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M&A revolves around people

Part 7: Numbers matter, but the human factor counts at all levels

M&A revolves around people

This is the seventh blog in my series exploring various aspects of community bank mergers and acquisitions. This blog will address the “people” aspects of an acquisition—i.e., the people who participate, the people who need to be considered, and the people who are really important.

Owners trump everybody

Any time you consider the people associated with a merger or acquisition transaction, the analysis has to begin with the shareholders of both the buyer and the seller.

For every board of directors, whether on the buying or selling side of the negotiation table, the primary obligation is to make the shareholders better off as a result of the deal. I’ve said that in earlier blogs, but it bears repetition so you don’t take your eye off that ball.

From the buyer’s perspective, that means the acquisition transaction must enhance value for the buyer’s shareholders, which generally equates to an increase in earnings per share; improved return on equity; better share liquidity; and, ideally, an improved dividend stream.

From the seller’s perspective, the shareholders also need to be better off than they would have been had the deal not been done. In other words, the selling shareholders must be better off—and be convinced they are better off—accepting the purchase consideration offered by the buyer in lieu of continuing to hold their institution’s stock.

When analyzing the “people” aspect of any acquisition, don’t forget that the shareholders come first.

But that’s not the end of it.

Considering the board and the two CEOs

Moving down the food chain, the next group of people to consider is the board of directors.

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In connection with acquisition transactions for the buyer or the seller, it is very difficult to have the entire board involved in the entire process. This is often so even if your institution’s board is fairly small. Trying to incorporate the entire board into the acquisition process on either side of the equation is fairly inefficient for most institutions.

The most efficient way to handle an acquisition transaction is to appoint an Acquisition Committee. Generally this includes the chairman, the CEO, and possibly one or two outside directors, depending on the overall size of the board.

Setting up this group does not mean final approval of the acquisition does not need to occur with the full board having full information and understanding. But negotiation of the finer points of the acquisition should be delegated to a committee, the majority of which are outside directors.

As an aside, even though the target institution’s board should appoint a committee to oversee the acquisition process and the CEO should be a member of that committee, the CEO of the target should not be the primary negotiator of the transaction with the buyer.

This is particularly true where the CEO is not planning to retire. Remember, he or she is likely negotiating with his or her future boss.

The CEO of the buyer will often be the primary negotiator for the buyer, subject to oversight by the committee. This is acceptable because his or her role is typically not impacted significantly by the deal.

The CEO of both institutions plays a critical role in the process, but it is important the target’s board protect the shareholders from any intentional or unintentional bias from the chief executive.

Senior management: Where the deal meets the details

The next group of people to consider is senior management. On both sides of the transaction, the senior executive team generally is where the work is done. As noted in previous blogs, a stock-for-stock acquisition should involve due diligence of both institutions.

Even in a cash acquisition, the executive team of the seller will want to be able to figure out if the buyer can come up with the cash and get regulatory approval for the transaction.

In either case, the executive team is always involved in the due diligence process, and each institution’s CFO, at minimum, is involved in pricing the acquisition transaction for the buyer or analyzing it for the seller.

No deal moves without key specialists

Beyond the executive officers, there are critical sub-components of the acquisition team that cannot be forgotten, such as Credit and Compliance.

The largest asset category on the books of community banks is loans. The Chief Credit Officer or the Credit Department of the purchaser needs to analyze and assess not only the target’s loan portfolio, but also its lending culture.

The compliance function is also critical. The last thing a buyer wants to obtain is an undisclosed or undiagnosed compliance problem from the target institution.

Keep in mind, with a merger transaction, you get everything that target bank has— including its lousy compliance program. And the regulators do not care whether the former target institution was the source of non-compliance.

Finally, bank culture

The last, and often most overlooked, “people” group in a community bank acquisition is the overall internal culture of the target.

This may not seem major, particularly because most of the individuals who make up the target’s internal culture have little to no say in the acquisition process.

However, seemingly simple issues can make a significant difference in how easily the two institutions integrate. For example, do personnel in the buying bank wear suits and ties every day, whereas the personnel in the selling bank wear shorts and golf shirts? 

Maybe that is an extreme example, but you get the idea. Culture is squishy, but it’s real.

Cultural issues are critical to day-to-day operations, which in turn are critical to the long-term success and integration of the acquisition. Such issues must be considered prior to closing.

Particularly if your institution is the buyer, do not overlook the details and impact of the seller’s employees. You need them to remain on the job, particularly those individuals, such as lenders, who are generating the seller’s revenue.

Lock them up early, and make them feel good about the transaction. Failure to do so could cause a potentially good, accretive transaction to turn into a loser that the board, senior management, and the shareholders are eventually upset about.

And if that happens, you’ll really learn about people.

Next: In M&A, communication reigns

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish Smith Tuck Consultants, LLC, and a member of the Memphis-based law firm of Gerrish Smith Tuck, PC, Attorneys. He frequently contributes to Banking Exchange and frequently speaks at industry events.

In mid-2016 Gerrish's blog received a national bronze excellence award from the American Society of Business Publication Editors. This followed his receipt of the regional silver excellence award for the Northeastern Region from the same group.

Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish Smith Tuck has assisted over 2,000 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at jgerrish@gerrish.com.

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