Banks don’t die, they just get acquired. So predictable has been this cycle of life that it supports an annual conference called “Acquire or Be Acquired.” It all works until the cycle changes. The M&A market isn’t gone, it is undergoing a fundamental change.
Data from SP Global shows a slowing of the banking M&A market over the last couple of years. The majority of the transaction volume came from larger deals driven by a race to scale. Synergies are hard to capture despite the rosy promises in the decks produced by bankers and consultants. Merging cultures, processes and technologies takes time, energy, and capital, often far in excess of projections.
Bank survey data from Cornerstone Advisors in their What’s Going on in Banking Report 2022 shows mostly what one would expect: the majority of bankers cited Growth Opportunities, Market Expansion, and Economies of Scale as the primary motivations for seeking M&A opportunities.
One aspect not covered there, but reported in August by Sam Kilmer and Chris Fleischer of Cornerstone, is that the most interesting M&A is taking shape around technology capabilities, including banks acquiring fintechs and fintechs expanding their reach.
Why Would I Acquire Your Bank?
There are 4 reasons traditional mergers and acquisitions are slowing down, each in its own a right an impediment to getting a deal done:
I don’t want your branches
I don’t want your core (and data) problem
I don’t want your customers
I don’t want your people
Real Estate is a Real Problem
Pre pandemic, branch footprint was both an asset and a challenge to the acquisition process. Branches that extended the geographic reach of the acquirer but overlapping footprint took time and energy to dispose of. In the new world driven by digital, the value of real estate is greatly diminished and the cost of disposal is magnified.
Technology Debt
The cost to convert customers from the acquiree’s core is baked into the transaction price. The magnitude of this poison pill has grown as the amount of data kept and desired continues to grow. Extracting data from legacy systems is a necessary but expensive burden.
Only The Good Ones
The cost of customer conversion is exacerbated by the fact many of the accounts aren’t a good fit for any acquirer pursuing a differentiated strategy. All of the costs and limited upside make acquisition an inefficient approach to growth in the modern era.
The People Problem
The last asset with diminished value are the people that come with the transaction. Historically some number of personnel would be duplicative and would generate some cost savings and the remainder would be needed to operate the new larger business. Technology reduces the need for the human capital and too many are people ill suited for the future of banking.
So You Want to Be Acquired
Successfully being acquired by another bank in this new era requires a new playbook. Good ratios, complementary branch footprint, and good relationship managers are no longer the key criteria.
1. The first key to success is building a differentiated asset. You need to have something others don’t. Non-rate based sources of deposits, new products or segments, and new capabilities are all examples of assets worth acquiring.
2. The second key is to clean the technology house. Marrying modern systems to a customer driven approach can help an acquirer leapfrog their own technical journey. At the very least, working to make data accessible can turn the core conversion from a problem to a premium.
3. Third, focus. A good strategy identifies which core constituents to focus on and solves their problem uniquely rather than trying to be all things to all people. Successfully executed, the bank should have more of these customers versus a random mix. The acquirer is getting a more valuable asset because fewer unattractive segments need to be carried.
4. Fourth, build the bank of the future and your team is more likely to be “acqui-hired”. This phrase is common in tech circles when the acquisition brings over a well functioning team that would be hard to replicate as a primary motivation for the deal. Competence in product management, data science, development and agile compliance is hard to build. Not only will these team improve the execution on the first three items, they will command a premium.
The M&A superhighway isn’t closed but it does require a different playbook to find the on-ramp.