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September 30, 2005

A Thought For The Weekend: Why Bank Acquisitions Fail To Meet Growth Expectations

Great and provocative article by Jim McCormick and Gordon Goetzmann of First Manhattan on why bank acquisitions frequently founder on the rocks of poor organic growth.

New FMCG analysis shows that a key reason many bank acquisitions fall short of expectations is that buyers do not uncover organic revenue growth problems at the seller. Consequently, while agreeing to a deal price, the acquirer’s management does not fully appreciate that they are implicitly signing up for a heroic turnaround of an underperforming institution.

More after the jump:

They make the great but frequently-overlooked point that banks for sale are much more likely to be having organic growth problems already, and may be dressing the balance sheet. If as a buyer you are also having trouble growing organically (and why else pay a big premium for another institution?), you have a recipe for an underperforming combination.

If, as a potential buyer, your retail organic revenue growth has been consistently strong and has been underpinned by distinctive customer value, you have higher odds of success in the M&A game. However, even for such banks, it is important to think twice if your target is in a region where it faces particularly strong competition.
Conversely, if your performance and that of the target are sub par, and management has a “must-win-this-deal” mentality, then a plan for how the target will be managed so as to be competitive in the market becomes paramount.

(via BankStocks)

Posted by The Banker at September 30, 2005 06:31 PM

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