Financial Services Merger of Equals and Strategic Mergers: Striking a Difficult Balance

As 2025 begins, optimism abounds for a return to a normal regulatory environment that, together with improved economic and business conditions, leads to robust bank and other financial services M&A activity. Merger of equals or “MOE” transactions have been common in financial services historically and were prevalent during the first Trump Administration, as exemplified by the $28.3 billion merger of BB&T and SunTrust creating Truist and the $21.5 billion merger of Global Payments and TSYS.

An MOE allows a financial services institution to roughly double in size and use the additional scale to drive cost savings and offset significant fixed costs. Investments in technology, products and brands are critical to growing core deposits for banks and customers for other types of financial institutions and scale allows these investment to be spread over a broader base of revenues. Structurally, an MOE can be accomplished by having both companies’ stocks converted into stock of a new holding company or by having one of the companies issue its stock for its merger partner’s stock, often with no control premium being paid to either party’s shareholders. And, while the term suggests that both companies are on an equal footing with one another after the deal is complete, in point of fact, other than the size of the parties, the “equality” of the two partners (e.g., post-merger governance and management) varies substantially from transaction to transaction. Significant strategic mergers in financial services that do not provide for exact parity but are mergers of comparably sized institutions providing for shared governance and management of the combined company present many of the same issues as MOE transactions.

In many MOEs, neither party’s shareholders receive a control premium or transfer control. Instead, control remains with the public shareholders as a group. The exchange ratio is set to reflect the relative asset, earnings and capital contributions and market capitalizations of the two merging parties — typically, but not always, resulting in a market-to-market exchange. Premiums to market are also possible but are often relatively modest compared to those seen in outright acquisitions where one party is accorded control of the combined entity. Pricing restraint can create a “win-win” situation as a run up in the surviving company’s stock following announcement of the deal directly benefits the merged company’s shareholders.

MOEs are difficult to negotiate and even harder to successfully execute. Because MOEs generally do not provide shareholders with a control premium, it is usually important that any proposed transaction be structured as a true combination of equals, with shareholders sharing the benefits of the merger proportionately. The appearance, and reality, of balance is critical in such situations. Common goals and a shared vision are key, and cooperation must begin at the highest levels of the institution, where painful decisions frequently must be made.

At the outset, an MOE requires a strategic vision that identifies two institutions with complementary and compatible cultures, management teams and business lines. This strategic vision must be shared by the two CEOs and boards of directors and be closely followed by early agreement on difficult social issues, including board and management composition, succession of key executives, the identity of the legal and accounting acquirer, headquarters location, name and community commitments. These transactions impact all of a financial institution’s key constituencies, including shareholders, employees, customers, communities and regulators, and each must be appropriately considered and addressed. As a result of these various challenges, many MOE transactions never make it past the idea or discussion phase. Due to their size and complexity, MOE transactions also typically receive a higher degree of scrutiny from regulators and can be more likely to raise competitive concerns depending on geographic and other overlaps. And even if an MOE transaction is successfully negotiated and consummated, the successful implementation of an MOE will ultimately depend on the integration of the two institutions, which is lengthier and much more complex than in a typical acquisition. Successfully executing on a well-conceived MOE transaction requires strong leadership from the board and senior management to form a cohesive combined organization that puts aside the temptation to keep score between the two merged institutions, avoids paralysis resulting from a void created by the lack of a true-acquirer who is in control and making decisions, and leverages the strengths of each institution to become more than the sum of its parts.

The Advantages of an MOE Structure

For financial services companies seeking growth, MOEs can be an attractive avenue for gaining the scope of operations and making the investments in technology, products and brands needed to remain competitive in an industry that increasingly favors size and scale. MOEs can help enhance shareholder value through merger synergies and can be less costly than high-premium acquisitions. A low-premium MOE structure may represent the most effective alternative available to a would-be acquirer for a large-scale expansion. MOEs are also an attractive alternative for smaller and mid-sized institutions that would not otherwise have the interest, opportunity or financial capability to launch a large-scale expansion program. These institutions must either carve out a successful niche strategy at their then-current scale of operations or give serious consideration to a sale to, or merger with, a larger institution.

An outright sale of an institution is often an unattractive alternative for a variety of business, economic and social reasons. Management and boards properly perceive their duty as managing their institutions for the long-term benefit of their shareholders and other significant constituencies. While some sales can be highly beneficial for shareholders, they typically result in the loss of the institution as an independent presence in its community — which can be especially significant for older, well-established institutions. Shareholders, too, can lose in an outright sale or merger with a larger acquirer by being cashed out of their investment prematurely or being forced to accept an equity security in an institution that is significantly different from the one in which they originally invested. The best business fit for an institution may be combining with a comparably sized competitor that best complements its operating strengths, long-term business strategy and culture.

