The Goose with the Golden Egg: Retaining the Value of an Acquired Equipment Finance Company
by Rita E. Garwood Mar/Apr 2022
Equipment finance companies are a prime target for acquisition. How can buyers retain the value of these businesses after closing a deal? Monitor checks in with industry insiders who share candid feedback on how to make an M&A deal successful for everyone involved.
When mergers or acquisitions are on the table, many companies tend to focus on the financial side, paying particular attention to growth rates, returns and market expansion. Although cultural fit is also always listed as a top priority, sometimes what seems like an alignment of values on the surface may look wildly different when it comes to how teams operate each day.
Monitor checked in with several people in the equipment finance industry who have observed the shifts that inevitably happen during a merger or acquisition. Due to the sensitive nature of this topic and our desire to elicit thoughtful and honest responses, the people we interviewed will remain anonymous. The content of this article is a summary of the interviews we conducted and does not reflect the knowledge or opinions of the author.
Business or Product?
Respondents were quick to note that the equipment finance industry is distinct and separate from the banking industry, even if they appear similar on the surface. Potential buyers must recognize they are acquiring a business and a platform with unique market and customer experience capabilities their company likely doesn’t possess.
“Don’t buy a business when you really want a product,” a respondent says. “If you want a product, then start it up yourself, put the technology in place, hire people and create the product line. But don’t buy a business and then diminish its value by turning it into a mere product.”
If you decide that a business is really what you want, it’s imperative to truly understand what you are buying. Although companies may have conversations about culture that may sound similar, they often take incredibly different approaches in terms of execution. A buyer needs to become intimately familiar with how the equipment finance company it is acquiring manages to accomplish everything it does. Without this knowledge, a common scenario often unfolds: A company with a fantastic growth rate and returns is acquired and everything seems to stall post-acquisition.
“I often think of it as killing the goose that laid the golden egg,” a respondent says. “You make an acquisition because you like what you see, and then you proceed to immediately change everything and still expect that you’re going to get the same results — that generally doesn’t happen.”
To avoid this outcome, acquirers must engage in active observation and listening since the due diligence process alone will not reveal everything they need to know. They must immerse themselves in the business and fully understand how it operates before creating integration plans.
Embrace the Equipment Finance Industry
Culture should be about behaviors and principles, not processes. An independent being acquired must recognize that its behaviors and principles must shift to blend in. But the acquiring company must understand that the way things get done may be different in the equipment finance business than what is standard for banks.
“The rush shouldn’t be to make it be the bank way,” a respondent says. “Instead, banks should ask, ‘How do we maintain oversight and regulation around the equipment finance business while allowing it to operate in its unique commercial equipment finance way that respects industry alignment?’”
Having alignment with the industry is crucial. The culture of the equipment finance and leasing industry is incredibly strong — its members often compare the industry to a family. Potential buyers must be mindful of the strength of equipment finance industry culture and be willing to maintain the acquired company’s prominence, participation and relationships in the industry throughout the change.
To accomplish this, the acquired company must maintain a recognized leadership team. In many M&A scenarios, the goal of streamlining operations and controlling costs leads acquiring companies to dismantle the leadership structure of a recently acquired equipment finance business, impacting industry participation and prominence — a move that does not win respect from the equipment finance industry.
Without systemic leadership, the acquired business is often divided up into silos, leading to decisions that are made in the best interest of specific business functions instead of the whole equipment finance business.
“The acquiring company must respect that the equipment finance platform that they’re acquiring is a complex ecosystem in which each of the traditional silos within that platform have to work in perfect harmony to achieve its best profitability,” a respondent says. “Each functional area traditionally found in a bank cannot be optimized within their own silo, or it will be to the detriment of the platform that was acquired.”
The risk framework and mitigants of the equipment finance business can be incredibly different than traditional banking in several respects. One respondent noted, in equipment finance, risk is controlled by ‘multi-layer underwriting,’ which focuses on market segments, vendors, assets and end users. Acquiring companies that may not be familiar with this process may place too much emphasis in one area of underwriting while minimizing emphasis in other areas, which can skew the underwriting and cause ongoing problems.
