Publications & Resources

May/June 2008
Focus: Mergers & Acquisitions

Common Mistakes of Buyers and Sellers in Acquisitions

By Philip K. Smith

Five Common Mistakes of Sellers

  1. Pricing expectations beyond what the market will bear. Everybody likes to think their bank is unique. As a result, many boards begin the exploration of selling with a level of expectation of the value they will receive that is beyond what the market will bear. The board should be wary of any investment bankers, consultants or other advisors that pump the board into believing that any level of specific return will be gained in a sale. Set your expectations according to current market conditions. 

  2. Not understanding how banks are valued. Purchasers do not buy capital, they buy future earnings potential. Having too much capital as a selling institution is just as much of a problem as having too little capital if you are a buyer. Banks that “store up” additional capital in the hopes of obtaining a premium in a sale process will find that “excess” capital could be better used. 

  3. Structuring a merger of equals. Another bad mistake some sellers make is believing there is such a thing as a “merger of equals”. There is no such thing. A sale by any other name is still a sale. Realize that you are either a buyer or a seller. Focus on the practical results, not the language. 

  4. Timing. Achieving the best value for your organization may not always be a function of having the perfect organization to sell. Unless there are buyers, your perfect bank does not stand a chance. Many institutions are forced into selling at the wrong time because they did not take advantage of opportunities earlier. The goal is to time the market so that your bank has some “sizzle” to sell and someone willing to pay for it. 

  5. Not getting value from your professionals. Institutions make a fatal mistake if they receive a few expressions of interest, try to save time and money by simply negotiating on their own with the potential buyer, cutting a deal and selling the institution. Good professionals can add value to the overall transaction, rather than taking from the value. 

Five Common Mistakes of Buyers

  1. Getting the board ahead of the numbers. Don’t get the board into a buying frenzy and start down the acquisition road without even knowing if you can afford it. If a board becomes aware that an institution may be for sale, the first step should be to conduct an in-depth financial analysis to determine the price that they could pay, how they would fund any acquisition and if the transaction makes sense strategically. 

  2. Failure to lock up key individuals. A buyer that fails to lock up senior management through employment contracts or otherwise may find that the earnings stream it had hoped to purchase in the deal no longer exists because key producers have taken positions elsewhere. In addition to locking up key personnel with employment contracts, it is critical for a buyer to ensure that non-compete agreements exist for key personnel of the seller. 

  3. Not conducting adequate due diligence. It is incumbent upon buyers to thoroughly conduct a due diligence to make sure that the target organization is as represented. Buyers should make sure that the seller is free from regulatory and legal problems, that its loan loss reserve is adequately funded, future earnings potential is as expected, that anticipated cost savings can truly be generated and, most importantly, a thorough “scrubbing” of the loan portfolio needs to be conducted. 

  4. Using the wrong method of payment. Consideration needs to be given to whether a seller wants stock from a buyer, cash or some combination. In most community bank situations, the seller is only interested in cash from another community organization but might be willing to consider publicly traded stock. The buyer should consider whether any cash that is going to be paid will come from the buyer’s excess capital resources, a correspondent loan or some third party funding such as trust preferred securities. 

  5. Why buy it if you can steal it? If an acquisition does not truly fit within the organization’s overall strategic plan, caution should be taken in pursuing an acquisition just for the purposes of eliminating competition. The organization might be better off simply picking up or “stealing” all of the business once a new competitor comes into the market. 

Philip Smith  is president and a member of the board of directors of the Memphis-based law firm of Gerrish McCreary Smith, PC, and its affiliated bank consulting firm, Gerrish McCreary Smith Consultants, LLC. He may be reached at (901) 767-0900.

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