While M&A activity has been abnormally cool during 2023, recent deals foretell another wave of consolidation on the horizon. Banks struggling with margin pressures and the rising costs of regulation and technology will look to scale efficiencies via mergers to help restore vitality to their financial performance. In this pursuit of operating efficiencies, effective contract negotiation is a powerful tool that can ensure banks receive scale benefits from their major vendor contracts.
Think about the operational integration between two banks as a race against time. The banks want the organization and systems to come together as soon as possible so that a unified brand, delivery system, and back office can unlock true cost-saves. However, to arrive at this milestone, the bank’s future technical stack must be decided quickly, gaps identified, and new contracts negotiated. Importantly, every new or modified contract needs to ensure that:
This can be a daunting challenge when CIOs, CFOs and legal counsels are engaged in closing the deal and running a busy and changing organization. A special team whose interests are in perfect alignment with achieving the future bank’s accretive value cost synergies must be mobilized to manage the overall tech stack decisions and a significant portfolio of vendor contracts from both banks. Note: If members assigned to this special team are vying for spots on the org chart of the future, their personal agenda will trump everything else; this is not aligned with the merger outcomes/goals.
This contract mobilization team should employ the following best practices:
Know where to get the volumes and aggregate them for vendors to bid on. Management needs to come together and identify the respective people at each financial institution who will be able to gather this information. Vendor contracts are likely the highest noninterest expense after employee comp/benefits. Mergers need to be executed swiftly, and the ability to quickly organize these volumes is critical in these deals.
Merging tech is all about the need for speed. There are a lot of moving parts and all are happening at 100 mph. Vendors also know if a bank’s negotiation time compresses unnecessarily, it loses leverage. The aim is to have all critical technology contracts negotiated within 100 days from start to finish.
Executives anxious to set the future tech direction often make the mistake of signing statements of work for the conversion as well as letters of intent with vendors, basically nullifying a strong portion of relationship negotiating leverage. Sure, sales professionals who get sent into merger situations are smart enough to use the urgency of the merger to compel executives to execute agreements quickly. Be careful and don’t be cajoled into an agreement that leaves money on the table.
There is no ROI on a long-term contract if an institution’s growth plans revolve around M&A. While a vendor may need to be given a somewhat extended term in a merger, the new term still needs to be reasonable in length. The annual price increases in long-term contracts can be highly dilutive to the value of the contract savings over time as well as harm a bank’s ability to do more deals down the road. A 10-year term extension is long; a 5-year term extension is normal.
Negotiate with the earn-back period in mind. Accretive value savings targets are real, and the merger will be publicly judged on post-merger run-rate NIE synergies.
An outside consultant can assist you in a variety of capacities prior to, up to, and post-legal day one including contract negotiations, technology assessments, technology roadmaps and merger integration/conversion services.
In a bank M&A transaction, management has a responsibility to quickly report to shareholders and the street the accretive value of a deal. The savings generated from vendor contracts are one of the largest areas to generate immediate, medium and long-term value/savings in an M&A event. Executing a disciplined 60-day playbook around major contracts can prove to be one of the most accretive moves smart bank professionals can make.