Three Secrets to Successful Bank Mergers & Acquisitions

Executing a successful merger is becoming a crucial skill in banking. Experienced legal, accounting, and consulting partners are invaluable — but real integration rests on how well banking execs identify priorities, pace the consolidation, and communicate their culture.
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Banking’s merger and acquisition rate has been decidedly pokey since 2009, at least compared to other industries.

Those days are over.

Bank mergers and acquisitions “are at such a scale that they aren’t going to be episodic for bankers much longer,” says Paul Berg, Senior Client Partner at the consulting company, Korn Ferry. “They’re going to be a way of life.”

Indeed, bank mergers and acquisitions are up 42% since 2020, with 8,733 deals completed and 3,145 pending. Seven of the ten biggest M&A deals of the last decade (as measured by asset size) were announced in two years. 85% of banks in BankDirector’s 2022 bank merger and acquisition survey said they’re interested in acquiring or being acquired. Credit unions are on an M&A tear as well — in Q1 of 2022, the NCUA approved 41 mergers.

Consolidation At Work:

More than four out of five banks say they would be interested in acquiring another bank or being absorbed into one.

The Fuel for Bank Mergers

Buyers are plentiful, including private equity, SPACS, bank-backed venture capital units (Citi’s Citi Venture is one), digital-native banks, tech companies, and, naturally, big banks. Ten bidders lined up to buy parts of Credit Suisse in late 2022.

And with so many big banks trading at twice their tangible book value, according to R. Lee Burrows, vice chairman for investment banking at Performance Trust Capital Partners, even smaller banks trading at 1.8x their book attract the acquisitive. Further, 13% of banks with assets up to $10 billion are willing to pay 2.5x book value.

Their attention is often welcome. Though S&P Global Intelligence says fears of a recession and weak foreign currency may slow M&A activity, banks and credit unions know they must grow or die. Bain and Co. says mergers and acquisitions could account for 50% of financial service revenue growth in the years ahead. A merger also offers opportunities to capture scale, customers, geography, or tech advantages, lose assets that don’t differentiate, solidify or deepen investments, and enter new banking ecosystems to create value.

Dig Deeper: Three Major Trends in Credit Union Mergers and Acquisitions

The Bad News: Most Deals Fail

But bankers should know that for all the work and hope behind a bank merger, 70% to 90% of them fail, according to longstanding research reported by the Harvard Business Review (HBR). Many credit union and bank mergers don’t even make it to the deal table.

Remember Blue Ridge Bankshares’ attempted merger with FVC Bankcorp? Or VyStar Credit Union’s run at Heritage Southeast? Those reversals got a lot of ink, but they’re hardly unusual. “Of the 20 largest terminated deals since 2012,” according to S&P Global Analysis, “six fell apart in 2022, including three of the ten largest terminations in that time period.”

Part of the problem, says Larry Emond, Senior Partner at the global executive search and advisory firm Modern Executive Solutions, is a flawed understanding of bank mergers.

“There’s really no such thing as a merger. It’s almost always one company acquiring another. There are exceptions, but the culture and leadership of the acquiring company generally takes over.”

— Larry Emond, Modern Executive Solutions

Moreover, the acquirer is liable to be very different from the bank or credit union it buys: Research reported in HBR found that companies with more-structured management practices were more likely to acquire companies with less-structured management practices. That means the consolidation team may get all the way to close with a deal thesis that “one plus one will inevitably equal five,” as Emond puts it. “Which is why the history of acquisitions is so disappointing.”

Every one of those failed mergers costs banks and credit unions a fortune — plus the blood, sweat, and tears of innumerable employees.

When a bank merger or acquisition collapses, it takes a lot down with it.

And it usually happens, says Berg “because of a lack of investment in integration management.” That may surprise bankers who assembled a talented Decision Management Office (DMO) to facilitate the input of high-caliber M&A lawyers, accountants, and consultants. Not to impugn that approach — expert input is essential, no question.

But successful mergers often come down to the way banking executives understand and focus on three key factors: priorities, pace, and culture. Here’s why.

1. Priorities — Each Requires Different Resources

Setting the right priorities focuses executives and DMOs on the few agendas — customer or member retention and acquisition, tech integration, human management, etc. — that create one successful company out of two.

“You need to know what your objectives are,” says Joe Aberger, Executive Vice President at the consulting firm, Pritchett LP. “What does success look like? Where’s the finish line? I’ve seen bank mergers where that’s never defined.”

