M&A Momentum

Late last year, some experts predicted a “wave of consolidation” among banks in 2024. And on Monday, we got news that felt like a tsunami: Capital One is set to buy Discover Financial for $35 billion, creating a consumer lending giant. 

Things do appear to be picking up on the M&A front. According to S&P Global Market Intelligence, there were 10 U.S. bank deals totaling approximately $854.6 million in January, signaling a possible uptick from 2023’s decade-plus low of 98 deals for the entire year. 

With that in mind, we thought it wise to revisit an RMA Journal story that offers words of advice for banks considering M&A: Richard Parsons’ “Mull Before You Merge” from 2020. 

Banks often undervalue two risk types during the merger process, Parsons argues. While traditional risk management in banking acquisitions focuses on expense cuts, asset quality, and operational excellence, two other factors—synergy risk and business disruption risk—often get overlooked, even though they can significantly impact the success and long-term viability of the merged entity. 

• Synergy risk refers to the potential loss of synergies and efficiencies expected from a merger or acquisition. It arises when the combined entity fails to realize anticipated cost savings, revenue enhancements, or operational efficiencies. 
• Business disruption risk stems from the upheaval and disorganization caused by the integration of two entities. It encompasses challenges related to cultural differences, technology integration, customer retention, and employee morale. 

Parsons suggests that CROs and bank leadership consider expanding their risk focus to include synergy risk and business disruption risk during mergers. This involves understanding and analyzing the potential impact on customer/client revenue, as well as assessing the timing and extent of expense cuts to avoid unintended consequences on top-line growth. Additionally, CROs can play a direct role in evaluating the price/valuation of acquired banks to ensure that overpaying for acquisitions is avoided, particularly in cases of relatively large acquisitions.