A Merger Of Equals Can Be A Helpful Bank Merger Structure Under The Right Circumstances

11.28.18

Speakers on the subject sometimes state that a true merger of equals (“MOE”) does not exist in banking because there is always a buyer and a seller. In my view, while that statement may generally be true, it is not always true and MOEs do exist in banking and they can be a helpful bank merger structure under the right circumstances. We have been involved in three true MOEs between Wisconsin banking organizations, and the MOE structure in each transaction was important and beneficial to each of the banks. In fact, in one of the transactions, the holding company of one of the banks was the surviving holding company and the subsidiary bank of the other holding company was the surviving bank so that each party had a surviving entity following the transaction. In each of these MOE transactions, I doubt that the transaction would have been completed if the parties did not structure it as a true MOE. So why should we care about a MOE? Because, under the right circumstances, which admittedly do not occur very often, a MOE can be beneficial to both parties and permit a transaction to go forward where neither party sees itself as the seller. 

So what is a MOE? It is not a particular or specific kind of merger structure, but instead it is a judgmental interpretation of a fairly standard bank merger transaction. It is a transaction in which the parties agree to participate as equals to expand their collective size, profitability, capital and territory, and each feels like an equal to the other in the transaction. A MOE can involve surviving entities on both sides of the transaction and often involves shared management of the surviving entities from each party to the transaction. A MOE transaction typically is a stock for stock transaction based on present valuations and does not involve the payment of a premium by the surviving bank holding company to the other party in the transaction or the payment of cash by the surviving bank holding company for the stock of the other party. Those present values are usually determined by a third party. This aspect of a MOE where a premium is not paid may invoke concerns about the fiduciary duties of directors to the shareholders to maximize the ​“price” in a merger transaction and the inquiry may be made by shareholders as to why they did not receive a premium in the transaction. The response to that question may require thorough prior analysis by the parties and their advisors, and a third party fairness opinion may be important. 

The parties in a true MOE typically do not think of each other as a buyer or seller but as mutual parties to a transaction which is equally beneficial to each. A true MOE has the effect of increasing the size of the combined organization owned jointly by all of the shareholders of both parties with all of the benefits additional size brings to the parties in the current banking environment. In two of the MOEs we have been involved in, the name of the combined entity was modified to reflect the participation of both banks. The same is true with respect to the directors and management of the combined entities, and the boards were combined and senior management came from both banks. I am confident that the bankers involved in those MOEs will tell you those transactions worked well for them. 

Clearly, a MOE is not for everyone and is admittedly an uncommon transaction. A MOE is a complicated transaction and it does require extensive patience and accommodation from both banks. The unusual social factors in a true MOE are incredibly important. They include selecting the surviving bank charter and bank holding company in the transaction, selecting a name for the combined bank which reflects the names of both banks, and selecting the directors and management from both entities. A MOE can also raise certain fiduciary duty issues to be addressed by the parties. In some cases it may simply be better and more efficient for the parties to act in their capacities as buyers or sellers and to maximize the value for the selling shareholders. 

Nevertheless, under the right circumstances, a MOE may be structured and accomplished to satisfy the interests of both banks. If you or your board wish to consider such a transaction, I suggest that you discuss the transaction in detail with your advisors before making a commitment to engage in a MOE. 

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