Publications & Resources

May/June 2008
Focus: Mergers & Acquisitions

Tapping Alternative Funding Sources

By Michael J. Purchia

Today’s chaotic capital markets have major implications for bank Merger and Acquisition (M&A) options. Bank stocks within Western Independent Banker’s (WIB) footprint, despite having superior performance and growth opportunities, are not immune to Wall Street’s perception of bank equities. Should your M&A ideas and plans be put on hold? It depends. If your plan is well thought out, there are funding sources that you control, to convert your ideas into reality and make them a good long-term investment.

During the previous five years, there were 197 acquisitions of western banks, with more than a quarter made by banks in non-WIB states. During the same timeframe, of the 174 acquisitions by WIB-headquartered banks, only thirty-one (18%) of the target acquisitions were not headquartered in WIB states. There appears to be enough M&A opportunities in western states to attract out-of-market buyers and entice WIB member banks to stay close to home.

 

Target States

State %

 

Buyer States

State %

Alaska

1

0.5%

 

1

0.6%

Arizona

11

5.6%

 

2

1.1%

California

89

45.2%

 

81

46.6%

Colorado

37

18.8%

 

19

10.9%

Hawaii

1

0.5%

 

4

2.3%

Idaho

6

3.0%

 

2

1.1%

Montana

5

2.5%

 

9

5.2%

Nevada

9

4.6%

 

10

5.7%

Oregon

9

4.6%

 

9

5.2%

Utah

5

2.5%

 

6

3.4%

Washington

24

12.2%

 

31

17.8%

 

 

 

 

 

 

Total

197

100%

 

174

100%

Western bank transactions vary from Wachovia’s $25.5 billion Golden West mega-acquisition to smaller combinations. Our M&A tracking database reveals the median M&A transaction valuation in western states was 33% higher than the national average.

In our experience, over the past two years, branch and corporate real estate assets were an important consideration in 80% of the transactions that we reviewed. 

Three real estate-based financing methods should be used to help fund acquisitions. The first approach taps into corporate real estate capital, branches and administrative offices, using sale-leaseback financing. This standard operating procedure for the country’s largest acquisitions is often overlooked by regional and community banks. The rationale behind sale-leaseback transactions is to invest capital in higher-yielding assets, e.g., loans, operating systems and sales staff. In a recent evaluation of 400 corporate properties, the average annual property appreciation was only mid-range, single-digit!

Michael O’Mara, Director of Investment Sales for Paramount Partners-Retail Brokers Network, based in Braintree Massachusetts , specializes in providing sale-leaseback advisory services. O’Mara states,” A few reasons why the country’s largest banks structure sale-leasebacks in their mega deals range from liquidity, flexibility and tax advantages, while maintaining operational control of their bank real estate. Investors are looking to own bank real estate, including community bank properties, and are paying up. We are seeing historically low cap rates for fifteen and twenty year sale-leaseback transactions.”

The second tactical move is streamlining the post-merger branch network.” Branch consolidations and dispositions are a must,” according to Todd Boyer, a well-known Las Vegas real estate broker at R.O.I. Commercial Real Estate and also a member of the Retail Brokers Network. “Bankers need to think of their real estate assets as an investment portfolio. Markets change!” said Boyer.

Cash generated through the sale of redundant or under-performing branches helps pay for the acquisition and funds growth initiatives. Boyer observes, “Surplus bank properties are getting top dollar today. There is an active market of non-bank retailers and professional practices that are active buyers of former bank properties.” get authorization).

The third real estate-based funding source takes a hard operating look at newly acquired branches. It’s important to ensure that newly acquired branches don’t become a management drain.  Identify the areas of most attractive growth, provide guidance, but don’t introduce a new layer of bureaucracy. “Reducing overhead and focusing on higher-yielding market segments pays off”, according to Bill Hasapidis, president of BancTrac Solutions, a national provider of software tools for customer value analysis and performance measurement. “Improving the operating efficiency of the acquired branch network should be one of the top objectives of the acquiring bank”. He further points out that in a typical 20 branch network, a 10 basis point improvement in the efficiency ratio could generate savings in excess of $1 million per year, a significant bottom-line impact.

There is no post-acquisition magic bullet. However, by using systematic and proven methods for re-allocating capital and improving branch cash flow, an acquisition gets a running start. The keys to a successful acquisition utilizing alternative funding sources are twofold: 1) have your team roll up their sleeves to identify internal acquisition funding sources, and 2) work with real estate and branching professionals that can add tangible value to your M&A process.

The payoff is that you will be in a better position to both control your fortune and improve the likelihood of a successful merger.

Michael J. Purchia is director, strategic market intelligence and real estate services, for BrandPartners, a national provider of integrated solutions for retail environments, in Rochester, N.H. He can be reached at 800-732-3999 or mpurchia@brandpartners.com.

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