Lessons Learned from Mergers of Equals and Other M&A Risk Management Considerations

A competitive lending landscape and demand for deposits are a couple of reasons why institutions consider a merger of equals or an acquisition; however, institutions should be fully prepared to conduct a thorough due diligence. The following are a few tips for consideration as your institution contemplates or prepares for a strategic merger.

Cultural integration should be considered a top priority, as it is important for management teams to take a step back from the numbers of a deal and consider the impact on people. Culture is often the determining factor for successful integration. On the surface, institutions may think they are well-aligned; however, when institutions fail to integrate cultures, they may find the new entity is losing good talent. A few questions for management to ask about culture include:

  • How do our core values align?
  • What will the leadership style be?
  • How will this be communicated our people?

Management and the board of directors should read the merger agreement carefully. Last minute changes and negotiations may have unintentional accounting and tax consequences. According to Topic 805, all businesses combinations are to be accounted for at fair value resulting in numerous valuations, assumptions and judgments. Valuations – loans in particular – are critical. It is important for an institution to know what they are acquiring, and it is key to consider more than just credit marks. Other considerations include potential effects on subsequent accounting and whether enough historical information exists for CECL adoption. Institutions may need to consult with valuation experts who understand the accounting for fair value and subsequent adjustments. Other valuation considerations include the core deposit intangible, employee compensation agreements and investments portfolios. Lastly, the impact on income taxes can be substantial. Tax considerations can include structuring the transaction, deducting merger costs, modeling potential impacts to acquired tax attribute carryovers (like net operating losses), reviewing inventory of the deferred tax asset (DTA) components and considering nexus for state filing. Institutions should consult with an M&A tax leader and attorney in the early stages of an acquisition.

Finally, communication is key for a successful acquisition. Weekly status meetings prior to the merger, as well as regular status meetings afterward, are crucial to identify new or unexpected issues. These meetings should be results-oriented and collaborative among all personnel. The board of directors should be able to obtain status reports, both operational and financial, and monitor goals and deadlines to ensure the implementation plan is being executed as designed, which makes continuous and frequent communication with the board of directors critically important. The board of directors also should challenge delays since they may indicate larger problems. Most importantly, the board of director’s vision and strategic decisions will assist those in the day-to-day activities so as not to lose sight of any goals associated with a successful acquisition and integration.

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