Why Contracts Can Make or Break a Bank Merger

This financial institution merger fell apart over $700,000 because the acquiring institution did not want to pay it.

Wow.

Hey, GonzoBankers. This is Tony DeSanctis back to talk about M&A. One of the things that’s probably most important in the M&A space is the contracts and the vendor relationships, and how to get the most out of those.

So I’ve asked Neil Devasar to join us, our master negotiator, to talk about some of the ins and outs of contracts, specifically as it relates to M&A.

Neil, thanks for joining me.

Tony, good to be here.

M&A makes contracts a little bit more complicated, so tell me a little bit about some of the challenges when it comes to contract negotiations around M&A.

If you visualize two columns, left and right side, Bank A, Bank B, they have their own 20, 30, sometimes 80-plus contracts on each side.

Mm-hmm.

They all have their own set of liquidated damages. They have their own set of termination lengths. They have their own set of deconversion costs and conversion costs.

Let’s just pick a number of 10. Ten times those four variables, 40 combinations minimum, because the financial institution has to decide what system is staying, what’s leaving and what’s the math behind it.

One of the first due diligences I did, this financial institution merger fell apart over $700,000 because the acquiring institution did not want to pay it, and they were surprised.

Wow.

A normal contract negotiation goes...

Six months.

On a merger, what’s the timeline typically?

Forty-five calendar days, not business days.

Calendar days.

We’re in and out. We have to be that fast because the financial institutions are ready to decide, and especially on the major systems, they have dates in mind on when the institutions are combining.

But there’s some good news here, isn’t there?

The best news about all of this is leverage. These negotiations have the highest leverage when we enter the negotiations, just because one vendor knows they’re going to lose.

So we have a short time window to go through a pretty intellectual process and a pretty disciplined process so that we can produce north of 30% in accretive savings.

No, I mean, that’s absolutely critical. And if you think about it, especially for banks where they’ve got shareholders in publicly traded situations, they’ve got commitments they’ve made to the Street or others, they’ve got to hit those numbers.

Those contracts are a significant part of that accretive savings that you’re talking about.

So if you’re thinking about an M&A and you aren’t spending the time on the contract side of things, you’re missing probably half the opportunity when it comes to an M&A.

Let us know in the comments what you’re seeing, and we’ll talk to you next time.