Preparing to Overcome Problems in Bank M&A Transactions

by Michael G. Rediker, Porter White & Co.

In recent months, the merger and acquisition market in community bank stocks has revived from the moribund state prevailing during and after the Great Recession of 2007-08. As the number of deals has picked up, so has the number of problems encountered in divestiture transactions which are frequently once in a lifetime transactions for community bankers with little or no practical experience with these types of deals. This brief reports on some of the problems we have observed during the last couple of years with the objective of preparing our readers (particularly readers who are potential sellers) to avoid similar problems in their deals should they come to pass.

Beware of deals that result in market concentration. Antitrust is one of the areas that bankers seldom face unless they are involved in an acquisition where the surviving entity has large market share. The possibility of antitrust issues is increased by the fact that the law in this area is way behind the times because it fails to recognize the growing market share of non bank lenders (e.g., credit unions) and mortgage companies, competition from large brokerage firms (many of them with bank affiliates) which pursue both depository and lending relationships, and the reality that with a smartphone one can deposit a check or take out a loan from a financial institution in another part of the country. Because antitrust law no longer makes sense a deal needs an expert lawyer and sometimes an expert economist to survive a challenge in this area.

Data processing termination fees. Many, if not most, community banks outsource their data and financial processing under multi-year contracts. These contracts frequently call for termination fees that are material in relation to the consideration offered by a buyer in the event of a sale of the bank. The best time to negotiate these fees is at the time of initial solicitation of proposals for data processing outsourcing. By the time a divestiture letter of intent is signed, it is too late.

Falling acquirer stock prices in transactions involving, in whole or in part, acquirer stock. Regulatory approvals in bank divestitures can take a number of months during which the market price of an acquirer’s stock will undoubtedly fluctuate and may decrease materially even without adverse events in the business of the acquirer. To keep the deal from falling apart it is important to provide for a range of values within which the parties are obligated to close. A decline in the acquirer’s stock price may be more readily acceptable if the deal value is higher than obtainable in a cash deal or the sellers benefit from a tax free exchange.

Employment contracts. Banks frequently enter into employment contracts with one or more of their principal officers and these agreements sometimes provide for large payments in the event of a change in control of the banks. It is important that these employment contracts be negotiated with the possibility of the sale of the bank in mind and that the contract terms be commercially reasonable. Overly generous payments may lead to a reduction in the sales price received by the stockholders and may also put the contracting officer in a conflict of interest position as his or her duty to shareholders comes into conflict with personal financial interests.

Keeping your crystal ball shiny to deal with minority dissenters. In every merger and acquisition transaction the parties worry about whether they are receiving (paying) too little (much), and sometimes minority stockholders bring appraisal actions seeking a higher value for their shares. If you are a seller the best way to become comfortable with the transaction price is to have a firm handle on what your bank is worth as an independent business over the next five to 10 years. Is the consideration you are being offered more than you think your bank is worth if it stays independent (this can happen in a transaction fair to both parties when the acquiring bank and the acquired bank are worth more together than they are apart, when 1+1 is more than 2)?  How do you convince your directors, and ultimately your stockholders, that the deal price is more than you are worth as an independent entity?

The answer is that you should prepare and update annually a strategic plan and a three-to-five year forecast of operations with accompanying discounted cash flow analysis. If you will do this over time you and your board will gain confidence in your judgement of the value of your bank and be in a position to react definitively to purchase proposals that you solicit or otherwise receive. Discounted cash flow valuations based on forecasts done by management in the regular course of business are generally respected by courts in the event there is a challenge from minority shareholders leading to appraisal actions, and you will be in a position to defend against dissident stockholders with “made as instructed” valuation experts in tow.

Michael G. Rediker, CFA is an investment banker with Porter White & Company in Birmingham. He can be reached at (205) 458-9135 or Since 1968 Jim White has advised businesses, individuals, non-profits and munici-palities on a wide range of financial matters. He founded Porter White & Company in Birmingham in 1975 and presently serves as chairman. Jim can be reached at (205) 252-3681 or