, while deal volume has continued a steady pace, pricing appears to have softened slightly in 2016. Average deal value to earnings was 19.99 percent in the first half of 2016, based on 127 pending and completed deals, compared with 21.31 percent in the first half of 2015 for 132 transactions. Average deal value to tangible common equity was 1.34x in the first half of 2016, compared to 1.44x in the first half of 2015.
Barring unforeseen economic challenges, community bank transaction activity is likely to continue at a stable pace. While lower profitability, heightened regulatory oversight and increased capital requirements may contribute to the decision to sell, most community bank transactions are driven by seller succession planning considerations and shareholder liquidity needs. With these drivers pushing some banks to consider finding a partner, prospective buyers need to proactively assess their merger and acquisition strategy and actively engage in pursuing acquisitions that may be a good fit for the buyer.
Although there are significant hurdles to overcome when pursuing, completing and integrating an acquisition, there also are significant opportunities for those leaders willing to boldly pursue the right opportunities for their bank.
For more on how to successfully navigate a combination of institutions, contact your BKD advisor.