What are ALM First Analytics’ Merger Valuations?
Merging entities can be a daunting process on multiple fronts, especially knowing that properly combining balance sheets is critical to future success. You must assess the viability of a merger and decide whether such a strategy is congruent with company goals and culture. Moreover, the required documentation can cause additional questions and confusion.
ALM First Analytics serves as your trusted partner, streamlining a complex process and providing strategic insights. Ease the way to merger and acquisition decisions with our premier team of valuation experts, who will deliver a complete, turnkey merger valuation solution that meets ASC 805 requirements.
Utilize ALM First Analytics’ Expertise
ALM First Analytics prides itself in its independent, holistic advice, having performed over 100 merger and acquisition transactions. Our core philosophy revolves around assessing the greater need of your balance sheet, and as a trusted partner, we help our clients manage risk, enabling them to grow and scale.
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Comprehensive Merger Valuation
The Comprehensive Merger Valuation solution is highly detailed and analyzes each loan at the loan level. The components of the Comprehensive Merger Valuation service, required under ASC 805, performed by ALM First Analytics include:
- The entity value, which determines the acquisition value of the Target institution, and becomes the new equity of the Target concurrent with the closing of the merger
- Fair valuation of the financial assets (investments and loans) and financial liabilities (deposits and borrowings) of the Target’s balance sheet
- The fair valuation of the intangible assets, typically the core deposit intangible (CDI) and mortgage servicing rights (MSRs)
- A determination of the resulting goodwill (or negative goodwill) based on the foregoing valuations as well as any adjustments determined by third parties for fixed assets and repossessed assets, and other non-financial assets and liabilities
MacroView Merger Valuation
ALM First Analytics’ MacroView Valuation service has been designed for those instances where the Comprehensive Merger Valuation product is not required due to immateriality or for circumstances where the parties must have an understanding of the fair value estimates consistent with ASC 805 prior to executing a merger. Our MacroView Valuation provides critical insights into the acquirer’s management and board of directors without the detailed loan level analysis that is required for accounting purposes.
Highlights of the service include:
- Detailed information ideal for discovery and planning purposes
- Broad, high-level view of an institution’s worth
- Loans pooled by type to determine value
- The impact to capital
- Fair valuation of the intangible assets
Goodwill Impairment Testing
The Goodwill Impairment Testing Service is designed to test for impairment after the merger is completed. This level of service entails a two-step test that is used to identify potential goodwill impairment.
The first step compares the entity value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test in unnecessary.
The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
The Fairness Opinion Service is designed to provide a fair value range of an institution in order to determine if a change-of-control transaction is fair from a financial perspective. In comprehensively examining the deal economics, ALM First Analytics will perform the following analyses with intellectual rigor: comparable company, precedent transaction, discount cash flows, control premium, and accretion/dilution analysis where applicable.
ALM First Analytics issues fairness opinions for affiliate and insider transactions, related-party transactions, synergistic mergers, business combinations involving competing offers, and down-round financings.
What components comprise a merger valuation?
A multitude of key measurements are necessary for a sound merger analysis:
- Fair valuation of financial assets, including investments and loans
- Fair valuation of financial liabilities, including deposits and borrowings
- Fair valuation of non-financial assets and liabilities, such as land and buildings
- Fair valuation of intangible assets, including core deposit intangible and mortgage servicing rights
- Fair market value of capital (the entity valuation)
- Determination of goodwill or negative goodwill
- Goodwill Impairment Testing
- Fairness Opinions
Does an institution need both a MacroView Merger Valuation and Comprehensive Merger Valuation?
The MacroView Merger valuation can be used for discovery and planning purposes or as the initial step to securing regulatory approval to merge. In some instances, the Comprehensive Merger Valuation product is not required due to immateriality.
The Comprehensive Merger valuation solution is highly detailed and analyzes each loan at the individual level, providing items required under ASC 805. Many institutions choose to do an initial MacroView Merger in order to gain regulatory approval prior to merging and then complete the Comprehensive Merger valuation at the time of the merger. The ALM First merger valuation team can help institutions determine what type of merger is right for them.
