Mergers and Acquisitions

Sections in this Topic

Overview

In 1994, there were 10,450 financial institutions in the U.S., and by July 2007, the number had decreased to 7,357. While the number of financial institutions declined during this period, total assets increased from $4.01 trillion to $10.1 trillion. Expansion by acquisition was common throughout this period, as bankers generally believed that it was better to enter a new market by purchasing an existing bank than by building a branch network from the ground up.

Consolidation

Consolidation is expected to continue in the banking industry; however, mergers and acquisitions (M&A) slowed in 2007, and the issues in the credit markets may have affected the ability of some financial institutions to pursue such opportunities. For example, in 2007, Liberty Bank & Trust Co., one of the nation's largest African-American-owned banks, acquired Douglass National. When it opened in 1947, Douglass National was the first African-American-owned bank in the Kansas City area, according to the bank's website. The institution was named after Frederick Douglass, the famous 19th century abolitionist. According to Woody Briggs, an analyst with investment banking firm Chaffe & Associates Inc. of New Orleans, "There has been a movement of some of the larger and more successful minority banks to absorb... other minority-owned banks."¹

Liberty has purchased three other failed banks since the early 1990s, according to McDonald. Those banks include Corpus Christi Federal Credit Union and Carrollton Homestead, both of New Orleans, as well as Life Federal Savings Bank of Baton Rouge. Liberty has 20 branches in four states, including locations in Mississippi and Texas. The Douglass National deal raised Liberty's asset base to $373 million.

Although banks are usually acquired by other financial institutions, they may be acquired by individuals or groups interested in controlling a bank without building one from the ground up. In 2006, Robert L. Johnson, the founder and former chief executive of Black Entertainment Television, acquired a Florida savings and loan and moved it to Washington, D.C.

News reports indicate that the RL Johnson acquisition may be a springboard for a large consumer financial services company aimed at African American customers. In one article, Barbara Hagenbaugh and Sue Kirchhoff explained that "The bank was renamed Urban Trust and is part of an effort by Johnson to build what he hopes will be the country's largest minority-owned financial services company, one positioned to attract major Wall Street investors as it seeks to foster and profit from rising black wealth. The company is meant to compete with the nation's most elite financial firms, but, its new chief executive said, it will also spend "a lot of afternoons in churches" advocating homeownership.²

Important M&A Factors

The key drivers for mergers and acquisitions are geographical diversification, increased economies of scale, leveraged investment in technology, skill and expertise, revenue and/or market share, and pressure for performance. Mergers and acquisitions expedite a bank's expansion and can be an alternative to establishing new branches. As banks become larger, there is more pressure for smaller banks to improve economies and efficiencies in order to compete with the larger banks. Banking mergers and acquisitions are an attractive method of increasing economies of scale through the reduction of fixed unit costs.

Advancements in technology, including local area networks (LANs) and the Internet, have made it easier for companies to expand operations. Improvements in technology and communications can facilitate cost reductions and allow a company to do business in places that were not possible years ago. Also, the Internet may pressure banks to reduce cost structures, thereby increasing mergers and acquisitions.

Acquiring institutions need to identify many business considerations and risks. Anticipated cost savings may fail to materialize for several reasons, such as cultural and management incompatibility between the acquirer and the target, unforeseen credit issues at the target, poor employee morale, and unanticipated adjustments to the bank's mission, leading to customer departures. These risks may be mitigated by performing comprehensive due diligence, forming merger integration teams early in the process, establishing and maintaining strong management information systems (MIS), and integrating the best practices and infrastructure from both organizations.

Regulatory matters also need to be considered, since several regulatory hurdles may appear before a merger is consummated. In addition to the applications required by the institution's primary regulator, applications may be required by the state banking department and the Federal Reserve. The Justice Department, Federal Trade Commission, and Securities and Exchange Commission are involved with the decision process.

The regulatory agencies want to ensure that expanding banking organizations have the financial and managerial strength necessary to succeed. A bank holding company acquiring another bank or bank holding company needs to be well-capitalized and well-managed at the time of and immediately after the proposed transaction.

The Federal Reserve also considers consumer compliance and the Community Reinvestment Act when reviewing a regulatory application. Any consumer complaints or protests are gathered by the Federal Reserve. If there is a large volume of complaints, a public hearing may be held to get feedback from the community.

References

J. DeGregorio, "Liberty Bank Acquires Missouri Financial Institution," The Times-Picayune, January 28, 2008.
B. Hagenbaugh, and S. Kirchhoff, "From BET to Hotels to Banking, Johnson Keeps Moving Forward," USA Today, April 12, 2006.