“It helps to have someone who can speak objectively—someone who can
tell me that maybe I’m not as pretty as I think I am.” When it comes to
selling the bank, you want it straight. Plus, a half dozen additional
factors to consider if buying or selling is in your future.
By
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, contributing editor
Not every bank uses an investment bank or legal advisor, but most do. Here are some of the reasons why, and how to get the most out of the relationship
Every bank deal carries a story of how the alliance makes sense from a strategic, geographic, technological, or line-of-business perspective. But behind the scenes, there are often other stories about the M&A advisors who help bank buyers and sellers navigate through the deal-making process; how the advisors were chosen; and how well they performed. There was the case, for example, of the bank that felt it knew potential acquirers so well via social relationships that the bank didn’t need an investment banker for a potential sale. Much to its dismay, when an offer was made, it was substantially short of what the seller thought it was worth—and the process ended in a stalemate. Subsequently, the bank sought the services of an investment bank and garnered a price with an unexpected acquirer at a price beyond its original goal.
That story, not surprisingly, was related anonymously. The world of investment banking and mergers and acquisitions generally, despite all the attention paid to the numbers, is a highly personalized business. Thus, pretty much everyone contacted for this story was skittish about talking for attribution about real life experiences, instructive as they can be. You never know when you might be doing business with someone again.
But there was plenty of willingness to talk about the need for M&A advice; and what banks should look for in an advisor/investment banker, especially for small to mid-sized institutions that have become more focused in recent years on merger/acquisition strategies. Many of them have tapped the talents of advisors whose services range in scope from legal to accounting to investment banking expertise. Interviews with bankers and advisors reveal that need for such services varies from circumstance to circumstance. Some say that they do not utilize outside investment banking advice given available internal resources/talent, while others have ongoing relationships or utilize outside work only on selected projects. Credentials, cost, control, and compatibility all weigh into the picture. Moreover, perspectives on the need for advice can vary whether a bank is an acquirer or seller.
“One of the key qualities to consider in selecting an advisor is finding someone you can trust—someone who has earned your confidence, is a good listener to what you want to accomplish, and can execute according to the stated game plan,” says Curtis D. Carpenter, Sheshunoff & Co. Investment Banking managing director, Austin, Tex.
“You want someone who knows the players and isn’t afraid to call a situation the way he or she sees it,” says Arnold Danielson, chairman of Danielson Capital (formerly Danielson Associates), Vienna, Va.
Buyers or sellers may find M&A advisors useful for a variety of reasons. First, sources say, experienced advisors can provide efficiency via their network of contacts, their knowledge of market dynamics, and their familiarity with financial modeling techniques. Second, an advisor can serve as an effective intermediary in negotiating details. Third, an advisor’s familiarity with the process can help banks avoid potential pitfalls, while keeping the project on track from legal and regulatory standpoints.
Needed: perspective and context
Given the demands of merger negotiation and execution, experts state that banks should also consider the full range of services that a potential advisor provides.
“As a starting point, a company should go through the full analysis of strategic options available to them to produce shareholder value,” says Steven D. Hovde, president and chief executive officer of Hovde Financial Inc., who works out of the firm’s Chicago office. “In some instances, it may involve remaining independent, but making various changes. It may involve raising capital or stock repurchases or divestiture of lines of business or the sale of branches in slower-growth markets. Alternatively, it may entail the acquisition of branches or banks or de novo activity. Or it could be an exit strategy.”
Prospective buyers will want to make sure they are not overpaying for what they are getting, while avoiding costly acquisition “surprises” down the road.
On the flip side, prospective sellers may feel that they need additional perspective in understanding their value within the context of pricing trends or contemporary negotiating terms.
“On the seller’s side, it helps to have someone who can speak objectively—someone who can tell me that maybe I’m not as pretty as I think I am,” says Walter G. Moeling IV, who chairs the financial institutions practice group of Powell Goldstein, out of the firm’s Atlanta office. “On the acquirer’s side, the advisor may serve as an analyst/cheerleader—a sanity check who can tell me when I do this deal that the market’s not going to kill me.”
While some may balk at associated fee structures, several sources interviewed stress that cost should be considered within the context of the overall transaction. Moreover, many state that advisors’ value to sellers can be seen in higher premiums.
Bankers with smaller staffs who are more heavily focused on the day-to-day operations may find that advisors’ knowledge of organizational cultures, strategic focus, operating philosophies—among other factors—within targeted geographic regions or business-niche areas provides efficiency in sorting through M&A noise.
