Bankers are finding it increasingly important to manage investors’ expectations as they discuss acquisitions.
Management teams need to clearly explain what they plan to do — and then go out and execute. Establishing and maintaining trust between executives and investors has only grown in importance since the financial crisis, especially now that consolidation activity is heating up.
In terms of discussing deals, bankers must clearly outline the types of acquisitions they are interested in, while also providing guidance on acceptable financial parameters, industry experts said. Failure to do so could draw the wrath of shareholders.
"Communication is key in making sure that management and shareholders are aligned," said Stuart Stein, a lawyer at Hogan Lovells. "Different banks have different plans, and investors need to invest in the ones they believe in. Without management communication, that won’t happen."
Bankers face a delicate balance providing information about their M&A plans, industry observers said. They need to share a variety of information, such as their desired markets and whether they are looking to buy whole banks or business lines. Executives should also consider sharing financial objectives, such as tangible book dilution and the time it would take to earn that dilution back.
"It is extremely important that the markets know what a bank intends to do," said Tom Rudkin, a principal at FIG Partners. "The market adjusts their valuations to the bank’s stock to include that type of additional value, assuming management and the board are good at acquisitions."
Cascade Bancorp in Bend, Ore., is looking to roll up banks in the Pacific Northwest with up to $500 million of assets. The company, which recently agreed to buy 15 branches from Bank of America, also bought Home Federal Bank in Nampa, Idaho, in 2014.
Management considers three or four years to be its maximum period to earn back tangible book dilution, said Terry Zink, Cascade’s president and chief executive. The $2.5 billion-asset company would need a "very compelling reason" to pursue anything outside of those parameters, he said.
"Otherwise, credibility is shot," Zink said. "We try not to tell investors anything that we aren’t 90% sure will happen."
Still, banks that disclose too many specifics risk showing their hand. Doing so could lead to swings in the buyer’s or seller’s stock price, and it could trigger inquiries from the Securities and Exchange Commission and Financial Industry Regulatory Authority, Rudkin said.
Leaks could also create openings for rivals to interfere with a deal. For instance, Hanmi Financial in Los Angeles made an unsolicited public bid for BBCN Bancorp after a Korean-language newspaper published an article stating that BBCN was deep in negotiations to buy Wilshire Bancorp.
"Bankers need to be specific as they can be without going over the line," said George Morvis, chief executive of the consulting firm Financial Shares Corp. "They should definitely articulate the extent to which they plan to use M&A as part of their overall growth strategy."
Larger institutions may have more challenges being coy about their acquisition strategies, industry experts said. The pool of banks they are potentially interested in buying is much smaller than that for community banks. Institutions with more than $50 billion of assets also have to get capital plans approved by regulators.
Bigger banks are "in a much more restricted environment because much of capital management is being outsourced to regulators," said Scott Siefers, an analyst at Sandler O’Neill. "I think you can’t be as specific as smaller banks, but that doesn’t mean you can’t communicate an interest or even broad thoughts about how big you would like to go."
KeyCorp in Cleveland upset shareholders in October when it announced its agreement to buy First Niagara Financial Group in Buffalo, N.Y.
Key’s stock dropped in the days after the announcement as management faced backlash over how long it would take for the $95 billion-asset company to earn back dilution to tangible book value. To a lesser extent, investors were probably unaware that Key would consider buying a bank as large as the $39 billion-asset First Niagara, industry experts said.
Rather, investors likely thought Key was more interested in nontraditional deals in niche areas, similar to its acquisition of Pacific Crest Securities, a technology-focused investment bank, Siefers said. The market may have sldo been surprised at the price Key was willing to pay for First Niagara, Rudkin said.
"Investors don’t like to be surprised," Siefers said. "This is a group that has gone through a lot of volatility through the crisis. There has been a lot of disruption to what investors thought they were buying, and good communication can help alleviate investor concerns. It’s an important function."
Key declined to comment.
Still, large institutions can do a good job communicating their strategies without giving too much away, industry observers said.
BB&T in Winston-Salem, N.C., which had made it clear that it wanted to bulk up in Pennsylvania, followed through by buying Susquehanna Bancshares and agreeing to buy National Penn Bancshares in Allentown, Pa., said Ted Kovaleff, president of Informed Sources Service Group and a BB&T investor.
Kovaleff’s portfolio features small banks that tend to become sellers. When deciding on investments, he said he aims to understand management’s plan to maximize shareholder value. This may mean interpreting different factors, such as a market’s growth potential and looking at competition, to determine whether an institution is looking to sell.
"Management isn’t always clear on what they will do, but there are tea leaves you can look at and come to conclusions," Kovaleff said.
Though smaller institutions may have limited infrastructure or resources to keep investors continually up to date, constant communication remains a best practice, industry observers said. Ideally, bankers should provide quarterly updates and host an annual meeting, Morvis said. Sometimes bankers avoid discussing M&A because of fears that what they say may be misinterpreted.
Executives "don’t like to get trapped into a corner," Morvis said.
Banks that fail to properly communicate plans can face investor backlash, including the possible selling off of its stock. This can be especially true if investors are surprised by the deal and then they view the deal as a bad strategic decision or think that the acquirer is overpaying.
Executives could also face potential shareholder activism if they fail to share a vision that is appealing to investors, industry experts said.
"Management teams face pressure to grow," said Jacob Eisen, head of the regional and community bank group at Maxim Group. "Unfortunately many investors expect them to show demonstrable progress quarter to quarter. … At the end of the day, sufficiently articulating financial or strategic rationale for executing a transaction will likely win over investors. But credibility matters, and there’s nothing more important than staying consistent with public communications."
Besides keeping investors in the loop, discussing M&A can also send a message of sorts to banks that are thinking about selling or to shareholders who wish their institution would cash out.
Cascade receives calls from potential sellers after it publicly discusses its M&A strategy, though management doesn’t share its thoughts on acquisitions to specifically mine prospects. Still, it is a nice benefit, Zink said.
Since the financial crisis, shareholders are doing more due diligence on their investments, and they are generally more vocal about strategies the dislike, Zink said.
As a result, it is critical for management teams to outline their plans clearly and follow through.
"If you tell people that your strategic plan is acquisitions, and then you never do anything, then that maybe calls into question if you have a strategic plan," Zink said. "But it’s worse to do a deal just for the deal’s sake."