"Beware of any 'merger of equals'. The idea is noble, the reality is a mess. The reason is in the premise. If the merging companies are so darned equal, why should either adopt the practices, policies or people of the other?"
Jack Welch, former Chairman and Chief Executive Officer of General Electric, "The Six Sins of M&A", Business Week Online, September 17, 2007.
Larry, Curly and MOEs - Why Only Stooges Think of Mergers of Equals as Funny Business
Mr. Welch echoes the mainstream opinion about merger of equals ("MOEs"): that (a) there is no such thing as business "equals", so by definition there can be no such thing as an MOE, and (b) even if two "equals" were to try an MOE, they would be bound to spend their combined existence fighting to be the ultimate "winners" in the deal.
The suggestion that a company should completely disregard MOEs - (typically defined as a combination of two similarly-capitalized companies in which neither party pays a control premium) - because the name conveys a more utopian vision than the reality is puzzling. Lest Mr. Welch forget, companies regularly clothe the messy realities of business in catchphrases. "Synergy-related headcount reductions", anyone?
Indeed, the belief that the word "equal" requires the technical precision of a fifty-fifty union, ("If you can't come up with another seventeen No. 2 pencils, we're walking!"), borders on the absurd.
Michael A. Renninger of Renninger & Associates, LLC, a mergers & acquisitions and financial consulting firm, has battled this numbers-based mindset throughout his career. "I have heard plenty of advisors say that there is no such thing as a merger of equals, so people don't even try. That means that if you cannot end up 50/50, the deal doesn't make sense."
If one can look beyond the conventional wisdom, an MOE can provide a unique opportunity for Indiana financial institutions wishing to add scale that they would not otherwise be able to through organic growth, without the loss of independence that would result from an acquisition.
How Do I Know If an MOE is Right for Me?
If your bank suffers from any of the following symptoms: the desire to cut costs and increase lending capacity in a distressed credit market, the ever-increasing costs of compliance and maintaining systems, the ever-increasing regulatory burdens, and the outflow of talent due to retirements and the lure of metropolitan areas, an MOE may be right for you.
"A merger of equals gives the comfort of being able to control your own destiny through strategic planning and then being able to follow through with that. It's great when you have a merger vehicle that meets your strategic plans," says William E. "Trey" Etcheson III, President of Hoosier Heartland State Bancorp, the resulting institution from a 2008 MOE between Linden State Bancorp and New Ross Bancorp.
Side effects may include extremely happy customers. "The increased mobility of the customer base has made it necessary to have more locations in a broader geographic area," says Mr. Renninger. Adds Mr. Etcheson, "Our customers realized that we were just two community banks serving the same market, and the merger makes a whole lot of sense to them actually, and I've heard a lot of them say that they enjoy having more branches."
Indeed, while there may be service and other advantages that allow community banks to compete effectively with regional and national financial institutions, customers likely will increasingly demand at least some minimal level of products and convenience that can be achieved only by scale.
Tell Me MOE, Tell Me MOE, Was it Love at First Sight? - Finding the Right Partner
With MOEs providing an avenue for a bank to remain competitive without selling out, what should it look for in a potential "equal"? Oftentimes, banks participating in an MOE have similar customer profiles and markets, and are looking to come together to strengthen their core, increase their abilities to lend and create economies of scale.
"One bank may have more capital, one may have a better market, one may have better earnings, one may have a better management team, one may have better systems," says Mr. Renninger. "However, two organizations bringing their strengths to the table can result in a better overall bank, and that should be better for shareholders, employees and customers."
Narrowing the list of potential "equals" to those that mesh well on the balance sheet is but the first step of the due diligence process. A truer indicator of success of the MOE is how closely the institutions' cultures align.
"If the banks have two different cultures, the merger might as well be an acquisition because one of the cultures is going to succeed," Mr. Renninger observes.
In Hoosier Heartland's case, during the course of their due diligence, senior management at both banks felt that their employees were compatible. "From a social aspect, we were very blessed in that we had two employee groups that really meshed well," says Mr. Etcheson.
Despite the importance of the due diligence on human capital, it is often overlooked.
"You can't spend enough time on due diligence in terms of getting to know the other bank's employee base, especially if it's a smaller community bank," stresses Mr. Etcheson. "You may take for granted that you're all from the same area, but the way banks operate can be so vastly different."
Come Together, Right Now, Over M.O.E. - Documenting the Deal
In Casablanca, when asked about the character of Claude Raines' Captain Renault, Humphrey Bogart's Rick Blaine replies, "Oh, he's just like any other man, only more so." The same is true of structuring and documenting an MOE - it's just like any other merger or acquisition, only more so.
In other words, because each bank will have advertised the merger as an MOE to its employees, customers and community, the deal decisions that are faced in every transaction take on heightened importance in an MOE. The equality, or at least that perception of equality, must be as advertised.
