BASIC GUIDELINES FOR BANK MERGERS AND ACQUISITIONS

Post on: 28 Июнь, 2015 No Comment

BASIC GUIDELINES FOR BANK MERGERS AND ACQUISITIONS

Mergers and acquisitions have become a common feature in corporate circles in both developed and developing countries. In line with this trend, banks have not been left out as we have seen in the last decade several bank mergers or acquisitions in Africa, Europe and the United States. In Nigeria for instance, there were several bank mergers and acquisitions in 2005 due to the directive by the Central Bank of Nigeria (CBN) that banks recapitalize.

Where a bank merger or acquisition occurs, both banks should observe a common economic vision; this is important because the vision provides the bedrock upon which constant evolutionary opportunistic change can occur. It also directs the partners of the merger or acquisition towards common goals and in this regard, the following questions are relevant:

  • Do the merging banks have shared values and beliefs?
  • Do they have well defined strategic goals?
  • Would the merger or acquisition result in long-term business harmony, thinking together and growing together towards a common purpose?

In relation to strategic fit, the following questions must be positively answered:

    BASIC GUIDELINES FOR BANK MERGERS AND ACQUISITIONS
  • Is there a product market fit among the merging banks with different financial products and services following common distribution channels, utilizing similar promotion techniques, satisfying related customer needs/functions; and can all these be sold by the same sales force?
  • Is there operating fit which results from purchasing and warehousing economies, joint utilization of operational equipment, overlaps in technology design, common labour requirements?
  • Is there a management fit which emerges when different kinds of activities present mergers with comparable entrepreneurial, technical, financial, administrative and operational problems?
  • Would all these mentioned above allow the accumulated managerial know-how associated with one line of business spill over and be useful in managing another of the banks’ activities?

All mergers and acquisition must produce a synergy the synchronization of the different energies of each partner in the deal aimed at creating a powerful, more valuable post-merger entity. The synergy must produce a new post merger bank, which is better positioned competitively, more dominant and more valuable than the sum of its pre-merger individual banks. The synergy must also exploit complimentary technologies and be involved in cultural compatibility among the merging partners.

In evaluating bank mergers and acquisitions, it is important that certain fundamental criteria be applied in order that the present and potential worth of each bank will be determined as a growing concern. The merger and acquisition criteria are:

  • The worth of the assets of each bank (physical and financial).
  • How much productive investment has each bank in terms of assets, loans and advances?
  • What are the profit and cash flow potential of their loans, advances and investments?
  • How easily recoverable are the loans and advances?
  • Is there likely to be loss of shareholders resulting from asset-write-down, revaluation of ideal assets, loans and advances write-down; if so, by how much?
  • Estimate the sustainable earning streams from each bank and then use an appropriate risk factor to capitalize in order to have some working idea of its value.
  • Check the degree of innovativeness of each bank and its management in generating new and potential profitable opportunities. This is because, the only way of making true profit is through innovative profit; other profits are like trying to make last year’s profit over again the following year.
  • In the evaluation of each banks financial statement, apply the CAMEL rule Capital, Assets, Management, Earnings and Liquidation. CAMEL must be seen as a whole and not as discreet measures. It takes a visionary management to build and leverage the capital over and above the asset of the generated earnings, which can be translated into cash flow and liquidity.
  • A thorough investment analysis must be done by stripping the financial statement of all the facts thereby exposing all the muscles that drive the bank. This includes down grading all loans and advances, using the rule for non-performing, substandard and lost loans. Down grading all ideal assets to the level of their capacity utilization, ignoring all extra-ordinary income that is non-recurring, non-operational and therefore unsustainable; recognizing extra-ordinary expenses which may be the result of creative accounting increase expense, reduce taxable income and engineer high profits.
  • Place a higher value on fee-based income than on interest-earning profit; for the current interest earned by many banks is paper income on non-performing loans and advances on sustainable non-productive investment.

All these must be thoroughly assessed, valued, planned and budgeted for, in other to reduce post-merger stress. They will assist in pricing and proper merger and acquisition deal structuring.

There are always pit falls ahead often, the tyranny of the movement prevents the chief executive from paying attention to the opportunistic potentials of the future or indeed the problems associated thereto. Some risk areas to pay attention to in merger negotiations includes, for instance not having a clear and well articulated policy for developing competitive advantage and creating shareholders value after the merger. Secondly, not knowing what to do with an enhanced and more resourceful financial powerhouse thereby leading to the temptation of falling into ‘’the business as usual trap’’ is a major cause of corporate failure. Thirdly, not fully identifying and understanding the accounting and tax implication of the merger and acquisition thereby paying more in capital. Fourthly, not structuring the best merger and acquisition-financing package that is tailored to the deal, not fully undertaking and implementing successful restructuring and divestitures attendant to the merger. Fifthly, not fully estimating the cost of maintaining several low deposit accounts, planning for the increased cost of complexity of servicing a larger number of shareholders and evaluating the power of vested interest in labour unions, labour laws and politicians.

The extent of labour militancy and its effects on the smooth consummation of the merger deal must also be taken into consideration. Compensation packages for job losses must be budgeted for and should be realistically sustainable. The effect of compensation programmes on profit and cash flow of the merger and acquisition candidates must be thoroughly considered. The tendency of the acquiring bank to force the acquired bank to adopt and assimilate the operational culture as the dominant partner, thereby creating post-merger cultural incompatibility is also an issue of utmost concern. The inability of a medium management to adjust to a new higher quality-demanding environment is an issue that must be promptly addressed. Although mergers and acquisition will lead to the company having better access to capital for expansion of its operations, it must be emphasized that the fate of employees lie in the hands of the parties entering into the merger or acquisition.

In the process of mergers and acquisitions, the cards for negotiation are the quantum of what each party is bringing to the negotiation table. For instance, the value of the fixed assets of a bank, which is provided by a valuation report or the fundamental component of the balance sheet that pictures the financial health of the bank.

There is really not much to fear from mergers and acquisitions in the finance industry. The companies and the concerned banks stand to gain more through mergers and acquisitions than allowing their individual companies to be forced into liquidation whether voluntarily or involuntarily, by the forces of the operating environment. It is however necessary that in going into a merger or acquisition arrangement, a realistic assessment of each case should be carried out in order to guarantee the interest of all parties concerned, especially protecting the jobs of the employees or minimizing job losses.

by Ifeanyi Igweike


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