With merger activity on the rise during 2014, some boards of directors are considering whether the time is right for their financial institution to find a strategic partner. These boards, particularly those serving institutions with less than $1 billion in assets, may believe their banks need to gain size and scope to maintain a competitive footing. However, these boards may also want to maintain the strategic direction of the institution or capture additional returns on their shareholders’ investment. For these boards, a merger of equals with a similarly-situated financial institution may hold the greatest appeal, as a combined institution could gain greater competitive resources and additional return for its investors than if it were to remain an independent institution. Although a merger of equals may be appealing to both management and the board, the particular circumstances required to execute such a transaction can often be elusive. A merger of equals may involve structural considerations that are slightly different from other acquisitions:

  • Geography. The merging institutions typically have complementary, rather than overlapping, market areas. Some commonality among the markets is helpful, but significant overlap can eliminate many of the synergies associated with a merger.
  • Competitive Advantages. A merger of equals may make sense for financial institutions that have different specialties or expertise. For example, a bank with a high volume of commercial real estate loans may be able to diversify into C&I by finding the right merger partner. Deposit pricing can also create attractive opportunities, with low-cost deposits from slower-growing markets funding loan growth in an adjacent market.
  • Enhanced Currency. Mergers of equals are usually stock deals, allowing the shareholders of each institution to maintain their investment in the combined company. The goal is for the value of the combined entities’ stock to receive an uptick in value at the conclusion of not only the initial merger, but also upon the ultimate sale of the combined institution.
  • Management Integration. Combining the management teams and the boards into an effective team for the surviving bank without bruising egos can be challenging. However, a common goal and meaningful relationships between members of the leadership team of the two institutions can be helpful in finding a path forward.

If two like-minded banks are able to identify each other, negotiating the terms of the transaction can be a complex process, as many management and cultural issues must be resolved prior to entry into the merger agreement. Who is going to be the chief executive officer of the combined institution? Who is going to be on the board? Often, new employment agreements will be negotiated in order to lock in the new management team through the integration of the two institutions. The merger partners should also use the negotiation process to formulate an identity for the resulting bank. While a strategic plan for the combined institution is not a component of the merger agreement, a merger of equals demands that the two merger partners work together to chart a future course for the combined company. Unlike other acquisitions, where the work of integration will begin in earnest following the signing of the merger agreement, formulating a management team, as well as the strategic and business plans of the combined bank, starts at the negotiating table in a merger of equals.

Accordingly, executing a merger of equals can be very difficult. These transactions require each party to approach most matters with trust and with a clean slate, because there is no presumption that one institution’s process is better than the other. Having full buy-in from the respective management teams is essential, as the process for building a new bank can be tedious and can challenge long-standing practices in each institution. But it is through this hard work that a merger of equals can be so powerful, for it provides an opportunity to incorporate the best ideas and people from two successful organizations into a single institution.

So while the successful execution of a merger of equals can be challenging, with the right partner and commitment from the management and boards of directors of each bank, it can result in a bank that is greater than its two component institutions. Innovation is never easy, but building a better institution for your customers and shareholders rarely is.

This article was originally published on BankDirector.com.