Upheaval in merger approvals means banks must stay the course to achieve ultimate synergies

Approval uncertainty reigns

Financial institution merger transactions are complex and challenging to complete even in the best of times. Mix in the current environment of regulatory delay and uncertainty and you find acquisitive banks face a daunting situation. A quick temperature check of recent headlines showcases the depth of this new challenge.

“Long delays for deal approval cast cloud over bank M&A” American Banker

“Bank M&A backlog builds as deals await Fed approval” S&P Global 

“Bank M&A in U.S. Set to Slow from Fastest Pace Since 2007” Bloomberg

One of the roots of this regulatory delay stems from an executive order signed by President Biden in which he directed federal regulators to strengthen oversight of bank mergers. The slowdown is shown in the visual below from S&P Global.

Financial institutions will continue to merge as deal drivers remain

According to the research firm Fitch, banks are expected to continue to pursue growth through acquisitions into 2022, driven by a desire for increased scale and enhanced franchise strength either through new geographies or by growing market share within their existing footprint.

While industries across the board have seen an uptick in costs and compliance requirements over the past few years, financial services have been hit especially hard. Rice University’s Baker Institute for Public Policy found that when put together, US banks’ total non-interest expenses have increased by an average of more than $50 billion per year since the passage of the Dodd-Frank Act. 

According to Deloitte, the cost of compliance and risk mitigation over the last eight years has jettisoned almost all discretionary funding available to firms. Compared to pre-financial crisis spending levels, operating costs spent on compliance have increased by over 60 percent for retail and corporate banks. Increased scale can alleviate growing technology and compliance costs.

Scale in banking not only helps manage compliance costs, but it also contributes to efficiencies in people intensive activities such as loan processing and deposit exception management.

Given benefits of scale to address compliance costs, improve efficiency and create new marketing opportunities, financial institutions will continue to pursue M&A transactions. However, to the extent an announced transaction is delayed, deals can lose momentum and waste firms’ time and resources, often at the expense of strategic plans and long-term goals. Failed mergers could also reduce potential earnings and ratings upside and may exacerbate key-person risk if management or staff seek opportunities elsewhere.

What should bankers do?

As delays increase and uncertainty looms, bankers need to fall back on M&A fundamentals now more than ever. Acquisition execution within a financial institution remains challenging and tapping into the experience of an M&A partner still can help manage expectations and control uncertainty.

This partner should bring a proven M&A Playbook, or methodology that the acquiring bank can leverage to adjust timeline and program plans as dates become stretched.

An M&A partner can provide specific (and scarce) resources on demand in a resource-challenged environment. Finding both the technical and banking expertise needed with a tight labor market creates a quandary for the senior management team of the newly combined entities.

In a time of both M&A activity and low unemployment, financial institutions’ needs for skilled human resources can become acute. And the skill sets required to ensure M&A success include:

• Program and project leadership
• Banking and bank product expertise
• Quality management and testing experience
• Training and education material creation and execution

In times of delay, your bank’s board will need the education and information to help them keep their eye on the ball of the end results. Your employees will need continuous updates and communication on any delays and adjustments to the overall schedule. Your customers will need to be re-assured. In times of uncertainty, communications strategies, plans and tools used in previous M&A situations offer a real lifeline.

There is little bankers can do to control the timing of M&A deal approval. But by sticking to the fundamentals, they can control their transaction execution, readiness, and stakeholder communication to ensure overall M&A success.