So how does this play into vendor management? Consider this Reader’s Digest condensed “real-life” example:
Neighborhood Bank is pursuing acquisition of Corner Bank. Following a review by representatives from both banks’ I.T. and Operations departments of all of Corner Bank’s third party agreements, the merger is approved and the integration begins. Before long, Neighborhood Bank’s CFO gets that dreaded call: “We have a problem. We just learned from Corner Bank’s vendor that someone at the bank signed a seven-year agreement right before the merger became final. The buyout is $___ million.” Before even getting started, Neighborhood Bank kisses its first and/or second quarter profits goodbye. The bank’s board of directors is a bit troubled by this, and all of a sudden the CFO’s priorities shift to a new focus on vendor management.
We have seen this happen countless times with various price tags attached. Many CEOs have heard the stories, and they’ve prepared themselves for the possibility of this phenomenon with a typical knee-jerk reaction of cautioning staff to enter into very short agreements. We would like to recommend a more detailed direction that includes some best practices on both sides of the “acquisition fence.”
As an acquirer starts to look at an acquisition opportunity, it will be calculating the earnings potential of the consolidated bank. To do this, it needs a birds-eye view of ongoing revenue from the combined institutions, the ongoing expenses, and the one-time expenses associated with the integration. The acquiring bank can look to its existing vendors to determine what its ongoing expenses will be, but it needs to look at the target bank’s contracts to know what the one-time expenses associated with setting aside those agreements will be.
With some careful consideration and the adoption of a number of tried-and-true best practices, an acquiring bank can minimize the likelihood of show-stopper contract surprises. Our recommendations follow:
As the due diligence team goes through the process of deciding what systems and services the combined institution will use, they will have at their fingertips the potential ongoing and one-time costs associated with the target bank. Decision making will be improved and surprises will be minimized.
The Target Bank
A note of caution: a bank’s long-term third party agreements can make it unattractive to potential suitors. Banks that may be in play for an acquisition should have an organized plan for managing these vendor agreements. Our recommendations:
These tips and techniques were presented with the intent of helping management teams understand the different activities that take place during a potential or realized merger opportunity. Our goal is to help banks get all of the systems and third party agreements integrated without fanfare so they can concentrate on the really hard part of the integration – i.e., the people side.
Whether inventorying your infrastructure, assessing your current vendor relationships or looking to choose a new data processing system provider, you can count on Cornerstone Advisors’ unmatched vendor experience to guide you in making educated technology decisions.
From systems evaluation to vendor selection to contract negotiation to conversion oversight, Cornerstone has done it all – and we’ve done it many, many times.
And we take it very, very seriously.
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