The banking industry has seen a rapid change in deal activity in recent years. In the first 11 months of 2020, the industry presented 100 deal announcements worth an aggregated $21.51 billion, according to research conducted by S&P Global Market Intelligence. This is a major drop from the 235 deals worth $54.23 billion that occurred over the same period of time in 2019. In light of this shift, the role of due diligence for bank M&A transactions is of critical importance now more than ever before.
What Is Due Diligence in Mergers & Acquisitions?
Financial institutions involved in a merger or acquisition go through the process of due diligence before closing a deal. Due diligence is a detailed analysis of a commercial business, generally performed by a potential buyer, during a business transaction.
The process involves the investigation, verification and audit of a potential investment opportunity to confirm that all the financial information and relevant facts provided by the seller are accurate and that no vital details were suppressed.
Due diligence during an M&A transaction can provide bank leaders with the assurance of what they are buying before closing the deal. Transactions that go through the due diligence process also offer a higher chance of success.
How Is Due Diligence Different for Banks?
Despite being one of the most regulated sectors in the United States, mergers and acquisitions in the banking industry have always been risky ventures. Due diligence can help banks address or prevent adverse impacts related to the environment, consumer interests, human and labor rights, disclosure or corruption associated with clients. It can also help bank leaders avoid the pitfalls of reputational and financial risks.
Effectively mitigating these adverse impacts may help improve stakeholder relationships, increase positive contributions to the community and protect the bank’s reputation. Banks may also carry out due diligence to meet certain legal requirements concerning responsible business conduct (RBC).
Why Is Due Diligence Important for Bank M&A Transactions?
The main objective of due diligence in bank M&A transactions is to allow the buyer to confirm information about the seller, such as finances, contracts and customers. Once this data is gathered, the buyer can make an informed decision and close the deal with greater certainty.
Business owners are sometimes reluctant to share negative information about their company. Without due diligence, potential issues may not be discovered until after the deal has closed. Disclosing problems before the transaction is complete enables the buyer to address pending issues or make the decision to walk away from the deal.
The Importance for Buyers
Due diligence is a critical part of a bank M&A transaction, allowing the buyer to collect as much information as possible about a seller to better value the business and identify potential risks, such as employer-related liabilities or pending litigation.
Through the disclosure of financial statements, contracts, organizational records, intellectual property, authorizations, permits and employment policies, buyers can also gain a solid understanding of the seller’s operations and risk tolerance.
The ability to identify and access liabilities, risks and other business problems in the target company before the finalization of the transaction can prevent significant financial losses and bad press in the future.
The Importance for Sellers
Due diligence tends to provide buyers with the greatest advantages; however, sellers can also benefit from the due diligence process. When selling a bank, a seller naturally wants to get the highest amount of money possible. However, calculating a price has its challenges and some businesses may undervalue their company.
The rigorous financial analysis involved in due diligence may reveal that the fair market value of the seller’s business is more than was originally calculated. It is not uncommon for sellers to conduct due diligence on their own before entering a transaction to value their company competitively.
How an M&A Advisory Firm Assists Banks with Due Diligence
Preparing to transfer company ownership is a major endeavor that often requires the expertise of an M&A advisory firm. Banks of all sizes trust M&A advisory firms to assist in every step of the due diligence process, from the initial analysis to the transaction’s finalization.
The time requirements associated with the M&A process can be substantial. An M&A advisory firm can save bank leaders valuable time by collecting important information and accessing business operations, allowing companies to continue driving revenue. M&A advisors also provide excellent support and guidance throughout the process.
Speak With An M&A Advisory Firm Today
Experienced M&A consultants can help businesses identify the possibility for scalability, growth and efficiency. They can also help ensure that no important details have been overlooked before the completion of a major business transaction. To learn more about the role of due diligence for bank M&A transactions or to speak directly with a knowledgeable mergers and acquisitions business consultant, contact the professionals at Hartman Executive Advisors.