While they’re rare, community banks should understand their duties when receiving an unsolicited acquisition offer. But how should your community bank respond to one?
By Beth Mattson-Teig
Banks hungry for growth are looking to mergers and acquisitions as a quick way to scale up operations and expand into new markets. The competitive marketplace is even pushing some to send unsolicited offers.
Although M&A transactions have been quieter this year, there seem to be many “behind the scenes” conversations taking place in the community bank industry, says Patrick Ryan, president and CEO of $1.8 billion-asset First Bank in Hamilton, N.J.
First Bank has been an active acquirer in recent years and currently has a deal pending to purchase $197 million-asset Grand Bank down the road in Hamilton Square, N.J.
Number of bank M&A deals in 2018
Unsolicited offers are rare in the banking sector, but some professionals say they’re seeing an uptick in such activity. Banks with an eye on growth may consider both on- and off-market deals, with strategies that range from subtle networking and relationship building to the submission of unsolicited verbal or written offers.
“My advice to clients who are looking at growth through acquisition is to not simply stay on the sidelines until you receive an offering memorandum indicating that someone has put their bank up for sale, but to be more active in looking at potential targets and to contact them to see if they might have an interest,” says Karen L. Grandstrand, a shareholder and chair of the Bank & Finance department at Fredrikson & Byron P.A. in Minneapolis.
One of the first steps for target banks is simply getting over the initial surprise of receiving an unsolicited offer, notes Mike Lundberg, national director of Financial Institutions Services at RSM US LLP, also in Minneapolis.
“If a bank has decided to sell and is out marketing the bank, they are already over that logical and emotional hurdle to sell,” he says. “On an unsolicited basis, the seller probably hasn’t crossed that hurdle yet.”
How a target bank responds to an unsolicited offer can vary depending on how the offer is presented and what’s included (see sidebar, left). “Whether you need to respond depends on whether it is a bona fide offer or a mere conversation or friendly overture at a cocktail party,” Grandstrand says.
But in most cases, says Ryan, “if an offer comes in verbally or in writing, the target bank would usually present the offer to the board so that a) they know it came in and b) they can decide how to respond.”
Any unsolicited offer should be taken seriously by bank management and the board of directors. It’s important to step back and evaluate the long-term value of the organization continuing to operate independently versus the value of the potential sale.
The process for responding to an unsolicited offer is very similar to that of a solicited offer, even if the target bank wants to decline and remain independent. The board has a responsibility and fiduciary obligation to shareholders to evaluate any offer that is received. So, the board must make an informed, good-faith decision and exercise sound business judgement regarding that offer.
Reviewing an offer
The process for reviewing an offer can vary depending on a community bank’s internal ownership and management structure. The entire bank board may address the offer, or the board may choose to form a special subcommittee tasked with evaluation and response.
Banks do need to put time and effort into reviewing the offer and crafting a thoughtful response, including conducting research and analysis. Grandstrand advises community bank boards to assemble a team of advisors who can look at legal, accounting and financial considerations.
Working with a qualified financial advisor allows a community bank to obtain an impartial opinion of the offer’s financial merits and value. In some cases, those consultants may identify areas of value within the organization that a potential buyer had not considered.
Legal counsel can also advise the board on state and federal securities and regulatory laws.
“The bottom-line point in all of this is that the board needs to make an informed decision,” Grandstrand says, “and the way to do that is to make sure that you gather information and advice on all aspects of the proposed transaction.”
While many community banks are resolutely focused on staying independent, Grandstrand says banks should not simply say no. “Even if your answer is no, do your thorough analysis and don’t burn any bridges,” she adds.
“Even if your answer is no, do your thorough analysis and don’t burn any bridges.”
—Karen L. Grandstrand, Fredrikson & Byron P.A.
Even if you think an offer is only a distant possibility, Grandstrand advises community banks to work with counsel or advisors to set up protocol for dealing with unsolicited offers so that you are prepared to deal with friendly or hostile offers if they do arise.
What can you expect in an offer letter?
Here’s some information that you can expect to find in a formal written offer:
- a sales pitch with background information on the acquiring entity, such as its history, financials, company culture and strategy for growth
- details of the proposed structure of the deal, such as whether the buyer is proposing to buy the bank holding company, the bank or a branch of the bank
- price, as well as whether the amount will be paid in cash, shares of stock or a combination of the two
- a statement that the offer is contingent on further due diligence
- notes on whether the target financial institution would have any board representation and/or plans to retain key personnel
- a statement that each party is responsible for its own expenses
The written offer will also include information related to exclusivity and confidentiality. “As a buyer, you don’t want to go down this path spending lots of time and money, and then ultimately compete with other potential buyers,” says Karen L. Grandstrand of Fredrikson & Byron P.A. in Minneapolis. “So, the letter often includes a provision on exclusivity, saying that for a certain period of time, the seller won’t entertain offers from any other party.”
It’s important to note that letters expressing interest are generally non-binding, except for terms related to confidentiality, exclusivity and expenses. In particular, the indication on price and structure is subject to further review and due diligence. “With any sort of an offer, you have to recognize that it is a starting point for discussions, and to stay engaged in the process” says Mike Lundberg of RSM US LLP in Minneapolis.
Beth Mattson-Teig is a writer in Minnesota.