Publications & Resources

May/June 2008
Focus: Mergers & Acquisitions

Buyers & Sellers: Ascertain Your “True” Valuation and Substantiate Your M&A Transactions

By Kevin Tweddle

It would seem that there is a lot of opportunity today for buyers to get a good deal and acquire another bank for one to two times book value versus the three and a half times book value of years past. However, with depressed stock prices prospective buyers may not be in the position of strength that you might think. So when considering a potential merger or acquisition, it has never been more important for buyers and sellers to do their homework to determine the “true valuation” and potential of a transaction – no one can afford a misstep in this market.

Make no mistake, we’re not talking about the financial analysis conducted by investment bankers, rather, the factors that drive earnings growth and build shareholder value. You must first look at the fundamentals of what contributes to each bank’s respective values, and ultimately, the long-term value of the proposed combined entity. Neither company should ink a deal without first obtaining a clear picture of what synergies and redundancies exist and what real opportunities the union creates for short and long-term revenue growth. It seems obvious that banks would garner this type of data when evaluating a merger or acquisition, but when under pressure to grow revenue and earnings, it is amazing how little attention is paid to this part of the due diligence process. 

Taking a brief step back, first and foremost, you must ask yourself what your bank needs most to grow the franchise; should it open a de novo branch, merge or buy? If the answer is one of the latter, then begin by examining the core competencies and weaknesses of each entity; of course, strive to strike a balance, as with any good marriage. Take the example of a bank in a rural market that had low cost funding, good deposit service charge fees and low loan volume. It determined, by leveraging online analysis tools, that it must diversify its lending and expand its commercial presence in order to generate a higher yield and improve net interest margin. 

The problem was that the bank had no growth potential because it was overextended in rural markets. The institution decided that its best route for achieving earnings growth was to expand beyond its existing footprint; through analysis it identified a bank in another state which was successfully serving higher growth markets. The buyer also had a significant wealth management department and was seeking more affluent markets to capitalize on this expertise; the seller wanted to build a wealth management business. Based largely on these synergies, the entities confidently decided they could generate greater shareholder value together than individually, and a successful union was consummated.

Other fundamentals (common among high-performing community banks) that you, as a buyer, should evaluate are whether a seller has solid loan volume, plays in higher growth markets and generates strong core deposit volume. As a seller, you should be focusing your efforts in these key areas – looking at your organization from a potential acquirer’s point of view. Buyers should also seek sellers that have built a strong business in specific niches where they may not currently have a presence, yet would complement their areas of expertise; a niche specialty franchise drives a higher premium on a buyer’s stock price.

It is also vital that you examine the market side of the equation; is there overlap in your markets? Ask yourself, with this union, whether you will enter a market(s) that has demand for the products you’re good at selling (i.e. home equities, rewards checking or specialty services, such as equipment leasing). You need to evaluate your branches, identifying your “cash cows,” “stars,” those with “high growth” potential and those that must be rationalized if you move forward with the deal. Last, but not least, conduct analysis to substantiate how your individual and collective strengths map against the competition in the markets you respectively serve and would enter with the commencement of the merger.

So, whether a buyer or a seller in the midst of a potential merger or acquisition, it’s critical that you look at the “true valuation” of a combined entity. It’s about examining the business fundamentals first to obtain a clear view of a marriage’s long-term potential. If you look back to acquisitions completed five years ago, the vast majority don’t look as attractive today. If those institutions were asked now whether the acquisition increased shareholder value, many would tell you no – because the fundamentals weren’t driving the decision to merge. Don’t make that mistake. Apply quantifiable analysis to your evaluation of these basic fundamentals in order to support your merger and acquisition decisions with confidence.

Kevin Tweddle, is the chief operating officer of Atlanta-based BancIntelligence, a Fiserv company providing the banking industry’s first online advisory solution. To obtain additional information and/or discuss the contents of this article, please feel free to contact Tweddle at 800-846-6681 or ktweddle@bancintelligence.com .

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