“Some boards get so caught up in deal fever that they can’t always see things for what they are,” says one industry insider. “If I’m buying this institution, I need to recognize that I’m buying it warts and all. Anything that’s missed from a risk management or compliance standpoint can be costly down the road.”
Any host of circumstances can create tensions during a deal, and the presence of advisors can help diffuse potentially difficult or awkward situations. For example, a rift among family members could cause a stalemate, or buyers may deem certain seller requests or demands to be unreasonable in light of industry norms. In other instances, unresolved leadership and/or employment issues may stir emotions.
“Personalities are a huge part of it,” says one banker who’s seen mergers from both buyer and seller perspectives. “When frictions and emotions surface, you need a level head.”
“There can be a lot of bumps in the road and if you don’t have an advisor, the process can be very taxing in terms of organizational time and resources,” adds John W. Blaylock, associate director of Sheshunoff & Co. Investment Banking. Brian Sterling, co-head of investment banking with Sandler O’Neill & Partners, L.P., New York, agrees. “Among many other things, advisors can put requests into context of what’s acceptable, they can prepare people for what’s going to happen during the course of a transaction and they can help people resolve issues of concern that arise.”
Beyond the financial modeling that occurs in mapping out a deal’s structure, for example, there are hosts of issues that vary from the handling of transaction costs to employment contracts with key executives.
Regulatory and compliance matters can seemingly take on a life of their own without sufficient attention.
Choosing the right fit
Determining whether an outside M&A advisor is needed for a particular deal is one decision. But selecting the right advisor is another. Bankers and advisors themselves stress that issues such as trust, experience, industry/market knowledge, reputation, commitment and communication skills should all factor into the choice.
“You need to know who you’re working with and there needs to be a clear understanding of goals and expectations,” says David Mills, executive vice-president of First Busey Corp., a $2 billion-asset financial holding company based in Urbana, Ill., which earlier this fall announced a merger with its next-town rival, the $1.6 billion-asset Main Street Trust, Inc., Champaign, Ill.
Granger Souder, executive vice-president and general counsel with the $18.1 billion-asset Sky Financial Group headquartered in Bowling Green, Ohio, concurs.
Sky, which has averaged about one-to-two bank acquisitions and one-to-three insurance agency acquisitions a year in recent years, has utilized advisors on some of its larger, more complex bank acquisitions. Souder stresses that it’s important for the advisor to understand the company’s business, its market, its operating philosophies and its strategic directives in order to be effective.
So how does a bank determine a fit? Experience is a major factor, and that includes the firm and its individuals. While number of transactions is an important consideration, the scope of deals should also weigh into the decision.
“Banks need to understand the deal experience of the individuals they would be working with, not just the experience level of the firm,” says Sheshunoff’s Carpenter. “Additionally, banks should consider the reach of the firm. We’re seeing more transactions where the buyer is coming from out of region, so there needs to be a strong broad base of knowledge.”
Keefe, Bruyette & Woods Vice-Chairman Andrew Senchak observes that depth and diversity of expertise are crucial, as banks in selected high-growth regions or banks with highly specialized niche areas of expertise can draw global interest. He adds that trust is also critically important, as the M&A process can present various twists and turns, and the client will want to have the confidence that the advisor has the experience to manage the process.
Frank M. Conner III, a partner with law firm Alston & Bird LLP and a frequent lecturer on matters pertaining to financial institutions, observes that clients must have confidence that a chosen advisor has the regulatory and organizational capabilities to be a part of a merger or acquisition.
If core competencies and analytical skills are a given, Sandler’s Sterling states that from a buyer’s perspective, market intelligence and relationships are extremely important considerations in making a selection of an advisor. Dialogue is also critical on the sell side to ensure that the advisor understands—and importantly articulates—client objectives accurately.
“You need to be sure that everyone is on the same page from a communication standpoint,” Sterling observes.
Candor is another key component in advisor relationships, notes Stephen Gurgovits, president and chief executive officer of the $6.1 billion-asset FNB Corp., based in Hermitage, Pa. Since January of 2004, the company has acquired four banks, two insurance agencies and seven finance offices.
While issues such as trust and communication can take years to build, experts recommend that bankers take advantage of industry conferences as informal opportunities to form impressions of advisors’ communication skills, based on their interaction with colleagues and others around them.
“How people treat each other when they’re not in client-presentation mode can provide insight into how that firm would treat you and represent you,” says one experienced deal maker.
Summing up the whole process, John J. Nelligan, managing director with Milestone Advisors, LLC, Washington, D.C., states that it is important for clients to have the confidence to look back at the M&A experience and know that they thoroughly explored all of their options and managed value for shareholders in the best possible manner. BJ
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