Putting Lipstick on a Pig

Bank lawyers understand that there are phases to our practices. In good economic times, investors start new banks; in recessionary periods, we get our clients out of the ditch; and in between, we frequently help preside over both voluntary and shotgun weddings.

We are on the cusp between “good economic times” and wedding season. Since 2015, we have seen increased merger and acquisition

activity, particularly in the community banking space. The rule of thumb has historically been that a bank with $1 billion in assets or less is characterized as a “community bank,” but it’s more complicated than that. Defining a community bank only by asset size omits the obvious — that a community bank, like politics, is principally local. The bank generally has local directors who know the market and can advise management about economic trends. Did the factory that employed most of the town’s able-bodied workforce just close because jobs were moved to the other side of the Wall? Has a major automobile manufacturer relocated its operations to the county? Understanding what makes a market attractive to an acquirer is key to attracting suitors.

When a Bank Wants to Sell

When a bank’s board of directors decides it’s time to entertain the possibility of a sale or merger, there are a number of important steps and considerations to help assure the best price for the shareholders and the most advantageous outcome for the parties:

  • Establish a merger committee or engage the full board in strategic merger planning. The bank should include its advisors in the planning.
  • Engage a professional valuation or investment banking firm to evaluate what your bank is really worth and whether to negotiate for an all cash, all stock, or combination cash/stock transaction;
  • Be creative in thinking about how to reconcile differences of opinion on the value of your bank’s assets.
  • Engage experienced bank merger and acquisition counsel who can help you not only with the transaction documents but with structuring the transaction in a way to avoid or minimize tax consequences to the sellers. Counsel should also assist the board with legal due diligence.
  • Perform due diligence on the acquiring company —  especially if your shareholders will receive the surviving company’s stock as consideration.
  • If culture is important to you, evaluate whether the acquiring company’s values mirror yours — will the acquiring company continue to serve the seller’s community in an effective way? Will the “back-of-the-house” employees lose their jobs?
  • Determine whether there are synergies that could reduce the cost of acquisition and net more cash and/or stock for your shareholders — for example, both companies are already on the same core processing system.
  • Remember that the bank doesn’t belong to the CEO or, usually, even to the board of directors: it’s about the shareholders, and a board that cannot act unselfishly and responsibly could find itself sued.
  • Besides shareholder value, decide what the board “must have” out of the deal: seats for some board members on the surviving company’s board? A job for the CEO? “Pay to stay” packages for some employees? A name for the combined bank that recognizes the seller’s legacy name?
  • Decide who will speak for the board in negotiations and empower that person or committee to make decisions.
  • A little lipstick on that pig can go a long way to helping assure her a date to the prom.

I have joked that, as credible statements, “nothing will change after the merger” ranks right up there with “the check is in the mail” and “I’ll respect you in the morning.” Counsel for a selling company has an obligation to deliver the truth of her client: that some people are likely to lose their jobs; that some customers may not like the new team or culture; that they will never get as many board seats as they want; and that the deal will cost more than anyone thought it could.

Handled well and with eyes wide open, a community bank merger can result in growth of the surviving company’s geographic footprint; economies of scale; reduced costs for compliance, risk management, accounting, operations and information technology; the ability to fill in business gaps and provide more financial products and services; and the upgrading of management and boards of directors.

Handled poorly or with blinders that only allow the parties to see the possible financial upside, a merger that fails to consider cultural differences (both in the way the banks do business and in the way the respective boards of directors view their roles) is likely to experience high winds and rough seas. Execution risk is another major hurdle if the parties do not commit enough time and resources into bringing the disparate banking platforms together. In this scenario, the customer feels the first wave of inconvenience, but ultimately, a merger haphazardly done will send the shareholders overboard.

Compliance and regulatory risks can also become unmanageable if the parties to a merger transaction have entirely different approaches to managing their challenges. Our advice to both buyers and sellers is that due diligence, not just of the loan portfolio but of all material aspects of the other bank’s platforms, processes, policies and risk management must be examined before inking any merger agreement.

Whether the ultimate merger is profitable or fraught with peril depends on preparation, hiring the right advisors, due diligence and open conversation between the parties about what matters.


Katie Edge KATHRYN REED EDGE is a member in the Nashville office of Butler Snow LLP with offices in Tennessee, Mississippi, Alabama, Colorado, Pennsylvania, Georgia, Louisiana, New York, New Mexico, Hong Kong, Singapore and London, England. She is a member of the firm’s Regulatory and Government Relations Group and concentrates her practice in representing regulated financial services companies. She is a past president of the Tennessee Bar Association and a former member of the editorial board for the Tennessee Bar Journal.

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