Selling Your Bank: A methodical approach eases transition

Northwestern Financial Review, Jun 1-Jun 14, 2005 by Carpenter, Curtis

In today's market, it is difficult to ignore the possibilities of selling your bank. Buyers are knocking on the doors of prospective sellers with proposals, and some banks have strategic plans that make positioning the bank as a premium prospect a key objective.

Even if it's not part of your long-term plans, knowing what it takes to make a sale successful for your bank can help you stay in control of the process and get the best outcome for your shareholders, your staff, and senior management.

Start the process by creating interest among a pre-qualified target group of potential buyers. You should do this even if an offer comes to you first, since competition can help you get your best price.

Send these prospects a detailed confidential memorandum that includes specific information about your bank and the benefits to the purchaser. Make sure that you obtain confidentiality agreements when the memorandum is distributed and prior to any on-site due diligence.

If you've done a good job of identifying prospects and preparing your initial information, you should get several proposals.

At this point you will evaluate the proposais and start the negotiating process on the financial terms of the transaction. Once the transaction has been negotiated, it is important to review the fairness of the transaction with your shareholders.

It also is important to understand how an acquirer values a bank. An accurate value of a bank should be what the current value is, not what projected earnings and cash flow are expected to be. Price is usually analyzed against book value and a projection of the next 12 months. One factor to keep in mind through the valuation process is that the net income of the bank and the price/earnings multiple of the acquirer's stock are key in determining the valuation. The bottom line is, the value of your bank depends on what a potential buyer is willing to pay.

Whether the deal is cash, stock or a combination of both, it will be decided by the shareholders and buyer. If stock is trading at a high market multiple, stock may be preferable, however stock that is trading below value may make a cash transaction a better deal. Key factors are the stock's historical price performance and volatility, trading volume, and how it compares to other stocks and investments. An all-cash deal will generally be fully taxable to your shareholders while an all-stock deal is generally tax free.

Be sure to negotiate how your stock options will be treated in the transaction. Find out if unvested options will be vested or if the buyer will pay for any exercisable options. In the event of a merger, most bank stock plans include a provision that accelerates the vesting of any unvested options.

The financial terms of a bank acquisition cannot be finalized until the buyer has completed a due diligence review of your institution. This is usually conducted after interest is expressed in purchasing your bank, but can take place at other times during the process. It is in your favor to encourage this due diligence early in the process so each prospective buyer has the opportunity to tender its best offer. This will increase competition and shareholder value.

The due diligence process is easy and painless. Each inquirer will send you a checklist of items to make available for review. These may include loan files, personnel policies, operating procedures, balance sheet, litigation and claims, employee contracts, and contracts for vendors and real estate.

It may make sense for you to obtain a fairness opinion. This can help to reassure your board of directors and shareholders that the price being paid or being received in a merger transaction is fair from a financial point of view.

Once the terms have been agreed on, you need to prepare the necessary documents, starting with a definitive acquisition or reorganization agreement. During many transactions, a letter of intent is used to help outline the anticipated terms of the deal. Your agreement should include:

* A description of the transaction

* Representations and warranties by the purchased bank and by the buyer

* Conditions required to close the deal

* Provisions from the date of agreement through the closing

* Closing procedures and termination expenses

With all the details set, it's time for wider approval. You will need to submit additional information to regulatory agencies, and probably get approval from your shareholders. Some acquisitions may also have to be approved by the acquirer's shareholders. While the regulatory and shareholder approvals are being sought, the acquirer will monitor the operations of your bank to ensure no significant changes have occurred.

Curtis Carpenter is Managing Director of Investment Banking Services for Sheshunoff Management Services.