Customer or member retention and growth, for instance, are often priorities because people are three times likelier to leave their bank after a merger. But the CX mechanics are different for each.

To retain people, the new organization must assure them their money is safe. And the burden of familiarizing consumers with new bank cards, branches, ATMs, fee structures, and interest rates must fall on the financial institution, not the consumer.

Growing a market, conversely, requires communicating a differentiated brand promise, omnichannel support, and opportunities so attractive it’s worth the trouble of switching providers.

Those are two different priorities, requiring different people, processes, data analysis and progress metrics. Doing both the same way dims their prospects.

Read More: The 5 Biggest Missteps Banks Make When Retooling Internal Culture

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2. Pace — Slow Consolidation Saps Morale

Consumers, shareholders, and employees usually start the clock on announcement day. At that point, they begin calculating the services, revenue, and opportunities that the financial service firm can provide them post-close. Their enthusiasm for the deal thesis increases in tandem with their perception of benefits. Aberger says bankers can expect that to last about a year.

Unfortunately, a bank merger can take several years to complete, and the regulatory approval process may slow them further.

And when an integration starts to feel interminable, employee morale, productivity, and profitability wane. So does consumer buy-in. “Supporters of the integration start to lose enthusiasm as the excitement wears off,” Aberger says. “Disappointing deals are highly correlated with slow consolidation.”

So with the clock ticking, executives should empower HR to pull all the levers of change management to speed consolidation.

Avoid Brain Fade:

Keep the energy high with noticeable integration activities — consolidate offices, promote cross-selling opportunities, roll out tech upgrades, meet with rank-and-file employees and top customers.

But perhaps the best way to speed the integration is by loosening up about it. “One of the worst things you can do is try to do things perfectly,” says Aberger. “That just slows you down. It’s really key that all the executives understand that you’ve got to get through this and make decisions expeditiously.”

Learn More: Avoiding Branch Rebranding Headaches in Mergers and Acquisitions

3. Culture — The X Factor in Merger Outcomes

When BankDirector asked banking execs to name the top five attributes of a target, ‘complementary culture’ was number one (64%), beating the second choice, ‘locations in growing markets,’ by six percentage points (58%). In comparison, only 15% of the respondents listed ‘high level of profitability’ or ‘technology platform/infrastructure’ in their top five.

Nonetheless, when a consolidated bank or credit union fails to gel, leaders often blame mismatched cultures. “They’re usually right,” Berg says. “Companies consistently under-estimate their culture assets and under-invest in managing them during times of change. A bank merger is such a big change that a bank’s employees can think they’re better off working for a different bank.”

Why Culture Counts:

EY research shows that merged companies lose 75% of their key employees within three years.

Part of the problem is that bank leaders may not grasp lower-level employee culture — the unwritten rules, norms, and assumptions — that drive behavior. “Post-close, that stuff can be the really hard stuff,” Aberger says. “Culture can create an us-versus-them dynamic, where people don’t let go of their old organization and the new one becomes weak.”

So starting as soon as the announcement is made, executives need to examine each organization’s leadership approaches, propensity for agility and risk, management theories, priorities, blind spots, biases, and customer expectations. “Even the way each side evaluates performance,” Berg says.

Some banks are P&L-sheet driven and others really value relationships, which are both valid but not compatible. “Knowing what success looks like in the new organization will have a huge effect on how you manage the post-close integration.”

Of course, the acquirer’s culture will probably dominate the bank or credit union, as Emond says. Executives should be transparent about that or risk losing employees’ trust.

But they should also be transparent about the positives of their cultural values — employee autonomy, perhaps, or flexibility, or wellness — along with new roles, assets, and development opportunities available to employees. “That’s not traditional command-and-control leadership,” Berg says. “That’s leadership that invests in cultural assets and describes a future employees can see themselves in.”

Read More: Chatbots’ Future in Banking: Supporting Employees And Improving CX

Stick a Fork In It

Ironically, one of the most useful M&A leadership skills bankers need is knowing when they’re done.

Many times, the lawyers, accountants, and consultants, along with leaders from every division, set KPIs and progress metrics. Those are important, of course – Aberger’s organization offers 27 different M&A integration playbooks. Executives should lean on their advisors. 

Yet the skill of knowing when to stick a fork in it is uniquely valuable. When you know you’re done, you know you’re safe to turn your attention elsewhere — and because running an M&A is such a lot of work. Reading the signals right keeps executives functional. And sure, setting priorities, keeping the pace, and managing culture adds yet more work. But it’s the kind of work that creates successful bank mergers and consolidations.

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