Sign of the Times
With few exceptions, sources will declare that “this year will be the year” for an unprecedented level of consolidation in banking. While it is true that consolidation has played a material role in shaping the industry for decades, the rate of consolidation, averaging four percent annually, is much slower than some of the headlines seem to suggest.
Still, the role consolidation has played in shaping the landscape is unlikely to end anytime soon, and even four percent shrinkage per annum is not insignificant when dealing with the large number of financial institutions still operating in the United States. Consider the statistics associated with banks only. Twenty-five years ago the number of domestic banks was more than 15,000.
Today, 6,000 banks exist. Using that number as a baseline and the average consolidation rate of four percent annually, in the next 12 months, 240 institutions are absorbed. Of course, as the total number of banks decrease, the number of deals will drop. However, for the near term the number of transactions will remain in the hundreds.
Interestingly, some of these deals will involve credit unions acquiring banks as the desire to benefit from increased scale spreads even to these not-for-profit organizations. Regardless of the type of institution though, each of these deals has certain complexities that cause the financial institutions involved to spend significant amounts of time and money trying to achieve an accurate valuation for the transaction. Too often during this process, both parties may discover – after the deal is done – that certain important considerations were not factored into the valuation calculations.
Why Some More Than Others
Of course, not every year is the same in terms of the number of deals and/or the size of the institutions involved in the transaction. Various market factors such as customer satisfaction drive these variances year over year. For example, the recent increase in mergers and acquisitions involving institutions falling between $500 million to $1 billion in assets is being fueled by the fact that more and more consumers are leaving community and regional institutions for the largest banks and credit unions who offer the services they want and need. In the past, the migration of consumers flowed in the opposite direction. At that time, mergers and acquisitions among the largest financial institutions were lowering service levels, causing customers to seek out the more personal levels of service at smaller institutions. Since then, consolidation among the largest financial institutions has diminished and customer service has improved especially in the digital channels. Attrition has dropped and the influx of new accounts has increased. In response, the smaller institutions are now actively seeking merger and acquisition opportunities in order to gain the economies of scale they need to compete with much larger competitors.
“During an acquisition … due diligence is more than just the verification of data. It is an objective analysis of all those factors that may affect the valuation.” Due Diligence in an Acquisition, TreasuryToday.com
What We Offer
SRM’s merger and acquisition practice is based on helping acquiring institutions properly evaluate and analyze the vendor contracts of both parties to determine where risks and opportunities may exist. It could be a clause within an addendum that obligates the acquirer to terms and conditions that would impact the valuation metrics shaping the transaction. It could be that the acquired institution’s arrangement with a vendor is preferable to the one held by the acquirer.
During an acquisition, SRM’s unique combination of strengths has been critical to helping clients ensure that the strategic value of the transaction is not diminished by obligations to vendors that were not fully understood. Having successfully completed thousands of projects for financial institutions, SRM knows where to look for mistakes that can be made by an institution in its relationship with vendors and how these errors impact organizations in the short and long term.
Prior to Public Announcement
Sometimes it is good news and sometimes it is a different kind of news. Regardless, involving SRM as early as possible means having the news even before the deal is made public. Even though most of the executives involved in an acquisition understand the principle of sooner being better than later, the type of contract due diligence SRM provides can be overlooked, especially considering all the important elements of this type of deal.
Prior to any announcement, SRM conducts a comprehensive vendor contract review to identify the key elements that may have relevance to the acquiring institution, such as effective dates, auto renewal clauses, expiration dates, termination language, and conversion fees. Though these elements sound rather mundane, they may represent millions of dollars of impact to the cost of an acquisition.
After the Public Announcement
SRM maintains a proprietary database containing benchmarks that provide data that can be used to determine if an existing contract is consistent with market conditions. If a contract is “out of market”, there may be cost savings and/or revenue opportunities that can be achieved through negotiations with vendors. Since many of the contracts in financial services are several years long, it is not unusual for there to be developments in the market that affect price and incentives.
“One of the most time-consuming (but critical) components of a due diligence inquiry is the review of all material contracts and commitments of the target company” 20 Key Due Diligence Activities in a Merger and Acquisition Transaction, Forbes
Using its proprietary database and team of subject matter experts, SRM analyzes the contracts of both institutions to determine if such opportunities exist. Our subject matter experts bring with them decades of experience in areas that can have a material impact on a bank’s or credit union’s bottom line; e.g., payments, core processing, digital banking, artificial intelligence, card portfolio optimization programs, and operational improvements.
Billions of Ways We Can Help You
SRM is an independent advisor to financial institutions that combines expertise, benchmarking data, and proven negotiating skills to deliver value to our clients. SRM has been serving banks and credit unions for decades. That experience allows us to assess accurately the unique relationship between a client and their vendors. The firm maintains a high level of transparency and promotes open communications between all parties involved in a project. By applying this approach, SRM has delivered billions of dollars in value to its clients.