Tech Contracts Creating Tangle of Troubles in M&A Deals

There are a lot of technology nightmares that follow a merger, but untangling contracts for software and other systems is one of the biggest.

Jack Deano, an executive vice president and chief technology officer with Iberiabank Corp. in Lafayette, La., knows this firsthand. The $11.4 billion-asset bank bought two smaller banks in May, forcing the company to decide which software platforms to phase out and which to keep.

Technology contracts "can be very onerous and many times there's little to no wiggle room in them," Deano says. For example, "if the bank you're acquiring has just signed a brand new five-year deal, you're looking at some pretty hefty buyouts."

Converting the target to the buyer's existing programs is standard procedure. That was the path that Iberiabank chose.

But before making those decisions, banks must read the fine print of the acquired banks' contracts to determine when to phase out systems and how much such moves will cost.

That advice applies to all conversions, but experts are sounding louder warnings in anticipation of more deals. Though a wave of M&A did not occur this year as predicted, and the number of banks on the Federal Deposit Insurance Corp.'s list of troubled institutions has declined, "I do expect M&As … will continue to pick up," says Paul Schaus, the president of CCG Catalyst Consulting Group in Phoenix.

"The price of bank stocks is depressed," he says. "You've got the regulatory pressure. … It's just like, 'Get me out of this.' "

The first step in reviewing contracts is actually locating them, which is easier said than done, according to Quintin Sykes, a vice president in Hitachi Consulting's U.S. financial services practice. Finding all the appropriate documents that spell out contract terms, termination fees and terms of service can be a challenge, depending on how good an acquisition target was at record keeping.

A buyer's executives "have to double-check the inventory of contracts against the inventory of systems that the bank is using," Sykes says. "If you don't have a contract for a given system, sometimes you have to go back to the vendor and say, 'Hey, we don't know where that is.'"

This process can also uncover hidden expenses.

"I found out in one deal we were paying for a time-and-weather [phone] number in a branch that we had bought," Sykes says of an experience he had while working for a bank prior to his consulting career. "We wound up getting the renewal because we didn't provide notice" to the vendor.

Some banks hire vendors to help them assess an acquired institution's overall technology inventory.

Citizens South Bank, the $1.1 billion-asset subsidiary of Citizens South Banking Corp. in Gastonia, N.C., uses software from Safe Systems Inc., an Alpharetta, Ga., vendor.

"The goal is to get the bank's arms around the IT infrastructure of what they're taking over," says Zach Duke, the executive vice president of business development at Safe Systems.

Contracts can go unnoticed before an acquisition because "many times you're only dealing with the upper levels of the bank you're acquiring," Deano says.

Fees related to extracting data housed in a software program, known as deconversion fees, are a major concern, Schaus says.

Vendors charge fees when a bank decides to end a contract early. The details depend on how aggressive a bank is at negotiating the initial terms. The fees are usually tied to the length of time remaining in the contract.