Why do M&A activities falter?
As companies are growing, they look for ways to leapfrog over the competition quickly and capture market opportunities. One way to accomplish fast growth is through a merger or acquisition. The ultimate purpose of mergers and acquisitions (M&A) is to grow the company and, in many cases, increase profitability. In the past few years, M&As have reached an all-time high since the financial meltdown of a decade ago.
There are obvious advantages of mergers in the financial industry, which is why it happens so often. Between 2009 and 2017, M&A activity in U.S. banking was relatively stable, with an average of 20 deals per year, according to McKinsey & Company. In 2018, there was an upswing; U.S. banks completed 49 M&A transactions. The banking industry significantly consolidated in 2019, and regional banking M&A deals hit a 20-year high, Deloitte reported. But mergers and acquisitions are never without risks — and some of these transactions fail to provide the anticipated value.
Mergers and acquisitions among banks and between banks and financial tech (fintech) companies bring many potential benefits: larger client bases, new revenue streams, advanced technology and higher profitability, to name a few. But too many M&As fall short of expectations. A KPMG study discovered that only 17% of M&A deals add value to the resulting company. Worse yet, 30% of mergers fail to create any discernible difference in value, and around 53% lose value.
Why do so many mergers and acquisitions struggle? In part because lenders, compliance professionals and other corporate officers involved in the M&A process aren’t fully prepared for cultural and information technology (IT) integration and don’t practice thorough enough due diligence.
Integration issues in mergers and acquisitions
Companies often fail to develop a thorough IT integration strategy for mergers and acquisitions. Combining organizations often use different data sources and information systems. Even businesses that use the same software might have varied internal processes.
Information systems integration in a merger and acquisition requires officers to decide which systems the resulting business will use and plan for how one or both companies will transition while minimizing the amount of time employees spend duplicating systems, applications and tools. A rough transition reduces employee productivity, and in turn can harm customer satisfaction.
Cultural integration is also important when it comes to mergers and acquisitions. At the heart of a consolidation is the joining of two sets of employees. Whether or not a merger is successful depends on how executives and officers combine groups of people with different cultures, leadership styles and operational practices — all while emotions are running high. Organizations can mitigate the risks of employee dissatisfaction and turnover by respecting each unique culture during the transition.
M&A financial due diligence checklist
What is financial due diligence? It’s thoroughly investigating and auditing all aspects of an organization’s finances and evaluating the financial, regulatory and litigation risks. The importance of M&A financial due diligence can’t be overstated when a financial institution is planning a merger or acquisition. Lenders and officers who fail to adhere to best practices could approve a merger that results in significant and unexpected losses.
Financial due diligence in an M&A includes:
- Financial statements
- General expense, fixed costs and variable costs
- Capital expenditures, investments and deferred capital expenses
- Revenue sources
- Profit margins
- Accounts receivable (AR) aging
- Accounts payable (AP) schedule
- Quality of earnings report
- EBITDA report
- Future budgets, operating plans and financial projections
- Cash flow report
- Long and short-term debt and interest rates
- Loan portfolio evaluations
- UCC filings
- Other security interests
- Condition of assets and liens
- Assumption of debt obligations
- Judgments, pending litigation and litigation risks
- Insurance coverage and claims
- Compatibility audit
- Reconciliation audit
Financial institutions’ mergers and acquisitions
Due diligence for financial institutions’ M&As has another layer: regulatory compliance. The federal government heavily regulates banks and other financial institutions. During the M&A process, financial institutions often discover they have differing compliance programs.
It’s critical for executives, compliance officers and other stakeholders involved in a financial institution M&A to thoroughly review how each organization complies with the Foreign Corrupt Practices Act, Bank Secrecy Act/Anti-Money Laundering Act, Fair and Accurate Credit Transaction Act, Gramm-Leach-Bliley Act, Electronic Fund Transfers Act, the Patriot Act and others. With that information in hand, they can decide whether to integrate the compliance processes, maintain separate programs or create a new plan entirely.
The key to successful mergers and acquisitions
Those who feel the effects of a merger and acquisition the most are employees. For a merger or acquisition to be successful, stakeholders have to carefully plan integrations with people in mind. Plans should encompass how organizations will transition to new systems, processes and tools while respecting and gradually evolving each team’s culture.
Successful mergers and acquisitions also involve detailed due diligence of the organizations’ finances. But due diligence during a financial institution M&A is particularly complicated. To gather all the necessary information — including an institution’s portfolio risks and UCC filings — lenders and businesses can partner with Lien Solutions’ Professional Services. We have the tools to help financial institutions mitigate risk and navigate M&As successfully, including enhanced data analytics, data aggregation and systems that minimize workflow disruptions.