Bank M&A: Is It a Good Deal?
As a bank M&A consultant for over 30 years, the question I get is always the same – Is this a good deal? This question comes from both sides. So what do we mean when we say “it’s a good deal” from both the buyer’s and the seller’s perspective?
ABOUT THE AUTHOR
Bob Fegtly is one of the founding managing partners of DD&F Consulting Group headquartered in Little Rock AR. Bob serves as a Principal on various acquisition teams, specializing in mergers and acquisitions of financial institutions, including holding company and subsidiary acquisitions and sales, branch acquisitions and sales and whole bank transactions.
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The Arkansas Banker | April 2016
From a buyer’s perspective a transaction has to be accretive to book value, tangible book value and earnings per share for the transaction to be a good deal. Accretion means the stockholders of the buyer are financially better off than if they hadn’t done the transaction. It does not necessarily have to be accretive from the outset but must be accretive over some defined period of time. All transactions are unique and entered into for various reasons. The traditionally accepted norm says that if a transaction is entered into for strictly financial gain, the resulting tangible book value dilution should be paid back from earnings generated within three years. If the transaction is entered into because of strategic considerations, the transaction needs to be accretive within five years. Shareholder value has to be enhanced or there is no financial reason for an acquisition. However, there can be intangible benefits that sometimes can’t be quantified. Under those considerations management has to determine the value of those intangibles to the organization.
Buyers also have to take into account the type and amount of consideration used in a given transaction. Consideration in the form of cash usually enhances the earnings or earnings per share (EPS) going forward but creates dilution to tangible book value. The dilution is the result of marking the assets and liabilities to market. For publically traded banks, if their stock is trading at a high multiple, and if they pay a less multiple for the target bank, then the transaction can be accretive from a tangible book value standpoint but hurts the EPS going forward. A balance between cash and stock used for consideration needs to be carefully evaluated to balance the impact on tangible book value and EPS. From a sellers perspective a transaction must provide an increase in value over the current value of your bank. So how to you measure your bank’s current value? There are many measurements of value; accounting book value, trading or transaction multiples of peers, replacement cost valuation, liquidation value, etc. However, all these types of measurements base the value of organization on past performance. The only method which values the bank on expected performance is the Discounted Cash Flow Valuation. This method values your organization based on the present
