Interview with Linwood "Wood" P. Britton, III, Managing Director of The Orr Group, LLC
November 13, 2012
Wood Britton is a Managing Director of The Orr Group, LLC. His professional experience includes a combination of finance, marketing and technology. During his 10-year investment banking experience, he has been involved in numerous bank acquisitions on both the buy-side and sell-side.
Q: A recent KPMG survey that was published by American Banker said that ½ of all community bankers expect to be in a deal (either as buyer or seller) within the next two years. Do you think that is true? Why or why not?
A: I don't doubt the responses but that would end up with ½ of the number of community banks being acquired over a 2 year period if half thought they would sell and half thought they would buy. Of course if they all thought they would be acquirers then there would be no deals so it is hard to tell from the statement. I think the overriding sentiment is that bankers think the industry will start consolidating at a more rapid pace like we had seen prior to the recession.
Q: What do you believe is the main driver of this consolidation or M&A activity? Will it be other community banks, expanding regional banks, or private equity groups?
A: One of the main drivers of future consolidation will be the same driver that we have seen in the past. There is an over capacity of banking institutions in the U.S. Acquisitions have been feasible because of the efficiencies that can be gained by consolidating backroom operations and in some cases branch elimination. The other driver which has come about due to increased regulation is that the cost burden is much greater for smaller banks, which in turn makes it very challenging for a community bank to generate the type of ROE that we have seen in the past.
Q: There seem to be a lot of "sellers" out there (more sellers than buyers), so why do you think that there are so few deals? What are the buyers looking for?
A: The industry is over the credit hump to a large degree. However, I think buyers are still cautious when it comes to the target's portfolios. Sellers are also trying to come to grips with merger pricing parameters, which can be very sobering in many instances. Last, since some banks are over the hump, they may no longer be an active seller; instead they have decided to continue to fight it out and stay independent.
Q: If a board is considering selling the bank, what should it do? Is there anything that it can do to make itself stand out?
A: The board should hire an experienced investment banking firm to access the market conditions and the current operations of the bank in order to give the board a solid lay of the land. The board should have as much information in hand as possible before they decide if and when to go to market.
Q: What makes a deal fall apart after it has been announced by the boards?
A: Deals rarely fall apart nowadays since not only the LOI but also the merger agreement has been negotiated prior to an announcement being made. If they do, and it is not a regulatory issue, then it usually is that there has been some "material adverse change" to the target such as its financial condition worsening or its stock price falling.
Q: Is the community bank a dinosaur? Is the business model now that one has to be over a billion or so to survive?
A: When we started our business 17 years ago, everyone was saying that the magic number was $1 billion in assets. I think we have found over time that the magic number is different for different banks. There is a lot that goes into running a high performing bank and size is usually not the one deciding factor. We believe there will always be a place for community banks but it will be harder and harder for them to find the right niche, right market and right management team to provide the type of returns that we think investors will desire. It is hard to say what that right combination or niche is but it will probably need to include a strong and reliable deposit base.
Q: What did I not ask that one needs to know about M&A in the financial industry right now or investment banking?
A: Overall, we are seeing a lot of discussions in the marketplace and think that activity will continue to pick up. At this point of the cycle, we do not have banks that are four to five years old that have experienced rapid growth looking to cash out big. I think what we have are bankers and boards that have for the most part done a good job of weathering a horrible storm and have to make a decision if they want to keep fighting the headwinds of regulation and a slow growth economy or to go ahead and marry up with someone else.
About The Orr Group, LLC
The Orr Group is a leading independent investment banking firm that specializes in mergers & acquisitions, financing and strategic advisory services and has closed transactions valued at more than $4 billion. The firm was founded seventeen years ago on the experience and guiding principles of L. Glenn Orr, Jr., Chairman of Orr Holdings. Mr. Orr is the former Chairman and CEO of Southern National Corporation, an $8 billion bank holding company located in North Carolina, and he completed the 1995 merger of equals between Southern National Corporation and BB&T. The transaction was named by SNL Securities as one of the top ten bank mergers of the 1990's.