“They say that breaking up is hard to do.
Now I know, I know that it’s true.
Don’t say that this is the end.
Instead of breaking up, I wish that we were making up.”
—Breaking Up Is Hard To Do, by Neil Sedaka
As we continue to discuss why deals fall apart and what happens to disrupt banks’ initial plan for consummation, I thought it would be appropriate to start this blog with another musical entrée. [My first installment, “When merger deals come undone…” began with a verse from Carole King’s “It’s Too Late.”]
During the courting stage for a bank acquisition transaction, both the buyer and the seller are generally in a state of euphoria—or at least excitement. They have found a match and are finally going to be able to come together with an acquisition transaction.
Of course, in the beginning, both parties are anticipating great things. The preliminary negotiations have been completed, a Letter of Intent or a Term Sheet has materialized, and those initial terms have been worked over by the lawyers. The respective legal teams have developed the preliminaries into a Definitive Agreement—typically in 60-plus pages—setting out all the parameters of the deal.
As is often the case, however, only once everyone signs off on the Definitive Agreement does the deal “get in the ditch.”
Where the deals die—internal reasons
As I indicated in the previous blog, there are a number of issues that can derail a potential bank combination. I will develop some of those issues further in this week.
Sources for getting the deal off track can be internal issues at either the target bank or buying bank, or external issues, meaning primarily the regulatory agencies or the Seller’s shareholders.
From an internal standpoint, many of the issues are cultural. As I had one CEO tell me: “When we started working on this deal everybody was excited. The further we got into it, the less excited everybody got, including me. We finally just decided it was not going to work for us, so we walked away.”
That type of situation is typically evidence of internal cultural issues. The numbers may look great and the transaction may make sense on paper, but for whatever reason, once the purchaser gets involved in the internal culture of the target, it decides the deal does not work.
Other internal issues typically revolve around managerial capacity.
If the buyer is performing due diligence and anticipates that the target’s current senior management team can continue to operate the target’s locations on its own, great! There are no problems there.
However, if the buyer comes in for due diligence and finds out that the target’s senior management may not be best to continue to operate the locations, the buyer has to come up with a solution. If the buyer internally has no excess management to move to and operate the locations, then the deal will likely crater.
Where deals die—external reasons
From an external standpoint, deal-ending issues generally fit into one of two categories—either the regulators or the shareholders.
On the latter point, as hard as it may be to believe, there apparently is a cadre of plaintiffs’ lawyers who will sue virtually as soon as a bank acquisition transaction is announced or the proxy material is delivered to the shareholders.
The goal here is not necessarily to stop the transaction; it is simply “to make sure that the selling shareholders have adequate disclosures about the transaction.” (Uh huh.)
In those cases, as soon as the transaction is either publicly announced, or, more likely, when the proxy material goes out, the plaintiff’s lawyers find something to complain about regarding the documents. These suits are uniformly settled for a few hundred thousand dollars. Most of the money goes to the lawyers. And then the problem goes away.
Sometimes, however, this type of financial exposure before the deal is even consummated may tend to derail a transaction.
Although the shareholder issues are certainly a risk, the more likely cause of a derailed transaction is the bank regulators.
There have been a number of bank acquisition transactions lately that have either been totally shut down by the regulators or put on hold/“worked over” by the regulators for a lengthy period of time. (It’s run as much as over a year.)
When you have regulatory issues, it is difficult, particularly for the buyer, to maintain the internal momentum necessary to move forward with the transaction. If the buyer is concerned that the deal may never close, it may decide that it is more worthwhile to simply walk away and find another companion.
One of the more common regulatory hurdles is compliance.
There have been a couple of recent examples of some of larger regional banks getting into compliance problems at the same time they had a couple of deals pending. As a result, they had to put the deals on ice until they got out of the compliance penalty box.
Will those deals ever close? Who knows?
The regulatory factor is especially difficult to assess, particularly when a regulatory examination (usually compliance) occurs between the time a deal is announced and the deal’s closing date.
From a regulatory standpoint, the best practice is to vet the transaction with the regulators before the transaction has even been announced to see if there is any indication that the regulators will have difficulty approving the transaction.
Not all ditches become permanent fates
It’s not good to be in a situation where a transaction gets in the ditch and stays there. But you have to be prepared.
Every transaction—good, bad, or indifferent—will get into the ditch at some point. Relationships in general seem to go that way.
The question is whether the parties can pull the deal out of the ditch, dust if off, and move forward.
Or whether it will indeed be the end.
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