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Mergers and Acquisitions: Catch the Wave

M&A tends to heat up when profits decline, such as 2022.

Rob Chrisman
Rob Chrisman
A surfer viewed from below, underwater, with fish around.

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.

Cultural fit between a buyer and seller is paramount in any deal. What difference do great numbers and geographic fit make if the two groups don’t mesh and half the originators quit? Even if the owners get along, other members of the senior management team should be able to cooperate and have similar values, as should employees. Buyers will want a “no shop” provision for 30-60 days written in to the deal to avoid the seller continuing to look around.

As the deal proceeds, what will the employees be told? Information is important, especially as recruiters will swoop in. Transparency is critical in measured doses. Public announcements are becoming fewer, as those are generally viewed as doing nothing other than promoting the advisors behind the deal and may even have a negative impact on the two lenders or vendors involved in the merger or acquisition.

Buyers and sellers may talk on and off for years, and when a deal is initially agreed to the two parties may agree that “The timing was just right.” But it is not easy arriving at that point. Determining a value is very complicated. Perhaps it is a premium over book value, or an earnings multiple such as 3x or 4x of proforma earnings, not 2020 and 2021, which are unrepresentative, comparable sales, discounted cash flow, and the “build versus buy” discussion are common and all important.

As we head toward the holidays of 2022 and start thinking about 2023, few believe that the residential lending environment will improve. Owners and managers must constantly consider their business models and strategies, and what is best for the long term for the company and its employees. Acquiring, merging, or being acquired are certainly strategies that can be very beneficial if mapped out and executed well. 

This article was originally published in the Mortgage Banker Magazine October 2022 issue.
Rob Chrisman
Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 35 years ago. He is on the board of directors of Inheritance Funding Corporation, of Doorway Home Loans, of AXIS Appraisal Management, and of the California MBA. He is also a member of the Secure Settlements Advisory Board, an associate of the STRATMOR Group, and of the Mortgage Bankers Association of the Carolinas and its membership committee.

Published on
Oct 18, 2022
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