This paper is based on a regional bank acquisition case study. As an assessment piece, it was required of students to get into groups to analyse the case and present their opinion regarding a decision made by the President and CEO of MAB Bank shares, Inc. to acquire Southern Federal Bank of Bridgeton in 1997. MAB is so determined to take over Southern Federal Bank with the aim to capitalise on it given an opportunity to marginalize. Being a bank holding company with two banks in South Georgia, MAB’s CEO as well as its directors has a goal to make the company expand in its operation by maximizing its returns in investment on good markets rather than seeing it stagnant so that it be acquired or merged by some other companies. However, upon a group analysis on the case, we agreed that the CEO should go ahead in recommending to the board to purchase Southern Federal bank. But before justifying our suggestion, we have realized that the final board meeting to decide the investment will be interesting since there is no actual value to the proposed investment. This also appears to be the main problem associated with the acquisition besides all other factors to be considered. The CEO has to come up with valid and convincing points in order to win the favour of all the directors. The CEO would also consider the best alternatives to finance the investment based on a price tag. Thereby, our opinion to go for the acquisition is justified based on five substantial points with substantive discussions based on the case.
1. The reasons for acquiring the Southern Federal bank
The main reasons as to why we recommend Mr Pafford’s decision is based on the board of director’s interest. All the directors seem to have an open mind with strong ambitions that their company must continue to remain in business operations as an independent banking institution. And in order to do so, the management must ensure that MAB be strong and competitive. With the growing trend of other banks expanding their operation in the region by taking over smaller and less competitive banks, there is this need to acquire Southern Federal bank and the market share it holds before the other institutions marginalize on the opportunity available. And the decision to acquire the southern Federal would not only increase the market share of MAB to make it strong and competitive but, would also generate more income and reduce MAB’s operational costs through its expended marketing network. It would further cover market gaps before a rival competitor does. Upon these reasons, the acquisition is a necessity if MAB wants to serve its shareholders’ interests to remain in business.
2. The Problems to be captured in the decision making process.
Entry into new market- Upon the acquisition of the Southern Federal Bank, MAB as according to the article is going to enter a new market that is 90 miles to the West of Azalea where its current market is located. This would place MAB in a situation where it will take time to develop and establish customer relationship of which can be termed as a potential risk to hinder growth and development. But the entry to the new market can be taken as an advantage only when creative and innovative strategies are formulated to counter the problem. This requires the development of proactive marketing strategies and so, it is a manageable risk. The marketing management unit have this challenge ahead. With the best possible strategies constructed and outlined, they can establish certain market segment targets in the initial years of operation and ensure that it is achievable and if not, everything or a very significant portion of the investment is not going to be lost. It is always worth taking a manageable risk in every investment decision and it is not an exception in this case. The decision will also be a long term investment decision for the business that will depend on a good customer base. Thereby it is worth making some loss if it means too in order to gain a base customer. Like the famous saying said by John C. Maxwell, “If you want something better, give up something good.”
Products- The proposed acquisition will add on new products to MAB’s business specialisation which would create a conflict of interest with the acquired customers as many would consider drifting to competitors. * (MAB V SFB) This issue should be marginalised by including Southern Federals business expertise and products as MAB’s own rather than excluding them. The result would be to increase or maintain the existing customer relations that would intent be an advantage in the new market. Also, by strategizing to maintain the customers, MAB would have the chance to offer its other products to the market via the existing customer relations. Furthermore, the inclusion of Southern Federal bank’s product into MAB would give MAB’s existing customers a new range of products to choose on as well.
Demography- unlike MAB’s operational area where Downes and Baker countries having an ever expanding population growth rate, Southern Federal’s Carter and Harvey has a projected growth rate that is expected to be stagnant in the next five years. While this may appear as a potential threat to the investment, a creative alternative should be developed to counter-attack the problem. And this is for MAB to disregard the projected population growth and concentrate on the existing population in the next five years while waiting for the demographic change since it is about to enter a new market. If MAB can manage to grab hold of a significant portion of the existing population as its customers within the five years, MAB will be in a better position to capitalize in investment when the population changes in the projected time since its services would not considered an option since its marketing network and brand would be very much established. This is a long term investment decision making and success is not to be expected within the very early years of the decision rather to be analysed for the long run of the business.
