Any bank merger announcement comes with the discussion of people, a bank’s most valuable asset. When Bank A acquires Bank B, there is the risk that key staff from Bank B will defect. While both Bank A and Bank B want to retain those key staff, Bank C and D are in the wings waiting to pounce on opportunity. No matter if you are Bank A, B, C or D, there are powerful psychological and economic forces in play that should be understood and managed in order to achieve your goals.
For valuable bankers caught up in an acquisition, you have the Prisoner’s Dilemma. If all key bankers stay, assuming a competitive package, production and value is maximized for everyone. However, should key members defect, then the merger may be in jeopardy and/or those bankers that decide to stay are in a much less attractive position. More to this point, those leaving the newly merged firm later may find themselves late to the party as the more attractive positions at competitors get filled. Thus, even though the group value is most likely maximized if all key players stayed, the prospect of being the last one out the door of a sinking bank creates a powerful incentive to be a first mover.
This powerful incentive is further supported by banks that understand this pressure and contribute to the dilemma by making offers to the most valued bankers. The argument is compelling – instead of being a pawn in the game of M&A and since you are going to have to change banks anyway, come with Bank D where you will be valued and have more control of your destiny.
Of course, for the acquiring bank, there is a different set of dynamics in play. Offering a competitive retention compensation package would ensure the greatest number of bankers stay put, however this increases the cost of the bank merger which most likely already has to cut cost 20% to 30% as that is likely what they sold to shareholders. Even more complex, acquiring banks often price retention packages based on title, seniority or geography creating inefficiencies for other banks to pick off those bankers that are, or feel, undervalued. Failing to retain key people, of course not only might cause a failed merger, but because of the defections and reputational risk, leave both Bank A and B in worse positions than prior to the merger announcement. Even if the merger succeeds and some key bankers leave, flat or declining production may create a crisis in morale and confidence which could then be the catalyst for further defections.
After experiencing a number of mergers and acquisitions, there are some ideas on how to achieve your M&A goals no matter which side of the fence you are on.
For Bank Buyers
Get to the Sub-culture: While banks are good at understanding culture, time and effort must be put into understanding a bank’s sub-group dynamics. Maybe it is an SBA division, or a wealth management group, by acquirers must role play and understand several scenarios of teams leaving.
Market Packages: Try to structure retention packages to properly reflect market value. The more accurate this can be, the less likely the chance of defection.
Communicate often and be transparent: A communication vacuum will hurt you, so assume everyone is in play. Joint message releases, letting everyone know the frequency of updates and creating infrastructure to reduce anxiety will all help. Create clarity as early as possible about what the post-merger bank will look like, and address the difficult issues upfront. When uncertain, staff will assume the worst.
Be Realistic: It is highly likely that any merger will have personnel fallout. By understanding the possible departure scenarios, buyers can factor this into the price.
Don’t Stop Cheerleading: Build excitement about the merger for bankers on both sides of the combination. Fueling a sense of entrepreneurship, additional training opportunities, future growth plans and the wider range of capabilities to serve existing customers will likely lock many bankers in.
Talk to Customers: As soon as the deal becomes public, communicate with key customers to reassure them that service quality and continuity will continue. Engage them in the vision of the new combined organization and they will be less likely to leave with a key banker.
For Selling Banks:
Do The Homework: A selling bank is taking a bigger risk that the purchasing bank since a failed merger will often taint the selling bank more. As such, be sure to give the combination your all since you worked so hard to get to this point. Investigate the acquirer’s culture and processes and make these discussable up-front thereby avoiding any surprises.
Acknowledge Your Past: Your bank has come a long way and this is the time to celebrate the bank’s journey of getting to this point and the future potential within the larger bank. Build pride and commitment to combination.
Don’t stop Negotiating: Engage actively in negotiations about the combined operating model to ensure that important elements of culture, strategy and capabilities are maintained.
For Banks Looking To Take Advantage of M&A Activity:
Do Your Homework Now: Don’t wait for a merger to be announced to target key people. Have your staff maintain a list of people or groups that you would like to hire so you can be ready to pounce.
Get A Plan: Once a merger is announced, have a plan about who in your bank will approach the target bankers and what the process is going to be. The goal is to be first and present an offer that in exchange for an alternative, the target employee will come talk to you should they decide to go anywhere else. This option is extremely valuable and can often be achieved.
Be Laser Focused: Banks that know who they want and what they are willing to offer will have the greatest probability of achieving their goal. Knowing the value of the target employee or group to your organization is key when determining what type of package you can offer.
Play Into Chaos: No matter how many times banks go through an M&A action, there is always chaos and uncertainty. Banks that are acquired intermittently or for the first time are at a strong disadvantage, be ready to put your lines in the water early and watch for opportunity.
No matter which side you are on, the act of acquiring, being acquired or taking advantage of a combination is a separate discipline and should be studied, planned and manage. With a record number of mergers being announced in 2014, the chances of this article coming into play is high. Victory will come to those that have a tested and well-thought out approach.
Submitted by Chris Nichols on August 14, 2014