Banking Notes - October 2013: Five Practical Tips for Bank Acquirors

by Butler Snow LLP
Contact

As the fog of the recent economic recession continues to lift, many community banks that have weathered the storm are shifting from a defensive-minded strategy to an offensive one, which in many cases focuses on the acquisition of another institution. In the last edition of Banking Notes, we looked at five practical tips that institutions considering the possibility of partnering with a like-sized institution or an outright sale to a larger institution should consider. In this edition, we will explore five practical considerations for the would-be acquiror.

1.  Educate your board of directors on the M&A process now.

The boards of directors of a majority of community banks are comprised of local community leaders, many (if not most) of whom have little, if any, experience with the mergers and acquisitions (M&A) process. For this reason, it is imperative that an acquiror educates its board on the M&A process prior to exploring potential acquisition opportunities. Directors should be advised of, among other things, their fiduciary obligations in the context of M&A activity and the additional time and effort generally required of directors as part of the M&A process. Additionally, your board may wish to consider establishing a separate M&A committee to serve as the gatekeeper for acquisition opportunities that may arise.

2.  Build your deal team early and keep everyone involved.

One key to any successful acquisition transaction is a well-structured and collaborative deal team that is engaged from the beginning. The size and makeup of every deal team can vary, but most teams should consist, at a minimum, of key members of the acquiror’s executive management, the acquiror’s financial advisor/investment banking firm (if one has or will be engaged), the accounting firm regularly engaged by the acquiror, legal counsel, and key acquiror operations personnel. Many times institutions believe they can save money by not assembling and actively engaging members of their deal teams until later in the M&A process, quite frequently after a letter of intent for a proposed transaction has been signed. Unfortunately, mistakes that can easily be avoided are oftentimes made early in the M&A process by these institutions, and these mistakes can prove to be far more costly in the long run than the costs associated with organizing a deal team and consulting its members. For example, deal structure, which may be agreed upon at the outset of, or early in, the transaction process, should be carefully reviewed by an acquiror’s legal and accounting advisors, as seemingly minor differences in transaction structures can have very important tax implications for both the acquiror and a target institution and its equity holders. 

3.  Address people issues delicately and early on in the process.

Right or wrong, “people issues” oftentimes take center stage in the M&A process. Potential acquirors must be mindful of how target executives expect to be treated (both personally and financially) in the process, as well as how those same executives desire for the target’s other employees to be treated. Believe me, fiduciary duties of the target’s board members aside, an acquisition that makes perfect sense on paper from a financial standpoint can be stalled in no time by target executives who feel that they are somehow being treated unfairly or without the appropriate level of respect. In some instances, merely approaching a target institution executive regarding a change in his/her title or role with the acquiror post-transaction can have a profoundly negative impact on an acquisition transaction. Smart acquirors will consider from the outset how to incentivize a target institution’s executives and other employees to get behind and support a proposed acquisition transaction. In this regard there are various tools available to acquirors, including, for example, retention bonuses and equity incentive arrangements.

4.  Give consideration to your preferred acquisition currency.

Generally, there are two primary transaction currencies commonly available to acquirors: cash and securities of the acquiror. Institutions with large excess capital reserves or those with access to the capital markets may prefer to fund an acquisition with cash. Alternatively, institutions that do not have large excess capital reserves or that have well-valued stock trading at a nice premium to book value may prefer to fund a proposed acquisition with their own equity securities. A few important considerations for acquirors in this regard follow.

  • Acquirors should consider the dilutive impact to their existing shareholders of funding an acquisition transaction with acquiror capital stock.
  • Acquirors should consider whether funding an acquisition transaction with acquiror capital stock will require the acquiror to amend its charter to increase the amount of its authorized capital stock (which will almost certainly require the approval of the acquiror’s shareholders). 
  • Acquirors (particularly those not publicly traded) should consider the fact that, as a result of having to comply with federal and state securities laws, acquisitions funded with acquiror capital stock generally are more complicated from a legal standpoint and result in higher transaction costs for the acquiror. 
  • Acquirors desiring to fund an acquisition with cash should consider whether it will be necessary to raise additional capital as part of the acquisition process in order to fund the acquisition itself or the post-transaction operations of the acquiror, along with the associated complexities of any capital raise and the acquiror’s ability to navigate the same while simultaneously pursuing an acquisition transaction.
  • Acquirors desiring to fund an acquisition with cash should also consider the impact of anticipated capital outlays associated with the acquisition on their post-acquisition capital levels and their ability to maintain regulatory-mandated capital levels long after the consummation of the acquisition. 

5.  Meet with your regulator(s) early in the process. 

It is no secret that bank regulators like to know what is going on at the banks they regulate. Accordingly, keeping your bank’s regulator(s) in the dark about an acquisition opportunity is generally discouraged. If you have moved through the acquisition process to the point where your bank has signed a letter of intent to acquire another institution, it is time to schedule a meeting (or meetings) with your federal and, as appropriate, state regulators. It is seldom too early to seek regulatory buy-in for an acquisition.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Butler Snow LLP | Attorney Advertising

Written by:

Butler Snow LLP
Contact
more
less

Butler Snow LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.