In today’s complex regulatory and business environment, many community banks are considering either growing through acquisition or selling to a larger institution. As an alternative to these transactions, we are seeing an increase in community banks considering strategic mergers with similarly sized banks that would otherwise be competitors. These “mergers of equals” or “strategic mergers” are attractive because they allow two institutions to combine resources and gain market share, with the goal of creating a larger, stronger organization that is still locally owned and managed. If the right partner can be identified and an agreement reached on postconsummation strategy and operations, the combined institution can be better positioned to maximize longterm value for the shareholders of each bank.

Transaction Structure -

In a merger of equals, one of the entities involved will need to be the “survivor” of the merger for legal, regulatory and accounting purposes. Generally, mergers of equals are stock transactions in which the surviving holding company issues shares to the shareholders of the non-survivor in exchange for their current shares. The ownership split in the surviving entity will typically be based upon the value that each party brings to the pro forma business. In addition to the issuance of stock by the surviving entity, the parties may specify amounts of cash for use by one or both parties to pay special dividends to shareholders prior to closing or for shareholder redemptions. With survivor stock as a large percentage of the merger consideration, desirable IRS tax-free reorganization treatment can be achieved for mergers of equals. Tax-free reorganizations include no corporate-level tax at the survivor or target level, and the shareholders exchanging their shares for stock are able to defer any taxable gains until a future disposition of their shares.

Originally Published in BankNews - August 2014.