Financial Mergers and Acquisitions: Common Challenges and How to Avoid Them

Financial institutions undertake mergers and acquisitions to boost market share, capture synergies, diversify product offerings, and increase value to stakeholders. Often, the M&A process can save banks that would have otherwise ceased to exist.

For the reasons above, financial mergers and acquisitions can be highly beneficial. However, M&A transactions are not always successful or effective. How can financial institutions know if an M&A deal is worth pursuing?

Today, we’ll take a look at some of the top merger challenges to tackle.

What is a Merger?

A merger is when companies consolidate their assets. People often use the terms “merger” and “acquisition” interchangeably, but they have different meanings. When one company acquires another, they purchased the company directly. On the other hand, a merger is when two firms combine into one new legal entity.

Benefits of M&A

The M&A process serves many practical benefits, including:

• Growth opportunities. Merging with a larger organization provides critical opportunities for scale. Banks gain more capital for investment and lending, but they also earn a larger geographic area to operate. Ultimately, mergers and acquisitions help financial institutions achieve their growth goals.
• Fill business gaps. An M&A will help organizations fill business gaps, especially regarding products or technologies. Acquiring a company with a specific strength can be more efficient than building a separate business unit from scratch.
• Efficient operations. With an M&A, organizations can increase the efficiency of banking operations. In particular, financial institutions can consolidate and better administer operational infrastructures.

How Common are Mergers and Acquisitions?

Mergers and acquisitions are becoming increasingly common. In 2020, there were four notable financial mergers.

• Citizens BancShares acquired CIT Group in October 2020.
• PNC Financial Services Group acquired BBVA in November.
• Hunting BancShares acquired TCF Financial.

Why Do M&A Fail?

While mergers and acquisitions have many great benefits, they do not always succeed. Up to 50% of M&A transactions fail. Along with the potential for gains, M&A carries a potential for loss.

One of the top reasons that the M&A fails is because there was not a good motive for it. Each deal must have a clear and compelling “why.” If the financial organizations can not answer “why are we doing this” with confidence, then the deal is set to fail from the beginning. To avoid this, organizations must take a step back and focus on strategic planning. Determine if an M&A is the best method for achieving your goals.

Another common reason these transactions fail is that they target the wrong company. Ensure that you are looking at the right firm. Do not become set on a particular firm, but instead approach the idea with an objective assessment.

Overestimation is another top reason why M&A fail. Most often, the companies involved overestimate the increased revenue that they can expect. It’s best to make conservative estimates when determining if the deal is worthwhile.

Overpaying is another common issue. Entering an M&A requires a discussion on the company’s value. Sellers are looking to get as much as possible and often push if you aren’t paying enough. However, it is not always so easy to find out if you are paying too much.

The last and arguably most significant reason why M&As do not work out is that organizations often stay in a deal despite contrary evidence. Far too many pursue deals simply because they have reached a certain point. If the deal no longer seems as attractive or beneficial as it did at first, pull out.

Obstacles to Success for M&As

When approaching an M&A, both parties must consider the potential challenges. Far too often, the obstacles to a successful M&A deal are overlooked. Here are the biggest challenges to address:

• Property taxes. Many financial institutions struggle with proper recording and reporting of property taxes when an M&A happens.
• Communication and staff training to ensure everyone from each organization are on the same page.
• Employee retention, as not all employees on either side will be fond of the move. Make sure everyone is thoroughly informed and in agreement.
• Strategic planning. A successful M&A requires strategic planning to avoid the risk of failure.

Financial institutions should focus on careful planning and realistic expectations for mergers and acquisitions. Teksetra is here to help with several aspects of M&As. We offer IT support, e-waste management, relocation services, and more. To learn about how our team of experts can help your organization with an M&A, contact us today.