17 Sep MOEs
UNCONVENTIONAL M&A What Makes MOEs Unique—and How to Avoid Their Pitfalls
By Kamal Mustafa, Invictus Group Chairman (and former investment banker)
MOEs are not like typical acquisitions and cannot be approached in the same manner. They:
- Comprise a very small fraction of transactions.
- Have a high failure rate due to social/valuation/process issues.
- When consummated, practically always rank as the most successful transactions within the industry.
Social issues with senior management are typically the biggest reason why most MOEs fail. The CEO approach, industry reputation and interactions are crucial factors that can make and break a deal.
In any deal, directors and shareholders are extremely important. The directors and shareholders of both banks need to be made comfortable regarding the economics of the deal, the impact of dilution and the post-transaction value appreciation of shareholder equity. Obviously, the respective board reports will differ in detail and focus.
Transaction Approach and Due Diligence:
From inception to completion, an MOE cannot be approached like a typical acquisition. Each step has the potential to subvert a successful MOE, negating the substantial benefits of such a transaction.
The CEO. The initial CEO level contacts in a typical acquisition tend to focus on critical points of concern regarding the value proposition, transaction structuring and interpersonal issues. But in an MOE, the entire focus is to start with mutual acceptance of both institutions, focusing on the transaction’s significant operating and financial benefits. Properly managed MOEs and their financial and operating benefits can take on a life of their own, creating opportunities for each bank to make the right adjustments at appropriate times without jeopardizing the transaction.
If the initial independent evaluation of an MOE transaction is positive, the CEO of each bank becomes the primary salesperson of the transaction value to all parties in both institutions. Establishment of the potential value goes a long way in putting potential conflicts in context. Such conflicts could otherwise derail the transaction if addressed too early.
Initial Senior Management Interactions: Normally senior management, including financial and operating executives, are focused on a due diligence process geared to identifying and qualifying potential problems. In the MOE initial stages, they must follow the CEO’s lead and start collaborative discussions with their counterparts. These discussions should positively communicate the potential of the post-merger strategic plan. Once the MOE is in process, these collaborative discussions create the necessary goodwill that would support the MOE.
Here again, once the MOE is in full swing and senior management of both sides are collaborating, due diligence decisions will be viewed in the context of the total benefits of the transaction. In most successful MOEs, the due diligence process works in both directions. The leadership and message of each CEO is essential for this to work properly and successfully.
There are many benefits to an MOE. Some of these benefits are obvious, while others that are equally important are not recognized at the early stages of analysis:
- No acquisition premiums are involved.
- Unlike acquisitions, capital remains available for strategic actions post-transaction that would greatly increase shareholder value and facilitate integration. This value should never be underestimated.
Secondary benefits include:
- Minimum disruption of operations and collaborative efforts to maximize synergy.
- Greater focus of management resources and capital on a combined strategic plan rather than a traditional acquisition where integration becomes the default strategic plan.
Quite apart from the pricing benefits of the MOE, it is the CEOs’ vision of how the two companies would move forward, further increasing shareholder value, that must be communicated to both institutions early on during the process.
Bank management must understand the CEOs’ strategy and recognize that it is initially their responsibility to share the excitement in that vision with their counterparts. This cooperative process will also allow for a better and friendly evaluation of critical personnel and their potential role in the future of the MOE. Their objective must be to establish a collaborative environment where the job security and compensation benefits of the bank’s strategic plan are effectively communicated to the counterparties. This bottom-up goodwill goes a long way toward a winning MOE.