US banks could have a difficult time doing their due diligence on mergers if they have to turn over more of their analyses to the government, which would be required under a recently proposed regulation.
Shortly after the Federal Deposit Insurance Corp. put out a Statement of Policy on M&A, it also put out a revised application form to go along with it. The proposed changes to the form would require applicants to submit all the analyses, surveys and reports prepared for officers, directors or supervisory deal team leads related to competition, market share, sales growth, and potential product or geographic expansions or exits related to the proposed acquisition.
Such a requirement would prolong the regulatory approval process even more and create a domino effect on the due diligence process as M&A consultants would start to limit what they write in reports, knowing their analyses would be given to regulators, and cause banks to limit the reports they seek, deal advisers said.
"In the banking space, it is unusual to be required to share that type of sensitive information with regulators as a standard part of an application for approval," Michael Lewis, partner at Sidley Austin LLP advising on regulatory compliance and more, wrote in an email. "The language is extremely broad and could potentially encompass a wide range of internal market analyses."
Banks are worried that turning over such analyses could jeopardize their deals by exposing certain details like how the merger would fix a problem at the bank or plans to end a service or product or exit a market, said Matthew Bisanz, a partner in Mayer Brown's financial services regulatory and enforcement practice.
Moreover, having to turn in even more application materials will extend the merger review process at a time when lengthy reviews are becoming the norm.
"I doubt there is any way it could shorten processing times," Lewis wrote in an email. "It might add time in two ways: It will take more effort for an applicant to be sure it has provided all responsive materials, and it will add to the volume of information that the regulators need to review while processing the application."
Advisers are also concerned about the prospect of banks being required to give all their analyses to the FDIC. Under such a change, investment bankers will think more carefully about their analyses and what they include in the reports because the thought that it will go to regulators will be front of mind.
"Advisers like investment bankers and accountants will be reluctant to provide as candid a view if they know the bank must turn it over to the government right away," Bisanz said in an interview.
If the reports end up being less thorough or candid, banks could view them as less helpful in the due diligence process and stop getting them all together.
"People will be less inclined to get those kinds of reports as a result of that, and if they get those reports, they will try to get them done in a way that minimizes the reports themselves [from] creating an issue that regulators are going to be concerned about," James Stevens, partner and co-leader of Troutman Pepper Hamilton Sanders LLP's Financial Services Industry Group, said in an interview.