“Before making an investment or an acquisition, ensure that you have a deep understanding of the business, how it operates, how it manages risks, how it motivates employees and how its process flows because finding out things after the fact is never good,” a respondent says.
To Consolidate or Not to Consolidate…
After signing on the dotted line — and before creating integration plans — buyers must understand precisely what has enabled the equipment leasing company to be successful. How does it go to market? What does it do exceptionally well that has enabled its success? During integration, it will be vital to preserve those qualities. The acquiring company must vet every decision by asking, “Will this decision maintain or improve a strategic posture? Or will it diminish or deteriorate that posture?”
“Too often, the M&A team knows strategically why they’re buying the platform, but then the M&A team moves on to the next deal,” a respondent says. “The functional leaders in the acquiring institution don’t know or understand the strategic value of the acquisition and go after that functional consolidation and integration for efficiency within their functional area.”
Looking across the industry, it’s easy to recognize where the culture and industry prominence of acquired equipment finance platforms have been maintained. The teams of the acquired companies became part of the culture of the bank while the original equipment finance platform and relationships were left intact.
On the flip side, immediate consolidation and integration makes perfect sense in certain areas of the business, such as cybersecurity and infrastructure. But while making plans to consolidate IT and digital components, it is vital to focus on customer experience.
“You can’t consolidate for efficiency at the expense of customer experience, especially if the leasing company that you’re acquiring was already delivering an extraordinary customer experience,” a respondent says. “Be thoughtful about consolidation so you’re taking the best of both worlds and improving the customer experience for the acquired customer base.”
If the acquired company has gone through a digital transformation that has given it agility in creating new product capabilities, it is essential to retain those valuable capabilities. Trying to force an agile digital company into a bureaucratic IT structure will inevitably damage the acquired company.
Implementing the Integration
Once an integration plan has been established, it should be carried out quickly. If an integration drags on, employees, vendors and partners will notice the acquired company’s shift to the internal focus that is inevitable during integrations.
“You must have a pretty rapid assessment of the integration effort and execution that allows your team to get back to their focus on the customer and everything that has enabled them to be successful,” a respondent says. “Multiyear integration plans can undermine that.”
It’s also vital for leadership to be transparent and realistic about integration plans. While communicating with an acquired team, leadership often touts the positives of the transaction and insists that the transition will be easy.
“If an employee hears, ‘It’s not going to affect us’ or ‘We’re still going to be independent,’ they will quickly become frustrated at the first signs of change,” a respondent says.
The team members of an acquired company must remember they’ve joined a new family, which means embracing and adopting the behaviors and traditions of that institution while trying to preserve the market-differentiating capabilities they bring by serving the equipment finance marketplace.
“On the leasing company side, expectations going in have to be reasonable,” a respondent says. “There will be change. You are a part of a bank now, and if you spend most of your time fighting battles over things that must happen in a bank, you’re going to be in for a bad time. The sooner you accept reality and work to find reasonable ways to integrate it into the business, the easier your life will be.”
When employees hear their company is being acquired, they may lose the sense of security they had in their position and start looking for a new role. To ensure talent is retained, leadership must respect the value of the business they’re acquiring and be communicative about their beliefs and hopes for the business.
Employees want acquiring leadership to understand the value of the business, and they want to hear what that business will bring to the acquiring company. Effective leadership must communicate this with enthusiasm and a positive outlook for the future.
To demonstrate the value of the business, leadership should pinpoint specific things an equipment finance company does well and ask the team to partner with colleagues in the acquiring company to share their knowledge and expertise.
When the acquiring company is open to adopting practices from the equipment finance business and vice versa, employees will take note and the acquiring company will benefit from the strategic value of its acquisition.
Vice President of Technology and Data Analytics ,
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