Competition is strong among financial institutions engaged in M&A activity, which creates risk for companies looking to make a deal.
“There are both banks and non-banks looking to provide financing,” says Richard C. Hampson, state president and head of commercial banking at Citizens Bank, Michigan. “A common mistake we see is to put too much leverage on a company in a frothy environment. While the funding is available, it's not always the smartest thing to do. You start having trouble, you can’t service the debt and you put your company’s future at risk.”
Hampson heads up commercial banking for Citizens Bank in Michigan, helping middle-market and upper-middle-market companies craft the best strategies to meet their financial goals. Dealmaking is a big part of the process.
“If we work with you as a company and provide the right solutions with that thinking in mind of creating shareholder value, we're going to help you create more overall value in your company,” Hampson says.
We spoke with Hampson about why it’s important for dealmakers to get to know their bank and other observations from his work in this active M&A environment.
Inform your decision
The increased role of non-bank lenders, institutional funds and collateralized loan obligations has provided more options when it comes to financing transactions. Just like knowing what your business can afford in the way of debt financing is important, it’s also critical to understand what you’re getting from your lender.
“Another common mistake is to simply seek the lowest rate rather than look at a financial institution for its overall capabilities,” Hampson says. “While rate is important, you could argue that the relationship and capability of the lender should be the No. 1 priority.”
It’s always a good idea to maintain regular dialogue with multiple representatives from the lender, including the senior leadership team.
“The most important piece I've seen to successful transactions is having as many people from senior leadership at the bank know the leadership of the company,” Hampson says. “Over time, a company is going to grow. The need for capital and the asks are going to get bigger. The more engagement there is between the lender and the company, the better. It makes the process of providing financing solutions that much easier when both sides know each other well.”
This relationship becomes even more vital if there is an economic downturn or an underperforming period for the company.
“The bank’s senior managers can say, ‘Hey, we know them, we trust them and we’ll be there to support them,’” Hampson says. “If the relationship isn’t as strong, it might be a different conversation because that deeper level of trust hasn’t been built.”
Think outside the box
Active dialogue can also enable you to proactively maximize the value of a transaction.
“There are clearly companies in different spaces around the country that are consolidating, growing and buying competitors,” Hampson says. “They know their industry, as you would expect with any good company. But they also know a lot about their competitors. They know what they do well and not so well. They know what they would change when they acquire a particular competitor and how they would improve the business.”
Hampson worked with a client that sought to make improvements and changes in an acquisition target before the deal was done.
“They’re inside making improvements and changes to that company so that when it folds in, it's going to be performing even better than it was,” Hampson says. “Presumably it’s going to have some of the culture they already have in their own company. The obvious risk is if they don't consummate the transaction, now they’ve improved a competitor.”
While this strategy isn’t for everyone, it can provide great results if trust has been developed between the two sides.
“Typically when you make an acquisition, you acquire that company and you find out some things that you didn’t know,” Hampson says. “Now you're already inside and so you know some of the nuances of that acquisition and it can make for a very good transaction.”