Western Independent Banker - May/June 2008 - (Page 25) By Peter Buck and Adam Keefer Bank Acquiror’s Survival Guide 2. Establish Financial Goals The board is responsible for setting the bar of achievement for a transaction. In every transaction, an acquisition’s financial impact factors into the acquiring board’s decision to pursue an acquisition. Simply put, an acquisition is an investment of capital and, when evaluated, should be expected to achieve returns on that investment equal to or in excess of other investment opportunities (on a risk adjusted basis). At times, “deal mentality” can cloud judgment in the heat of the moment. To avoid that, a board should establish benchmark return expectations for all acquisitions. To be effective, the board must understand the analyses and assumptions used to evaluate their investment decision. Relevant fi nancial analyses with which the board should have familiarity include: • Impact to earnings per share and tangible book value; • Internal rate of return on invested capital; and, • Impact to regulatory capital ratios. 3. Prepare Documents As an acquisition opportunity unfolds, advance preparation of template documents allows management to focus on key issues and avoid becoming bogged down in punctuation and syntax. A board should leverage publicly-available resources and the experience of its advisors to create documents that are clear, comprehensive and effective. Every acquiror should have at the ready drafts of the following: a letter of interest, term sheet, confidentiality agreement, a due diligence request list, press release and an investor presentation. 4. Identify Working Groups Most critical to a successful transaction is productive coordination and communication between the merging companies. An acquiror must establish internal teams to handle each aspect of a transaction. • Diplomacy Team: Sourcing opportunities is vital to any acquisition strategy. Often the CEO plays this role, developing relationships with the target company’s leadership and, when appropriate, suggesting the mutually beneficial nature of a possible combination. Regular dialogue with industry professionals will be helpful in this effort. • Analytical Team: Likely under the direction of the CFO, and often with the assistance of outside advisors, this team is responsible for illustrating the fi nancial impact of a transaction and comparing the results to the board’s fi nancial goals. • Due Diligence Team: This team, comprised of company employees and outside advisors, “takes a look under the hood” of the target company. The purpose of due diligence is to identify and understand strengths and weaknesses of the target company and to verify assumptions used in the financial modeling. Experts with knowledge in operations, HR, IT, finance, legal, and credit administration will be required. The group must be large enough to efficiently execute the diligence review but not so large that confidentiality is jeopardized. This team’s efforts will culminate in a report used in the board’s formal review of the transaction. • Negotiation Team: This team is responsible for negotiating the transaction terms and is com- THE LEGENDS OF corporate dealmakers tell of board room crusades and high-pressure negotiations. But these exciting yarns pay little homage to the mundane storylines of preparation, strategy and discipline that support a successful transaction. Successful acquirors are prepared; their directors are knowledgeable, their executives are focused on key targets, their due diligence teams are at the ready, and their trusted advisors are a phone call away. Th is preparation is not left to chance; it is part of a comprehensive approach to making acquisitions a part of the strategic plan. Th is survival guide lays out the framework for instituting a successful acquisition strategy. 1. Set the Strategic Course In the context of an acquisition strategy, the board and management should identify attractive geographies (fi ll-in and expansion) and profitable business lines (complementary and supplementary) that will contribute to the strategic vision. Once priorities have been established, an acquiror can identify potential target companies that fit the strategic agenda. Successful acquirors are prepared; their directors are knowledgeable, their executives are focused on key targets, their due diligence teams are at the ready, and their trusted advisors are a phone call away. This preparation is not left to chance; it is part of a comprehensive approach to making acquisitions a part of the strategic plan. Western Independent Banker May/June 2008 25
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