Merger mania has descended on community banking throughout the United States. In the current rush to seek merger partners, many banks are unprepared for the task ahead.
There is only a vague awareness of the issues that will be faced, and very little understanding of how the process works or, more important, where the mistakes can be made that will condemn a merger proposal to failure. There are relatively few methods for completing a merger transaction, yet the opportunities to destroy a proposed merger are virtually unbounded. Fortunately, there are some techniques to avoid potential traps.
1. Make a focused decision based on a business plan. Too often, this monumental decision is based on whim, convenience, immediate gain, or the prevailing zeitgeist.
Long before a merger is considered, the community bank should establish a long-range business plan. Merger considerations should be focused on the plan, not vice versa. In this manner, a proposed merger will be valuated in light of the plan. A potential merger that doesn't fit the business plan should be rejected or, at the very least, reviewed with far greater care. The business plan should be revised in light of a proposed merger only after careful investigation and consideration.
2. Empower a negotiating team. Once the decision is made to proceed with a merger strategy, a committee of the board and senior management should be vested with authority to carry out discussions and negotiations consistent with the merger strategy.
The entire board should provide policy guidance and overall approval, but it is critical that the negotiations be conducted by a small group that speaks with one voice and can be decisive. Attempts by the full board to participate in all phases of the negotiations, or to second-guess each negotiating decision, can be devastating to the success of the negotiations.
3. Avoid even the appearance of insider trading. Once a merger is a possibility, or even in the most preliminary discussion phase, management, board members, and their families must cease trading in the securities of their bank or the target. While this advice may appear obvious, it is important to keep in mind at all stages of the process. Moreover, rumors, gossip, and "off the record" information sharing are sure bets for trouble. The acquisition process must have integrity and total confidentiality. Any lack of care in this regard can have serious consequences for the director involved and for the bank.
4. Establish a proper press policy. Dealing with the press is critically important. The community bank should adopt a policy that it will not comment on merger discussions. A proper response is "as a policy matter, we do not confirm or deny merger discussions or rumors." This should be the consistent answer, whether or not the merger rumors are true, until such time as counsel advises that an announcement should be made. Remember, a "no comment" response is not synonymous with the standard policy of neither confirming nor denying merger discussions.
Once an announcement is made, an orderly response process should be in place for dealing with the press and with shareholders. A member of management and a member of the board should be designated the sole spokespersons. Too many people responding to questions will spell doom in press relations.
5. Careful due diligence is critical. Selecting a merger partner with care is essential. This means extensive and precise due diligence. The areas of review that deserve greatest attention are the asset quality and operational integrity of the target and the cost savings that can be effected. Risk assessment objectives should be articulated and assignments made to appropriate inside and outside personnel. The board and management should monitor due diligence and keep focus on the strategic business plan and how the due diligence findings are supporting or straying from that objective.
6. Avoid a "deal" mentality. Once money starts to flow and numerous people are involved, the transaction begins to take on a life of its own. It is at this stage that a "deal mentality" creeps in. Individuals associated with the transaction become personally identified with it and can lose perspective. Issues are ignored in favor of proceeding with the transaction. Negative due diligence findings are minimized or set aside. As the costs mount the seeming inevitability of the transaction becomes compelling, and focus can be lost.
7. Don't let the "ice cube" melt. Once the transaction has been structured and the merger announced, the most dangerous time frame is at hand. This period is the "melting ice cube" phase. Time and human nature are the enemies. Essentially the target bank is an ice cube that the acquirer has agreed to buy. There it sits in the beating sun while the regulatory process, shareholder approval, and due diligence proceed for what seems like an eternity. In the meantime, employees of the target (and even senior management) become uncertain. Productivity and attentiveness give way to lethargy.
Perhaps it isn't intentional, but problems that in the past seemed manageable are allowed to fester and become serious. As the better employees wander off to other jobs, thus escaping the anxiety at the target, mediocre employees are often left behind with little incentive to perform.
While there is no simple solution for this stage, there are some tools available. First, communications are critical. A joint newsletter that keeps all employees informed is one vehicle. It should be edited with the perspective of the target employees in mind. Retention bonuses are an expensive but valuable method to keep the most indispensable employees.
Early identification of employee issues, some of which can seem trivial but are actually burning questions for the affected employees, is appropriate. A fine line must be walked to avoid making promises that can't be kept while at the same time attempting to get the most out of employees.
8. Monitor performance of the target. During this waiting period there is also a fine distinction between the buyer's carefully monitoring the performance of the target and interfering with the management of it. It is appropriate to include in the definitive agreement many prohibitions against irregular activities. Financial thresholds should be carefully considered in permitting capital expenditures, adding employees, changing compensation schemes, altering lines of business, and the like. It is also permissible for the acquiring bank to have a person sit in as a guest at board meetings and important committee meetings, especially the loan committee. The level of participation in such meetings must be carefully considered.
9. Don't relax after the transaction is completed. After the merger is consummated, it is easy for everyone to relax and think of the next deal. Unfortunately, more mergers fail as a result of sloppy implementation than fail prior to the completion of the transaction. All of the synergies of cost and reductions of overhead are ephemeral if the value of the transaction is undermined by loss of customers, increase of problem assets, or shrinking deposits. Customers hate change, particularly involuntary change. They refuse to be treated as fungible commodities. A smooth transition is critical in preserving value.
Mr. Rockett is a partner at Ropers, Majeski, Kohn, Bentley, Wagner & Kane in San Francisco.