In today’s economic climate, mergers and consolidations of financial institutions are fairly common. Anyone who has been involved in one knows it is a time of opportunity and critical decisions. So many considerations go into such transactions, most of which legal teams oversee. There are benefits of working with companies offering proprietary benchmarks and experience that goes well beyond the scope of work offered by traditional advisors – bringing an innovative and proven approach that mitigates expenses and maximizes revenue.
When banks or credit unions go through mergers and acquisitions they often have conflicting vendor contracts, many with time constraints or financial penalties. The easy solution is for the acquiring institution to force the consolidated organization out of their existing vendor contracts. But this doesn’t always make the most financial sense, often involving penalties and a potential lapse in customer access to certain programs.
How can you minimize liability and even increase your institution’s buying power during this transition? An objective advisor, like SRM, can play a vital role in contract outcomes. We can research and present options before you acquire or merge. Negotiating after the fact is harder, and you might get stuck with what you purchased, so you need to have all of the information before signing that dotted line.
There are certain ‘red flags’ to be aware of with vendor contracts when going into a consolidation:
- What kind of auto-renew language is built into contracts?
- Could you be missing an opportunity to maximize your now larger buying power by not looking at the big picture of your vendor relationships? If the bank or credit union you are acquiring has a variety of vendors for internet banking, core processing, and credit and debit card operations, and you don’t take all of those vendors into consideration, you may not be leveraging all of the opportunities available to you in the combined organization.
- Did you do all of your negotiating before the deal closed? This sounds like a no brainer but there are cases of acquired banks and credit unions cancelling all of their vendor agreements before the acquisition date. Who pays all of those termination fees? The acquiring organization may not have to realize these liabilities.
- When you’re negotiating your own vendor contract agreements, are you taking into account future acquisitions? You could be missing out on volume-based pricing scenarios or cases where you could benefit from bringing in other relationships under an agreement.
- Are you taking the terminations language under consideration? You could have room for negotiations and the organization you’re acquiring could have better cancelation language than you do.
It is also important to consider cultural fit from the vendor side. Do you need in-house or vendor-provided service for your new organization? Are the service level needs from contracts post-merger the same as pre-merger?
Are there emotional attachments to long-term vendor relationships that are getting in the way of prudent financial decisions? An outside consultant like SRM can be objective and still sensitive to cultural needs of both institutions.
There is never a more critical time to be flexible and knowledgeable regarding options than during an acquisition or merger. It is a time when both the tone of a vendor relationship and all of the contractual options should be leveraged to your potential benefit. An outside expert who can ‘see the forest through the trees’ and has experience across many vendors and financial institutions is prudent in guiding the best decisions in the midst of change based opportunity.