Banks, credit unions, independent mortgage banks, brokers, vendors, and others in the residential lending business wonder if they will be around in 3-6 months. Has the company managed to cut costs as quickly as revenue and volume has dropped? How much capital might a company “burn through” before things “turn around,” whenever that is? Should we look at merging, acquiring, or being purchased?
M&A tends to heat up when profits decline, such as 2022. During the last few years we saw “IPO mania” as the owners of, and investors in, of those companies “took chips off the table” through public offerings. In 2022 that has changed, and few lenders or vendors are talking about issuing stock. Most lenders hope to break even in 2022, and the number of investors who desire to put capital to work in residential lending has declined. Some have moved from being mortgage bankers to brokering, thereby eliminating underwriters, secondary marketing, and other positions.
M&A talk has only increased this year. Potential buyers are viewing the market shift in terms of adding geographic scope to their originations. “We’re not licensed in Texas, but if we buy this company…” They are thinking in terms of adding market expertise. “Hey, that lender has a well-respected reverse mortgage group.” How long will the seller stay involved? How financially stressed is the seller? Economies of scale, talent acquisition, strategic opportunities, and growing in a down market are often cited as reasons.
Potential sellers are asking, “We have limited capital; how much do we want to use up surviving?” “What value do we bring to a potential buyer?” “What are the long-term prospects of our company in this environment?” “Is my life going to be better?” “What about my employees?” “What is my time of life?” Retirement, preservation of capital, and demands for additional technology are often cited as reasons to sell, and often potential sellers will do their best well advance of any future deals to add production staff to increase value.
The thinking of deal structuring has shifted from IPOs toward “asset sales” as a method of transferring ownership, with the buyer purchasing the entire company. Of course, partial acquisitions also work, with the buyer eventually owning 51% of a company, or some type of modified joint venture arrangement. Stock in the seller can be purchased, companies can be merged. What liabilities are being assumed? If it is treated as an asset purchase, does that include people? Agency approvals? Licensing is important.
