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When merger deals come undone …

Why it happens, what to do about it

When merger deals come undone …

“And it's too late, baby, now it's too late

Though we really did try to make it

Something inside has died and I can't hide

And I just can't fake it”

—“It’s Too Late” by Carole King

Sometimes, despite our best efforts, relationships go bad.

Recently, there have been a number of bank acquisition transactions that have announced they are not moving forward. I doubt Carole King’s heartache was a result of a failed community bank merger or acquisition, but I can assure you the parties involved in a failed community bank merger or acquisition do not emerge unscathed.

Like a broken engagement

The scenario is this: The transaction gets announced, everybody gets excited, the market (if there is one) reacts in kind, and the parties proceed down the aisle toward a consummated transaction.

Unfortunately, a number of those potential unions have fallen out of bed lately. The question that initially comes to mind is “why.” Possibly a more important question, however, especially as more community banks look into selling, is whether these fallouts will develop into a trend or whether they will be isolated, unusual occurrences.

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The answer to the latter question really depends on the type of deal.

If the potential transaction is one where the to-be-acquired company is SEC reporting, then the buyer must announce the transaction upon the execution of the definitive agreement. This is the case even if due diligence has not, for whatever reason, been completed. This is also the case if, as is more typical, due diligence is “ongoing.”

Sometimes issues are discovered during due diligence that neither party knew about that may ultimately squelch a deal. These issues could be related to credit, compliance, other regulatory issues, internal culture, personality, or something else.

Transactions with non-public entities, on the other hand, are usually not announced, though they can be and sometimes are. The public usually just finds out about these deals when the regulatory applications are filed, which typically occurs after due diligence and the execution of the definitive agreement.

If those deals are going to tank, they typically do so before the public ever knows about the transaction.   

How to handle damage control

The best practice is to have due diligence done prior to signing the definitive agreement. This reduces the possibility (or probability) that the transaction will terminate post-announcement. If status as an SEC-reporting company or otherwise prevents you from operating according to “best practice,” then the big issue becomes how you spin the termination to the public.

In the termination of a merger or acquisition transaction, the target is typically the party that looks bad.

This is simply because of the common assumption: Most people assume the buyer did not want to go forward with a deal because the target has “hair” on it. Regardless of whether that is true, it is the perception. As you all know in community banking, perception is, for the most part, reality.

The reality is deals fall apart for a number of reasons.

Sometimes the failure is due to cultural issues, although hopefully these issues are vetted before the parties sign a definitive agreement. Other times, the issues relate to credit culture. Those issues typically surface during the due diligence phase. Still other times, the CEO who indicated he or she would stay on for two or three years checks out once he or she realizes the acquirer is going to check his or her every move, which causes the deal to fall through.

As I mentioned earlier, some failures are due to regulatory issues, such as discovering a fair-lending problem or BSA problem that the buyer did not sign up for. More generally, some deals terminate simply because the friendly federal and state regulators have to approve the transaction—and won’t.

The best practice in these post-Great Recession days is to vet a transaction with the regulators. Even doing that, however, does not guarantee success. Often the regulators will hold a transaction up, and such delays will typically mean termination after a certain period of time has passed.

Many barriers on the way to final deal

As you can see, the whole mergers and acquisitions arena is fraught with issues associated with due diligence, potential termination, material adverse changes, changes in management, and the like. Accordingly, I will address some of these issues in my coming blogs.

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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