I don't know about you, but it troubles me that advisors who would rather get an anesthesia-free root canal than work for a bank get seduced by a "perceived" large purchase price from a bank. We've all heard people brag about acquisition offers from banks ranging anywhere from three to five times annual revenues. Yet when we look into these deals, we usually find that up to half of the purchase price is held back and tied to future performance. What's more, often the currency that is being used is bank stock, not cash. Stock, especially if it is restricted or closely-held, should be discounted by as much as 50% from its stated value when being considered as part of the buyout.
In recent years, some of the most active buyers of advisory firms have been banks. There are big bank deals like Harris Bank acquiring Sullivan, Bruyette, Speros & Blayney, Inc. in McLean, Virginia, and MyCFO in California, and little bank deals like South Umpqua Bank in Oregon buying Carter & Carter in Eugene, Oregon. Sometimes, financial institutions will pay a premium for such acquisitions because they have a strategic motivation to expand their product line and increase their non-interest income. But do these deals work?
The answer is yes. Banks can be a great merger partner, primarily because of the resources that they have the potential of bringing to advisory firms. But sometimes these deals don't work. When they fail, it's often because the merging companies fail to address the strategic, cultural, compensation, and integration issues that come with every merger. Ideally, these issues should be addressed prior to consummation of the deal, but at a minimum they should be a priority during the first six months after the merger.
Unfortunately, banks are notorious for following the herd. When they see their competitors introduce a new business concept, there is a mad rush to follow. As a result, a bank's merger with an advisory firm may be more reactive than strategic, and it's important that you validate the bank's motivation before you proceed.
In our experience consulting with banks that have entered into the financial advisory business, we have found some common institutional problems:
o Their financial planning operations often lack critical mass. Because the advisory business is so foreign to bank leadership, the tendency is to start small. For instance, they might first acquire a solo or small practice to manage their risk. However, many of these practices are already at capacity, without resources to respond to bank leads, or even develop internal relationships that are key to growing revenues.
o They often try to be their own broker/dealer. Most firms that merge into a bank are regulated by the NASD, which presents the bank with an unfamiliar set of issues. For one thing, NASD prohibits corporate contracts (for reasons that escape me); for the bank to legally receive a distribution of income, they must form a broker/dealer to process the transactions. Often we refer a bank to a broker/dealer that is willing to provide private-label services, which reduces costs, but still leaves them with the issue of oversight.
o They have no plan or feedback loop to translate bank clients into financial advisory clients. Is there true compatibility between bank customers and the target clients that advisors seek? Would those customers be comfortable asking for financial advice from the bank or its subsidiaries? Once compatibility is determined, both sides need to develop an action plan, accountability, and a process for pursuing and managing relationships, as well as determining who gets paid for what.
Planner, Plan
Whenever we have been engaged to assist a bank or an advisor in a merger transition, we generally recommend that the leadership of both organizations devote time for organized strategic planning. They must resolve questions about the clients they'll serve and why, and the products and services they'll offer and why. They will need to agree on goals and identify resource gaps that will be hurdles to achieving those goals. They will need to agree upon the steps to be taken over the subsequent 12 months to move them incrementally closer to their goals, decide who will be responsible to take those steps, and determine how success will be evaluated. It can take up to three years for a merger to meet the expectations of both parties; without a joint business and strategic plan, it will take far longer.
Perhaps the biggest strategic issue that the bank and the advisor must resolve is defining success. Is it expansion of services to existing bank customers? Is it building a new financial services brand in the market? Is it return on equity or increased share of wallet? From the advisor's side, is it liquidity, market presence, management, or leads? Defining success will help both parties to direct the right resources to ensure a happy relationship.
