Posted by Jeff Gerrish in Jeff Gerrish on Community Banking
Fifth in a series: Maximizing shareholder return once clock starts
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This is the fifth in my series of blogs on merger and acquisition matters for community banks. Blog #2 dealt with the issue of "What constitutes an unsolicited offer." Blog #3 dealt with the issue of "What does the board need to do when it actually receives an unsolicited offer, i.e. analysis." Blog #4 gives the community bank board some indication of its alternatives upon receipt of the analysis of the unsolicited offer.
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This blog will deal with the issue of what happens in the real world when:
- The board receives the document that actually constitutes an unsolicited offer, i.e. an offer in writing with a credible number or approach.
- The analysis of the offer indicates the seller's shareholders would be far better off accepting the offer than continuing to hold the holding company's current stock from an earnings per share growth, market value, return on equity, cash flow, and share liquidity standpoint.
- The numbers clearly show that shareholders would be better off and the board has managed to get over the nonfinancial hurdles of the offer, e.g. the soft, noneconomic issues.
Reviewing the options
As I indicated in the last blog, the board has numerous alternatives to consider:
1. It can readdress its strategic plan to make the stock more valuable and get the economics closer.
2. It can accept the offer at face value (typically, not going to happen).
3. It can negotiate the offer with the potential purchaser.
4. It can reject the offer out-of-hand and run the risk of liability concerns from the shareholders should they find out about the offer.
5. It can hold the unsolicited purchaser at bay while it begins to explore other opportunities.
In the real world, something happens once an unsolicited offer comes in, the panic subsides, and the board members have finally "sold the bank" in their own minds.
That is, the question shifts from, "Should the bank be sold?" to "What is the best deal the board can get for its shareholders?"
On the laundry list of alternatives, this generally means negotiating with the unsolicited offeror and exploring to see if there are any alternative offers.
Can you go better than "good" to "best"?
It is generally not the case where a viable unsolicited offer happens that the bank immediately sells to that particular party.
This is notwithstanding the concern by the unsolicited offeror that their offer is being shopped (which it typically is, although not directly), nor that they are having competition they did not want.
It is also notwithstanding the unsolicited purchaser's attempt to lock up the target.
Generally, the board is going to explore more than one opportunity for obvious reasons in connection with dealing with the unsolicited offeror.
At this point, the bank is clearly in play and the board's duty is to get the best offer in the best currency.
But be clear on something: When you are "shopping the offer," you aren't literally going around saying, "ABC Bank just offered us 120% of book value. Can you beat that?" Instead, shopping just means that you go to another bank, and ask them if they are interested. If management there is intrigued, then they are invited to submit an expression of interest--quickly. Let me illustrate this with a story.
I remember well "back in the day" when one of our clients received a very credible unsolicited offer. The Chairman/CEO told me he was happy with the offer from a financial standpoint. I encouraged him to at least let me explore if there were other potential buyers who might be willing to pay more money or in a better currency. I even identified a laundry list of potential buyers.
The chairman indicated he would only be willing to deal with two of the parties I listed. Both of those were contacted and one made an enormous offer--the highest offer in that state at that time.
So, the deal was closed but not with the original unsolicited offeror, but the purchaser that the board had me solicit after it determined that the bank was going to sell anyway, one way or the other.
The clock keeps ticking ...
Once the board determines to shop the bank, it is not a question of whether the bank will sell. It is simply a question of at what price and for what currency will it sell.
The shopping of the target takes place fairly quickly. This is due in large part to the reality that you have a viable offer on the table that you do not want to lose, yet the board needs to make sure it is in fact the best offer available.
It may take two to eight weeks to determine whether there is another viable offer out there and get it reduced to writing.
Keep in mind, at this point in time, there has not been a single potential purchaser who has darkened the door of the target bank. The unsolicited offeror did so on the basis of public information, and so would any additional offeror at this stage.
Once the board has seen the color of the money and whose looks best, then a nonbinding expression of interest or letter of intent or term sheet will be entered and the due diligence will begin.
Putting the "engagement" in writing
Generally, a transaction will formally begin with some type of expression of interest, which is a general, nonbinding indication that the buyer is interested in acquiring the target bank for a certain price or ranges of prices. Once the discussion grows more serious and other terms of the transaction are determined, then those terms are typically set forth in either a term sheet or a letter of intent. (At my firm, for reasons to follow, we prefer term sheets.)
Both a term sheet and a letter of intent are nonbinding documents.
Typically, the only binding provisions in either a term sheet or a letter of intent involve the fact that each party will pay their own expenses and that each party will keep the transaction confidential subject to the confidentiality agreement previously executed.
Letters of intent are usually multi-page documents negotiated over lengthy periods of time--all of which translate into a total waste of time and money since they are nonbinding. Much more word-smithing goes on and it's typically an unnecessary expense for the client.
Our firm, as noted, prefers to use term sheets in acquisition transactions. These are shorter documents that simply document the parties, the salient terms, e.g. price, currency, structure, and employment contracts required, etc., and then reference everything else as normal terms and conditions in a transaction of this type.
Due diligence: The critical frontier
Typically, once a term sheet is inked, or even before, then the due diligence will commence.
Decisions with respect to due diligence involve many nonfinancial considerations. Among them:
- • How do you do it?
- • Can it be done offsite?
- • Can we use an electronic data room?
- • How do we keep the employees from finding out?
- • Do we tell the employees?
- • Do we tell the senior officers?
All those nonfinancial issues are critical in due diligence situations.
Coming up next: Due diligence and why it's critical for community bank acquirors
My next blog will give you the real world stance on due diligence, particularly in transactions between community banks.
Keep in mind, the transactions discussed in this column are between community banks, some public SEC reporting, some not.
But none of them are in a position to make any significant financial mistakes.
As a result, due diligence is critical, takes longer and is more expensive than most community banks anticipate. Stay tuned.
You can also catch the article, "Don't slouch towards sale: Put your bank's best face forward for buyers" in the ABA BJ Novembr 2012 Digital Magazine.
About Jeff Gerrish
Jeff Gerrish is chairman of the board of Gerrish McCreary Smith Consultants, LLC, and a member of the Memphis-based law firm of Gerrish McCreary Smith, PC, Attorneys. He is a frequent contributor to ABA Banking Journal and ABA Bank Directors Briefing, and frequently speaks at ABA events and telephone briefings.
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