Does ALM First Analytics perform valuations for institutions that are not financial depositories?
ALM First is experienced with CUSO valuations and has performed several valuations on CUSOs over the last five years which consisted of insurance brokerages, FinTech, mortgage banking, and financial consulting.
How is capital valued?
ALM First utilizes a combination of discounted cash flow analyses (i.e., income-based approach) and comparable transactions (i.e., market-based approach).
The Discounted Cash Flow (DCF) analysis determines the value of the target assuming that the subject merger is not completed and that the target implements a stand-alone business plan for the commonly accepted five-year period and then enters into a control transaction at the end of the fifth year. The method calculates the target’s expected earnings stream over a 5-year time horizon and then discounts those earnings back to the present value at a particular discount rate.
ALM First reviews comparable transactions and evaluates pricing ratios (e.g., price-to-earnings, price-to-book, price-to-tangible book) and financial information for recent acquisitions of similar size, similar financial strength, and similar geographic areas. Qualitative adjustments are normally made to the pricing ratios to account for the key differences between the target and the companies included among the comparables group.
The ultimate valuation estimates derived under each method are reconciled and the fair market value of capital is determined.
What is Goodwill?
Goodwill represents the difference between the entity’s fair value less the fair value of the identifiable tangible and intangible assets (i.e., the plug between assets and liabilities).
Goodwill is positive when the fair value of liabilities is greater than the fair value of assets received; positive goodwill represents the premium that an institution pays above the value of individual assets and liabilities. Positive goodwill must be tested for impairment on an annual basis or amortized on a straight-line basis. Goodwill is not impaired when the fair value of a reporting unit exceeds its carrying amount.
What happens with negative Goodwill?
Over the last five years, roughly 80% of merger valuations performed by ALM First have resulted in bargain purchases. (A bargain purchase occurs when the fair value of assets is greater than the fair value of liabilities received.) Negative goodwill flows immediately to net income for a gain and no future impairment is required. Special rules do apply when calculating regulatory net worth.
Does ALM First Analytics have experience in performing valuations on distressed loans, specifically Purchase Credit Impaired (PCI) assets?
During the recent downturn in the economy, many institutions acquired loan portfolios with deteriorated credit quality, and FAS ASC 310-30 accounting thus became more widespread. ALM First has performed valuations on several different distressed loan types. For example, ALM First recently valued several acquisitions where the target had a significant exposure to taxi medallions. ALM First can assist an acquirer with several options on how to unload taxi medallions loans.
What questions should we consider before undertaking a merger?
ALM First has a document of questions useful for institutions to consider ahead of time. A few example questions include:
- How will your institution integrate different work cultures?
- Are you willing to offer higher deposit rates to the target depositors if their current rates are higher than your current rates?
- Are you willing to give any board seats to the target?
ALM First would be happy to talk through additional considerations and potential opportunities. Contact us today to arrange a call.
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Contact us today to discuss the advantages of our merger valuations.
All investing is subject to risk, including the possible loss of the money you invest.
“ALM First” is a brand name for a financial services business conducted by ALM First Group, LLC (“ALM First”) through its wholly owned subsidiaries: ALM First Financial Advisors, LLC (“ALM First Financial Advisors”); ALM First Advisors, LLC (“ALM First Advisors”); and ALM First Analytics, LLC (“ALM First Analytics”). Investment advisory services are offered through ALM First Financial Advisors, an SEC registered investment adviser with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training. Moreover, ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors’ Brochure. You are encouraged to read these documents carefully. Balance sheet advisory services are offered through ALM First Advisors. Financial reporting services, loan introduction services, and other special project services are offered through ALM First Analytics. Neither ALM First nor any of its subsidiaries provide legal, tax, or accounting advice. This firm is not a CPA Firm.
INVESTMENT PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, ALM FIRST OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.