Transformational mergers have become a pivotal aspect in the landscape of bank mergers and acquisitions, offering opportunities to reshape institutions significantly different from their pre-transaction counterparts. However, such mergers come with high stakes, especially in the context of new regulatory frameworks elevating scrutiny and due diligence requirements.
The pace of whole-bank mergers and acquisitions in the United States has witnessed a notable decline since 2019. This trend began during the pandemic and continues today, fueled in part by amplified calls for reform in the regulatory processes governing bank mergers. The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Department of Justice Antitrust Division have recently revised their approaches to reviewing these transactions. The updated guidelines now encompass a broader scope for evaluating mergers, putting emphasis on factors such as qualitative competition, managerial resources, and the potential impact on communities.
Regulatory improvements are driving a more deliberate approach among banks when selecting merger targets. The environment is making it more challenging for traditionally aggressive “serial acquirers” to sustain their acquisition cadence, with the expectation now that a bank may manage only one merger annually. This stance is part of a broader emphasis on compliance and internal controls, as recent enforcement actions against banks, particularly those in fintech partnerships, suggest.
The transformation of merger dynamics is broadening interest in deals between similarly sized banks, especially in this regulatory climate. The appeal for bigger institutions to acquire smaller banks through “tuck-in” acquisitions is getting overshadowed by more substantial undertakings that promise newfound geographic presence, business diversification, and varied income streams. In contrast, smaller banks, crunched by demands for scale and succession planning, may find mutual alliances with peer institutions an enticing approach to achieve economies of scale and prepare for future liquidity events, including the possibility of being acquired by a larger entity or pursuing a public offering.
Larger institutions should prioritize detailed due diligence to authenticate perceived benefits and ensure the transaction narrative stands up to investor and regulatory examination. Moreover, banks must proactively manage the impact of any merger that pushes the surviving entity past critical asset thresholds, given the corresponding increase in regulatory expectations.
Transparency with regulatory authorities remains an essential facet of merger transactions. Ensuring that any supervisory issues are resolved prior to signing agreements is imperative, as is maintaining open dialogue with regulators beforehand. While a number of transformational bank mergers have been announced this year, the sector anticipates how regulators will respond under the new guidelines. Given the extended timeline it currently takes to finalize such mergers, patience is required as the industry awaits public announcements of regulatory approvals.
The full analysis by Will Hooper of Alston & Bird is available at Bloomberg Law.