Question

As per Harvard Business Review Articles, The Big Idea: The New M&A Playbook and M&A: The One Thing You Need to Get Right, - “M&A is a mug’s game: Typically 70% - 90% of acquisitions are abysmal failures”. You have been tasked by the Board of Directors of Commerce Bank (Regional Bank located in NJ, NY, PA) to explore expansion opportunities in Florida via an acquisition. Commerce’s mission is to be America’s Most Convenient Bank. The CEO of Commerce has already found a target Bank in Florida, about ½ the size of Commerce, as a candidate for acquisition and wants to proceed.

The Board is asking you to lead the Due Diligence Team to answer the following questions knowing that 70% to 90% of acquisitions do not meet their intended goals.

What are we acquiring?

Will this acquisition boost current performance?

Will this acquisition lower or increase costs?

What is the right price to pay?

How would you avoid integration mistakes?

What other qualitative and quantitative information would you need to make your recommendation?

How would you present this information to the Board?

Answer 1

We are acquiring half sized bank directly in competition in Florida segment with sizeable market capitalization.

Acquisition will lead to cost synergies and redundant units and branches will get shut, overalap of manpower and reosurces will get minimised and additional capital expenditure will bring in humongous profits base and customer market share.

Acquisition will add huge one time acquisition cost but will bring break-even in profits within 2 years of completion of merger.

The right price to pay is the discounted value of current market capitalization plus premium to make offer attractive and lucrative enough for bargain.

Integrated mistakes can be avoided using strong compliance to corporate governance standards such that merger doesn't breach or violate rules of Anti Trust and FBI and other regulatory agencies.

Other Qualitative information like integrity of management amd their employee skills and size, while quantitative information like financial ratios, profits loss consolidation balance sheets, non performance assets, bad loans and writeoffs, previous shareholders and pattern of investors.

Such information need to be encapsulated into presentation form and memo as well as an audited report done by auditors with strong due diligence and risk management frameworks.

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