The Five Wonders of Merger Contract Negotiations

In the operational race against time that defines a merger integration, these best practices will help the mobilization team manage the tech stack and vendor contract decisions.

While M&A activity has been abnormally cool during 2023, recent deals foretell another wave of consolidation on the horizon. Banks struggling with margin pressures and the rising costs of regulation and technology will look to scale efficiencies via mergers to help restore vitality to their financial performance. In this pursuit of operating efficiencies, effective contract negotiation is a powerful tool that can ensure banks receive scale benefits from their major vendor contracts. 

Think about the operational integration between two banks as a race against time. The banks want the organization and systems to come together as soon as possible so that a unified brand, delivery system, and back office can unlock true cost-saves. However, to arrive at this milestone, the bank’s future technical stack must be decided quickly, gaps identified, and new contracts negotiated. Importantly, every new or modified contract needs to ensure that:

• The combined bank negotiates highly competitive pricing that rewards the entity for its greater scale
• Any product or functionality gaps in the surviving systems are identified with new commitments from the vendor to address those gaps
• Any clear integration and operating risks are identified with commitments from vendors to provide deliverables and resources to minimize those risks

This can be a daunting challenge when CIOs, CFOs and legal counsels are engaged in closing the deal and running a busy and changing organization. A special team whose interests are in perfect alignment with achieving the future bank’s accretive value cost synergies must be mobilized to manage the overall tech stack decisions and a significant portfolio of vendor contracts from both banks. Note: If members assigned to this special team are vying for spots on the org chart of the future, their personal agenda will trump everything else; this is not aligned with the merger outcomes/goals. 

#1: Quickly assess and understand the combined volumes of the two banks

Know where to get the volumes and aggregate them for vendors to bid on. Management needs to come together and identify the respective people at each financial institution who will be able to gather this information. Vendor contracts are likely the highest noninterest expense after employee comp/benefits. Mergers need to be executed swiftly, and the ability to quickly organize these volumes is critical in these deals.

#2: Don’t let the vendor delay the negotiations

Merging tech is all about the need for speed. There are a lot of moving parts and all are happening at 100 mph. Vendors also know if a bank’s negotiation time compresses unnecessarily, it loses leverage. The aim is to have all critical technology contracts negotiated within 100 days from start to finish.

#3: Refuse to sign agreements with the vendor until the whole relationship has been negotiated

Executives anxious to set the future tech direction often make the mistake of signing statements of work for the conversion as well as letters of intent with vendors, basically nullifying a strong portion of relationship negotiating leverage. Sure, sales professionals who get sent into merger situations are smart enough to use the urgency of the merger to compel executives to execute agreements quickly. Be careful and don’t be cajoled into an agreement that leaves money on the table.

#4: Align the negotiations with announced merger accretive value savings targets

There is no ROI on a long-term contract if an institution’s growth plans revolve around M&A. While a vendor may need to be given a somewhat extended term in a merger, the new term still needs to be reasonable in length. The annual price increases in long-term contracts can be highly dilutive to the value of the contract savings over time as well as harm a bank’s ability to do more deals down the road. A 10-year term extension is long; a 5-year term extension is normal.

Negotiate with the earn-back period in mind. Accretive value savings targets are real, and the merger will be publicly judged on post-merger run-rate NIE synergies.

#5: Leverage specialized experts to increase the speed and accuracy of contract merger accretion

An outside consultant can assist you in a variety of capacities before, up to, and post-legal day one including contract negotiations, technology assessments, technology roadmaps, and merger integration/conversion services.

Follow the Money

In a bank M&A transaction, management has a responsibility to quickly report to shareholders and the street the accretive value of a deal. The savings generated from vendor contracts are among the largest areas to generate immediate, medium, and long-term value/savings in an M&A event. Executing a disciplined 60-day playbook around major contracts can prove to be one of the most accretive moves smart bank professionals can make.

“Vendor contract negotiations were the #1 largest contributor to achieving announced synergies.” -Chief Procurement Officer of a ~$60B Merger of Equals Cornerstone Contract Negotiation Client