REQUIRED READING: Considering Merger And Acquisition Strategies In Today’s Rocky Market

The mortgage industry is on a roller coaster right now and there are more twists and turns on the ride in the near term. In today's market, mergers and acquisitions are a critical component to many firms' success and survival. The pace is heightened and not likely to cool off for several years, so the big question is when to get on or off the ride.

In any market with high volatility, it is important to step back and plan ahead. Those companies and managers that take proactive actions will be positioned to maximize their opportunities and focus on execution. It is always tough to predict whether it is the exact time to buy or sell, so it is probably better not to try and time the market perfectly.

An alternative and much more realistic approach is to develop a strategic acquisition or sale strategy that opportunistically takes advantage of buy-side deals or positions a firm for sale. This will focus efforts on maximizing price and mitigating risk.

The first step in establishing a proactive plan to maximize asset value is to assess the value of the existing company, its capabilities and weaknesses. Every company that is going to weather the storm needs to have a high level strategic plan and a clear view of its existing asset value.

For public companies, this is certainly a matter of normal business course. The vast majority of mortgage firms and vendors are privately held, and principals should seriously consider taking proactive steps to build, manage and maintain the value of their firm through strategic planning.

The strength of products, services and liquidity are the three factors that will provide backbone to weather volatility. For companies lacking in any of these areas, a merger with another firm or opportunistically acquiring assets to fill gaps is now a realistic course of action.

Preparing to buy

Preparation for a buyer can be more intensive than the sell-side if done correctly. The objectives of the firm should be clearly identified. A few common factors may include geographic footprint, product, client base, level of recurring revenue, maximum revenue concentrations, risk level and minimum/maximum investment levels. Probably the most important item is to spend enough time to really understand the level of synergy (product, customer, market, etc.) so that you don't make a costly mistake.

The buy-side process should be carefully managed as a project with specific milestone activities leading up to the development of a targeted list of potential acquisitions. By targeting a small set of firms that meet the defined company criteria, this will help improve the likelihood of success in a fast-moving marketplace.

The targeted list should be ranked using the criteria agreed upon initially to determine the factors that make a good acquisition. A word of caution is often necessary here, as soft factors (i.e., management and personality fit) must be balanced with the hard factors (financials and performance metrics). Not balancing is probably the single biggest error that can be avoided.

The formal buy-side analysis phase often shortens the deal and diligence stages given a laser focus on the right assets. Acquisitions are now a realistic strategy for both large and small companies in the mortgage sector. Valuations on both mortgage lending operations and related vendors have declined over the last 12 months, and there is a fair amount of capital in the marketplace still available to fund solid deals.

Selling a company

While valuations have declined for firms virtually across the board in both public and private markets, the reality is that many companies will be faced with a decision to sell in coming months.

The sell-side strategy will vary for each company based on the particular financial situation, asset base, revenue volatility and prospects for growth. In virtually all cases, it makes sense to start the process by accurately defining realistic expectations as to the economic value of the company.

The economic value of a company should be weighed along with the current market trades/valuation of similar companies (public and private). Using a combination of pure economic valuation and market views, a benchmark for the company value is established.

The company valuation benchmark serves several purposes, including setting investor expectations and also establishing a performance metric for the management team/investment bankers to market the company.

In turbulent times, it is important to provide a realistic view of the company while maintaining a clear vision of future performance and growth.

Whether one is the buyer or seller, the key is planning and patience. The most successful firms allocate the time and resources to actively evaluate markets and execute transactions. Often, there are third-party intermediaries that can play a vital role in managing all aspects of the transaction process. In a market that is evolving on a daily basis, there may be great bargains as well as tremendous opportunities to lose your shirt.

Both buy-side and sell-side winners will emerge in this marketplace. The common thread is that the winners proactively seek opportunities, balance risk and demand validation of all aspects of the transaction.

Jordan Brown is CEO of MarketWise Advisors LLC, a Ponte Vedra Beach, Fla.-based- investment banking and consulting advisory focused on the mortgage industry. He can be reached at (800) 815-9484.


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