Parties to an MOE should give considerable thought to questions such as how many individuals will represent each bank on the board of directors, what the name of the combined bank will be, who the Chief Executive Officer will be, and where the headquarters will be. A deal that looks good on paper will have the outward appearance of favoring one party if the majority of the above questions are answered in that party's favor.
For example, when Bank of New York Co., Inc. ("BNY") and Mellon Financial Corp. ("Mellon") completed an MOE in 2007, they chose the name "Bank of New York Mellon", chose BNY's headquarters in New York over Mellon's in Pittsburgh, and chose Mellon's former CEO as the CEO of the combined entity. The board of directors consisted of ten members designated by BNY and eight by Mellon. Thus, from an outsider's perspective, this deal may have appeared like a merger in which BNY is "more equal" than Mellon: the BNY name came first in the new name, the BNY headquarters was chosen, and BNY got more seats on the board.
To allay these types of concerns, the banks publicly promised to maintain significant operations in the Pittsburgh area by doing things like creating a local advisory board, increasing the size of the Mellon's local charitable foundation, holding at least two Bank of New York Mellon board meetings each year in Pittsburgh, and increasing the number of Pittsburgh-area jobs.
The Bank of New York Mellon MOE shows the creativity that parties to an MOE and their advisors need to use to maintain the perceived balance of equality. Hiring counsel and other advisors sensitive to these issues and experienced in addressing them, and maintaining open and honest communication between the parties, are essential to anticipating and resolving these and other issues.
MOEning Has Broken - Life After Closing
Flash forward: you've found your "equal", the MOE has closed, and the lawyers and advisors have just patted you on the back on their way out the door. Your new partner looks at you and says, "Well, I'm glad we're finally done." As a wise banker, (and one who has read this article), you shake your head and say, "The real work is just beginning. Yes, you could say that we've got a lot MOE to do".
And you'll be right, of course. The closing of the MOE is certainly a great milestone in your journey of success, but it is not the final destination. The ultimate success of the merged entity will depend as much on the work done after the closing than that done beforehand.
One of the most difficult decisions to make, and one that must be discussed during negotiations, is which bank's systems to adopt. Not only are systems core to banking, but for most employees, a change in systems will be the first real manifestation of the MOE.
Employees feeling reservations toward the MOE because of the change of systems may need reminding that change occurs all of the time. As Mr. Etcheson relates, "We had changed computer systems in the past, and the comments I heard then are exactly the same as what happened when we merged. Change always gets blamed on the merger, but in reality change can occur without a merger."
Even an MOE with a pristine set of legal documents, beautifully integrated systems and spreadsheet upon spreadsheet forecasting efficiencies of scale can collapse if the parties fail to integrate their cultures.
Mr. Renninger says, "The importance of blending of cultures cannot be underestimated. There has to be a trust not only at the board level and the senior management level, but at the employee level."
Senior management may have to be more involved in resolving cultural or interpersonal conflicts than it is used to, but resolution of such conflicts is integral to the success of the merger. Moreover, those members of senior management themselves need to remain open to new ways of doing things.
Mr. Etcheson sums up the attitude needed thusly: "The most important thing when you enter into a merger of equals is to check your ego at the door".
"Checking your ego" can also be applied in an MOE where one party is "more equal" than the other. "If the bigger organization believes that its system is the better one just because it is bigger, then that probably is not going to work, especially if the smaller bank has to take a step backward in technology," says Mr. Renninger. "Sometimes the smaller banks have better systems because they have been able to be more agile."
Indeed, for the merged institution to succeed, it has to cull the best practices and the systems from both institutions, regardless of size.
Don't Be a MOEron - Expect the Unexpected
In any MOE, regardless of how well-planned, there will always be unexpected issues that arise after the deal closes. A prepared party anticipates that this will happen. For example, the volumes of policies that both banks bring to the table will likely be just different enough to require that a team compare each policy with its counterpart before a master policy is chosen.
Senior management should also be prepared to answer the unexpected question. "You think everything is under control, and then somebody asks you a question, and you think, ‘Oh yeah, I didn't even think about that!' Or, you had thought about it, but assumed that the staff would just adjust and go on," Mr. Etcheson says. "You have to realize that what's important to the person in the teller window or sitting at the operations center desk is different than the concerns you have."
There's Nothing MOE to Say - The Last Word
Returning to Mr. Welch's question: two companies would want to adopt the policies, practices and people of the other because sometimes two "equals" can pool their resources, achieve a level of critical mass while retaining a level of independence, and create opportunities for their shareholders, employees, customers and communities that each alone would never have been able to achieve.
Indeed, despite the conventional wisdom, the failure or success of any MOE lies not in the concept of "merging equals", but in its execution. With a large dose of patience in building relationships until the right economic and cultural fit comes along, a hearty portion of willingness to tackle the hard issues during and after closing, and a pinch of luck, Hoosier banks can find success in MOEs.