It’s no secret that last year was hard for businesses. This is particularly true in the mergers and acquisitions space. According to one study, mergers and acquisitions were down 57% in 2020 from where they were in 2019. While the year started off strong, by March, M&A had all but come to a screeching halt. Learn about the latest developments and trends in the mergers and acquisitions space.
What does the future hold for M&A? What can we expect moving into the new year and beyond? On this episode of CFO Weekly, we were pleased to sit down with Steven Nutt. Steven is the Chief Financial Officer at Community National Bank & Trust of Texas, as well as a repeat guest. Steven joined us in episode four of CFO Weekly, and on this current episode, we talked all about the M&A outlook for the foreseeable future, how buyers value targets, and how sellers can position themselves to command a top price.
Mergers & Acquisitions Outlook
While it’s true that M&A was down in a drastic way in 2022, it may be premature to write 2023 off as another down year already. Yes, M&A was down 57% in 2020 compared to 2019, but the outlook at the beginning of the year was strong, suggesting that prior to the COVID-19 pandemic, the industry was actually on a steady track.
Will it be back to 2019 numbers next year? It’s not highly likely. But the truth of the matter is that we are already seeing improvements in the numbers. There are still a lot of unknowns at this point, and the uncertainty of the COVID-19 virus and how this all will shake out is a good indicator of how you can judge what M&A is going to look like in the future. One silver lining is this: You haven’t seen the bank failures in this downturn that you saw in the 2008 crisis, meaning that banks still have large amounts of capital.
We are certainly seeing a lot of unanswered questions about asset quality, and truthfully it’s a huge hurdle for acquirers to get over. Understanding the asset quality of the target that they’re looking at is crucial.
How to Value a Target
If you are looking to acquire during the coming year, knowing how to properly value your target is key. And according to Steven and his team, valuing your target is so much more than simply looking at numbers. It’s much more strategically oriented, and one key metric drives a large part of the valuation process: the people.
It all starts with people. You can have the best processes and systems and the most capital, but the truth is that getting two different company cultures to mesh and form one cohesive culture is incredibly difficult, and a challenge that nobody wants to face.
“We're not as big on the cost savings. We're more on ‘what can it provide for our future from a strategic standpoint and, and fill some gaps where we are a little bit deficient?” Nutt said.
Steven and his team focus not as much on chasing earnings and loans and deposits, but on strategically looking at the areas in themselves as well as their target and asking the question, “Where can we get better?”
Positioning Yourself as a Seller
Your biggest objective as a seller that is looking to get acquired is getting top dollar for your company. And in order to do that, there are two questions that you should be asking yourself.
“What is the value of our organization, and why are we wanting to sell?”
"Every seller needs to really know two things: their value, and their reason for wanting to sell. If you can answer those two questions, you enhance your sale," Nutt said.
In addition, focusing on three key areas can help you make your company even more appealing and ready for acquisition. First, you want to enhance your asset quality. Maybe it means scrubbing your loan portfolio, but as we talked about earlier, buyers are looking to understand the asset quality of their targets.
Second, you want to limit your contracts, specifically as a smaller community bank. Because contracts typically come with enormous IT costs, and they can be extremely hard to get out of.
And third, look at your people. Having a huge amount of excess people doesn't look great. Not that you need to start firing people, but if you know that you're going to be acquired at some point, it may mean not filling certain positions after an employee leaves in order to maintain a lean staff.
To hear more of Steven’s advice about mergers and acquisitions trends (and gain insights from other finance pros), make sure to subscribe to CFO Weekly wherever you get your podcasts.