Want to Explore a Merger of Equals? Answer These Questions First
The consensus seems to be that community banking has become even more competitive over the last several years, as pressure on net interest margins increases along with regulatory and compliance expenses. As a result, community banks continue to look for ways to cut costs and increase revenues in order to remain competitive. To address some of these challenges, and to avoid becoming a target in a sale of control to another bank, it is becoming more common for our community bank clients to consider the possibility of a "strategic combination" with another community bank, otherwise known as a "merger of equals." (We use those terms interchangeably in this article.)
In this brief article we provide some specific questions and talking points to help guide potential partners during their initial discussions regarding a merger of equals. Interested community banks might even consider using this article as an outline for that first meeting with each other to discuss whether a strategic combination makes sense.
In a merger of equals, two competitors of relatively equal size and health decide to enter into a business combination (i.e., a merger) because they realize they are better together than they are apart. Shareholders from both parties end up with stock in a larger community bank with pooled resources and more earning power. Although the financial and other long-term benefits to shareholders of both community banks can be substantial, these discussions often fall apart because the respective boards and executives cannot agree on political, social or cultural issues.
Often a discussion of a strategic combination starts with an initial meeting attended by one or more senior executives from each community bank. The executives already realize that there are at least some strategic benefits to joining forces, which is why they are at the meeting in the first place. However, they often do not know what questions to ask one another, or they purposely avoid discussing the "hard questions." In our experience, getting the important—and sometimes difficult—political, social and cultural issues on the table at the initial meeting saves time and frustration for everyone. The answers to these questions often will help the parties to more quickly determine whether the "fit" is conducive to a strategic combination.
So what questions should be discussed at this initial meeting with your proposed partner to review a merger of equals? Below are several questions that can serve as a good roadmap. It may also be worthwhile to review these questions with your board of directors prior to that initial meeting, to thoughtfully consider your board’s position on these issues as well as to brainstorm compromises you can offer. As mentioned previously, you might consider taking this list of questions to the initial meeting with your proposed partner to serve as an outline for those preliminary discussions.
- Do our board and management teams have mutual respect for one another? Have we had a good business relationship in the past? (e.g. Have we collaborated on loan participations or other business or community endeavors?)
- Who will be on the board of directors? How many board seats will each bank get on the combined bank’s board of directors?
- Who will fill the key executive management positions?
- Where will the combined bank’s headquarters be located?
- What will the name of the combined bank be? Do we want to adopt one of our existing names? A new name based on our combined names? Or a completely new name and brand?
- What new products and services will we bring to the table for each other’s customers? Will both of our customer bases benefit from an enhanced scope of services, a larger lending limit, etc.? What services can be combined and result in a better efficiency ratio?
- What are our biggest operational or other weaknesses? Can we correct any of those weaknesses with a strategic combination?
- Will all employees be retained? Can any downsizing be accomplished through attrition and retirements rather than layoffs?
- Will any branches need to be closed? What will our geographic footprint look like?
- Will our shareholders be better off if we combine? What about our customers? Communities? Employees?
- Are our values and cultures similar?
- Employee work/life balance
- Customer focus
- Performance incentives, benefits package, opportunities for employee advancement
- Staff involvement with community service
- Monetary donations to communities
- Whose data processing and technology platform is better? What will the termination and conversion fees be for terminating either of our data processing contracts?
- How will we measure whether the merger of equals is successful?
If you can come to agreement on most of these issues, then there is reason for optimism for further discussions, and you may be on your way to a beneficial strategic combination benefitting your shareholders, employees, customers, and communities.