On the Money: Bank mergers can be perilous

Financial institution mergers and acquisitions without Federal Deposit Insurance Commission (FDIC) assistance are expected to become widely prevalent as more troubled lending institutions weigh the option of selling in the current environment rather than facing an extended recovery period or even the threat of FDIC receivership.

Banks that acquire troubled institutions can expect to experience financial surprises after the deal is done – surprises that were not apparent, or even missed, during the deal-making process. Whether by design, malicious intent or lax oversight, how can these banks manage exposure to this risk in a manner that may provide recourse, if necessary?

After a transaction takes place, a savvy purchaser conducts proactive risk management in order to uncover surprises such as concealed losses, asset impairment from recording transactions improperly or regulatory compliance issues. These purchasers do have recourse for post-M&A transaction problems – provided they take the appropriate steps to protect themselves at the sale closing. If engaged on the front end, certified computer forensic experts can collect the necessary information from the institution being acquired, including all financial data involving suspect transactions, potentially incriminating e-mails and supporting files and documents. This information can be preserved for analysis by experts if and when it is needed for a fraud investigation.

In one recent case, the acquirer conducted its due diligence and believed it had identified all possible significant and material objectionable or improper transactions. However, post-acquisition, management discovered numerous questionable transactions and errors in judgment that appeared to be suspicious. If, during the course of the due diligence, the buyer had captured information in a forensic manner and retained it, the buyer and its legal counsel would have had evidence that could be used to quickly expedite the matter without incurring substantial litigation costs. E-mails, Excel worksheets and financials would have been available for review and could have expedited answers to critical questions. This information could have exposed who knew what about the problem, when it was known and what steps were taken to cover it up – thereby reducing legal expenses considerably.

Mike Stoetzel is a partner at Wauwatosa-based Clifton Gunderson LLP’s Middleton office.

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