Organizational culture- The existing organizational culture of MAB is more opposite to Southern Federal’s. Having product differentiation, their cultures are also different as according to the view of some board members. Savings banks are termed as “unduly conservative or have a thrift mentality”. This implies that they are more polite in dealing with competitors and customers whereas MAB as a commercial bank is completely different. They have a more proactive culture to deal with customers and competitors. However, organizational cultures are created systematically with human knowledge and they are bound to change so that it suites an organizational interest. In MAB’s situation, the option would be to take a slow approach before fully implementing MAB’s culture into the acquired bank. This is to avoid customers being chased away due to the new styles. This is a management concern and therefore it is an easily manageable factor.
Organizational restructure- This is a very essential aspect to be considered by the management. There is this possibility that most employees of Southern Federal bank who are also permanent residents of the towns will have to be redundant. This would give a bad impression to the community regarding MAB’s image which, would further have negative impacts on its future operations especially in related to customer relations and employment management issues. To contend this, the management have to consider keeping the workers by re-employing them in the holding company as well as in the new banking branches with certain cost cutting measures like remuneration restructuring. This is just another manageable constrain as the deal cannot be hindered. To achieve this, it requires experienced leadership in such a newly establish business operation. This is a perfect match for the trade, experiences and expertise of someone like Mr Will Watson who is the new President of Madison Avenue bank.
Valuation- Southern Federal bank being a thrift institution with closed stock, it is impossible to establish an exact value for the entity. There by, based on the available data of Southern Federal bank, analysts come up with various estimated values for the Southern Federal bank. This was done through the three valuation models deliberated by the CEO. When using the asset method, it was established by the analysts that after valuing Southern Federal bank’s net asset, the value would fall within the price range of $14,776,000 to $17,514,000 based on the expected deposit intangible range 3%-6% as attracted by its net value. When using the income approach, various levels of cost savings were assumed to derive the price ranges. At the cost saving range of 0-35 %, the value range was $10-18 billion. Excluding the market approach, there is already a price range in place for the management to consider establishing a bid price. On the other hand, MAB also needs to have a value to portray its capacity in acquisition.
3. Deciding a specific price for Southern Federal bank
Based on the two price range outlined in the valuation process, a specific estimated price has to be presented to the board. This must be an amount not exceeding the highest amount in the range or falling below it. And this price will also be a one to create goodwill by giving both parties a fair deal. It should be within the financing capacity of MAB while it is slightly above the tangible asset value which is $13,062,000 of Southern federal. While this amount will not always be accurate, it has to be defined and justified somehow. And based on the price range, we have decided to recommend the median prices of all the valuation method to the board for consideration. Firstly, with the use of the asset method, we have decided to suggest the mean value which is about $16,145,000. Taking the highest value which is 17,154,000 to add with the lowest which is 14, 776,000, we divide the total by two to arrive at the average as stated. This is because when making the actual negotiation on the deal, the aim of MAB is to secure a price within the estimated range giving goodwill. When taking the mean of the income approach using the same formula, it was about $14,000,000 which seem to be a figure that will not allow goodwill to prevail since it is just slightly above the net asset value. The market approach cannot be used since either of the company does trade stock while the method outlines a list of stock for comparison. And so, since $14,776,000 seems to be insignificant for the deal, we would suggest $16,145,000 as our recommended value for Southern Federal bank.
4. Financing method
Considering the estimated price range, MAB does not have the full financial capacity in cash to acquire Southern Federal as per its income statement. This poses the need to decide the means to raise the funds. There are couple of way in which MAB could use to raise its funds. They are either by stock-for-stock, cash for stock or debt for stock exchange. While reviewing all of the methods, it is certain that each method of financing pose corns and pons. It is therefore important to study each method carefully before choosing the means to financing. The method is to be decided by the full board depending on the analysis presented. And so, it is established that a stock-for-stock is the simplest means to raise funds with a minimal risk and burden. But ownership will easily be sold out publicly exposing the entity. Stock for cash is neither the simplest nor the toughest means to raise funds.
5. Means to account for the financing
According to the CEO, he knew two ways to account for the acquisition and there are as pooling-of-interest and purchase methods.