Like most vendors that serve banks, the entire team at PrecisionLender keeps a close and wary eye on the industry’s merger and acquisition activity. Though deal volume has leveled off a bit from the pace of late 2015, it still seems like nearly every week one of our clients or prospects is impacted by a merger, as either the buyer or the seller. Our client base tends to be progressive and growth oriented, so we land on the side of the acquirer more often than the acquired and spend a fair amount of time talking through the pluses and minuses of acquisitions.
Those discussions cover the usual litany of reasons for doing a deal. An acquisition can add scale, it can add fresh new talent, and it can help you gain a foothold in a new market, be it geographic or a new line of business. What’s really interesting to us, though, doesn’t show up on that typical list. An acquisition also offers a unique opportunity to reevaluate your bank’s entire pricing strategy.
When you acquire a bank, somewhere on your very long to-do list is the rollout of your current pricing process. For most banks, that means you have a sophisticated pricing tool and set of related workflows that need to be introduced to a brand new group of relationship managers (RMs). The fascinating result of this is that the rollout is NEVER a neutral event. Instead, it falls into one of two ends of the spectrum of possible reactions.
The Mutiny
At one extreme (the one dreaded by the acquirer), you rollout your pricing system to the new RMs, and you have an instantaneous uprising. They claim the pricing levels, or the tools, or the approval process simply will not work in their markets. You expected an easy training session, and instead are facing a mini-revolt. What does this mean, and more importantly, what can you do about it?
Possibility No. 1: The New RMs Are Right
They’re just saying what your current team was either afraid to say or got tired of saying. There are still far too many banks that wield their pricing tool like a sledge hammer, bludgeoning RMs with it to try to improve profitability. A pricing tool should never be a simple calculator that only measures the profitability of a deal as negotiated by the RM. When set up that way, the ONLY way it can provide value is by shaming an RM about a deal they’ve already made. In other words, the pricing tool’s only function is to keep lenders from doing something dumb.
Modern pricing tools don’t earn their keep by calculating results. That’s the easy part, and frankly, can be handled by a spreadsheet. Heck, we share the math for free if this is what you’re really looking to do.
Instead, pricing tools should be used to shape and win deals while those deals are still malleable. The tool must start at the conversation between the RM and the borrower; if it can’t facilitate that negotiation, then all of the fancy math and pretty reports are wasted money and effort.
Possibility No. 2: Your Price Targets Are All Wrong
In this case, you are getting pretty clear evidence that your targets are not realistic for the new market, especially if the grumbling is accompanied by a drop in volume. Targets should be set very close to local market rates, which means an across the board target for all of your products and all of your markets is simply not feasible. Do your homework, run a few tests, and find out where deals are actually being won and lost in any given market. Then, you can adjust to be slightly above or below that market level depending on the bank’s appetite for that particular type of deal.
FYI: We covered why targets are so important (and superior to using hurdle rates) in this recent post.
The Deafening Silence
Of course, your rollout has another possible outcome as well, and this one at first seems like the ideal outcome. You rollout your system to the new RMs, bracing for some inevitable backlash, and then … crickets. It is 100% smooth sailing, with no complaints or obvious problems. All clear, right? Not so fast. There are two potential issues here as well.
Possibility No. 1: The New Folks Aren’t Really Using the Tools
Sure, they may be going through the motions, but are they really pricing deals as you intended?
At many banks, pricing is viewed as completely market-driven, with RMs having no choice but to match competitor rates if they want to win deals. But the pricing tool and its targets shouldn’t be treated as hard and fast rules, but rather – to quote Captain Barbarossa from Pirates of the Caribbean – “more what you’d call ‘guidelines’.”
If the bank you’ve acquired is pricing based on the market, your new RMs are price takers, and are treating your most profitable asset class (commercial loans) as a commodity product. If you want accretive earnings from this acquisition, this is a culture issue that needs to be addressed head on. It may seem like a non-issue since there is no complaining, but it must be viewed for what it really is: a passive-aggressive thumbing of the nose to your hard earned pricing culture and process.
The solution is to make sure your training is more than just the usual “click here and enter numbers there” style of software training. Your new RMs need to be sold on the value of pricing and the tool you use. Then, you need to approach it as negotiation training. Show them how pricing can be used offensively instead of just as defense against unfair competition. The right kind of pricing “weaponizes the math” and allows your RMs to be smart, creative, and flexible with their borrowers, building structures that fit the specific needs of a borrower while still meeting the bank’s targets. This is valuable to RMs, but they’ll need proof and consistent reminders to break old habits.
Possibility No. 2: You’ve Made Things Too Easy
The other possible cause of this eerie silence is target related. Your targets may just be too low. You won’t find many RMs who will raise their hands and say that winning deals is too easy with the prices they are quoting.
There is a fantastic lesson to be learned here from poker, best summed up by Matt Damon’s character in Rounders, Mike McDermott. “If you can’t spot the sucker in your first half hour at the table, then you are the sucker.
The same is true in lending. If you aren’t losing some deals to crazy competitors, then maybe you’re the crazy competitor. Every market has one, and sometimes it’s hard to know if it might be you. There is no shame in losing some deals on price, and we suggest those losses be tracked meticulously. How many deals did you lose, who won them, and what were the terms they offered? Then you can get real, actionable, and detailed market feedback that is substantially more valuable than “average market data.”
We even have clients that set thresholds for how many deals are lost on pricing; if they don’t see one deal lost for every five won (for example), then they raise targets until they hit that ratio. This ensures that:
- Their RMs are truthful about lost deals and help track them.
- They are not leaving money on the table by unnecessarily undercutting market rates.
The Value of a Reality Check
Acquisitions are inevitably tricky. You have a whole lot of things that can blow up, and there is generally a lot of political capital at stake from the management team and the board. They are high stress and high stakes, so the inclination is to breeze right by things like pricing processes.
But, this is a rare and golden opportunity to get outside of the echo chamber of your own bank and do a reality check on your pricing strategies. Make sure you take full advantage; the bump to performance will spill over from the acquired bank to the existing asset base, and will give you a much needed cushion for all the other hurdles you will have to clear.
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