The song Should I Stay or Should I Go was originally recorded by the rock group “The Clash” in 1981. The song has since been covered by well over 50 artists from The Ukulele Orchestra of Great Britain to Ice Cube. No matter who’s playing this song, whenever I hear it, I’m reminded of the senior management, investors groups and boards of directors with whom I’ve spoken over the years. They always have a recurring question: “Should I Stay or Should I Go?” Well, in banker-speak, this translates to “Should I Sell or Should I Not?”
Knowing when to buy is easy, because everyone knows when something is a bargain. Knowing when to sell is a lot harder, especially when we have just endured a 5.5% rate increase by the Federal Reserve and the havoc that created related to the mark to market on securities and the impact on deposit costs and loan yields. Of course, the decision of selling has never been an easy one, as it affects families, friends, employees, the community, and usually involves millions of dollars. For all these reasons, the question is a good one to ask now, because as the sun rises and sets, so also do rates rise and ultimately fall (sooner or later).
Notwithstanding the rate situation, strictly from a financial standpoint, you should sell anytime an offer is made that is greater than the present value of future cash flows. That sounds easy enough, but in real life, things are rarely so cut and dried. There are always more variables to consider, many of which are intangible without a cost/income association.
What might those be? Here are some of the most common intangible issues to consider when determining when to sell:
Management and Board of Directors – Management, depth of management and involvement of the Board is key to any well-run organization, especially a highly regulated financial institution. When the owners, management and/or the Board are aging, the organization lacks a clear succession plan, the institution is unable to provide liquidity to older shareholders or is unable to attract new management and board members – these would be major reasons for an organization to consider selling.
Employees – Banking is a relationship business. If a financial institution is unable to attract the necessary, qualified personnel to operate the organization in a consistent and customer-friendly way, ownership should factor this into their decision.
Regulations – The current regulatory environment continues to place an increased burden of operational costs and manpower on financial institutions. Unfortunately, it doesn’t seem like things will be lightening up anytime soon. The ability to comply with the growing number of regulations impacts profitability as well as customer service, creating a need to hire highly specialized personnel in all risk management areas. Addressing these growing regulations places a tremendous burden on executive management and boards. Many organizations have grown weary of continuing to adjust to increasing risk management requirements, and if they think they’ll be unable to meet all the regulatory requirements, will consider selling.
Economy – The health of a financial institution’s loan portfolio and other assets has a direct correlation to the economy in which it operates and generates business. A downturn in the economy can happen on national, regional or local levels due to nationwide factors such as inflation, pandemic or wars, or on the local level from shutdowns of major employers or governmental operations. In times of higher uncertainty, the desire to enter into a deal may fade into the background, but as feelings of greater clarity or economic prospects improve, organizations who have been on the fence about selling may decide the time is ripe.
Market Area – A market area’s viability and growth prospects contribute to the decision making. Higher premiums are usually generated by well-run financial institutions located in metropolitan areas.
Technology – Technological changes have spurred financial innovations which have altered bank products, services and production processes. Each change comes with a substantial investment on the part of the organization, and with these changes happening constantly, banks have had a hard time keeping up with the new technologies, let alone the investment required to implement those technologies! An inability to make the necessary investments in technology required to meet customer demands and expectations can impact the decision to sell or not.
M&A Environment – Many factors play into the level of M&A activity and anticipated pricing: the economy, valuations of publicly traded stocks, regulations, GAAP and regulatory accounting and capital requirements… However, it should be noted that intangible reasons, such as a need for low-cost deposits, branch footprint, special/new product lines, etc., can also affect pricing and impact the consideration of a sale.
Potential Buyers – The asset size and geographic location of an organization may increase, or limit, the number of viable acquirors. An evaluation of potential buyers should be performed as part of the process in determining whether or not to sell an organization.
Personal Investment Objectives – When considering a sale – the desire to diversify a large investment, the need for liquidity or for estate planning purposes – these types of elements also factor into the decision-making process. Usually, bank investments comprise a large portion of an investor’s net worth and, therefore, these concerns come into play.
Although the tangible, financial outcome may seem cut-and-dried when considering whether “you should stay or you should go”, the reality is that many more intangible variables impact the decision. For an organization’s Board of Directors or large stockholders to make a fully informed decision and determine the best course of action for all involved, the intangibles should be given due consideration. Each situation is unique and will be viewed differently from each stakeholder of the organization. Even if the Fed lowers rates quickly – which we doubt – the decision to sell is never easy. The “indecision may be bugging you”, but we hope we have given you some solid points to consider during the decision-making process.