In any stock-for-stock merger transaction, the value of the consideration received is highly dependent upon the combined company’s future performance. Often, there is no better way to protect the shareholders’ investment than to ensure a significant continuing management role for both companies’ existing directors and management team. In most of the larger MOEs, there has been substantial balance, if not exact parity, in board representation and in senior executive positions and MOEs often provide for a CEO succession plan after an initial period. MOEs can also allow the combined company to leverage the strengths of both management teams using a “best athlete” approach, thus enhancing long-term shareholder value. Many MOEs allow the parties to achieve significant cost savings and operational efficiencies, again borrowing the best from both institutions, although geographic overlaps that would give rise to higher synergies may raise more competitive concerns or concerns from regulators and community groups if they are based on branch closures or layoffs. Assuming a proper exchange ratio is set, MOEs allow for a fair and efficient means for the shareholders of both companies to share in the merger synergies.

MOEs are not right for all companies, and the benefits and risk for any MOE transaction must be carefully considered in advance. Parties to an MOE should expect their transaction to be closely scrutinized by the analyst, investor and acquirer communities, who will eagerly jump at the opportunity to exploit any weakness in the rationale put forward for the proposed deal. Confidentiality during the often tricky stages of negotiating an MOE is absolutely paramount, as the combination of a range of difficult issues to be negotiated, the absence of a substantial takeover premium and (often) the prospect of a potent new competitor being created make such transactions particularly susceptible to dissident shareholder campaigns and competing bids.

Resolving the Key Issues

After agreeing on the business goals and means to enhance shareholder value, partners to an MOE must seek to achieve an efficient balance in key management and operational areas. Management compatibility is very important, and MOE agreements are almost always struck at the CEO-to-CEO level.

Key issues to be addressed include:

• the split of the board (sometimes a 50/50 split, although a number of situations have involved a slight majority in favor of one party; agreements concerning committee structure, chairmanship, membership and specified supermajority vote requirements may also be included);
• the split of the Chairman and CEO positions (frequently one party gets the Chairman position (which may be an “Executive Chairman” position) and the other party gets the CEO position, although sometimes the CEO of one party assumes both the Chairman and CEO title while the CEO of the other party may be guaranteed the title after a specified transition period; co-CEO positions, while often unwieldy, are sometimes used; retirement age and use of consulting agreements are often taken into account);
• the selection of the combined senior management team (typically involves retention of executives from both companies; the specific allocation of duties among key management team members is often addressed, sometimes in exacting detail; existing employment arrangements must also be considered; employment contracts often require modifications to protect employee and company interests and to reflect the newly proposed managementstructure);
• the rationalization of separate corporate cultures (including attitudes toward, and practices regarding, compensation, employee benefit and incentive plans, management styles, business strategy, use of technology, operating priorities, community involvement and reinvestment and future business strategies);
• identification of merger synergies (a fair sharing of the human pain and operational disruptions associated with the proposed merger synergies is important, as is a unified approach to severance arrangements);
• the company’s name (any number of options exist, e.g., a new name, a combined name, retention of one of the old names, retention of one name for some operations and the other name for other operations);
• location of corporate headquarters and other key operations (often based on costs and operational considerations, but can be a key social and constituency issue when the institutions are headquartered in different cities or states);
• commitments and reassurances to communities (employee levels, charitable giving and the location of key operations referenced above);
• legal structure of the merger and choice of a surviving entity and the acquirer for accounting purposes (the manner in which the merger is structured can affect the public perception as to whether one of the parties is “being acquired”; structure can also have important tax, accounting, regulatory and state law consequences, including the requirement to mark assets of the target to fair value; “newco” structures are sometimes used to avoid having to choose between either of the merging parties or to effect other changes deemed to be desirable going forward, such as a change of domicile); and
• the exchange ratio (the amount of the premium, if any, and how the premium is expressed can have an important impact on the public perception of the transaction and the pro forma dividend payout ratio must also be considered).

In most transactions, there is a trade-off among these various key issues, as the parties strive to achieve a mutually acceptable balance of power.

Negotiating a mutually acceptable balance of power is often difficult, and may actually run counter to the long-term objective of ensuring a successful integration of two institutions (which may require the existence of one dominant, visionary force within a company’s management and certainty as to “who’s in charge” during the critical integration process, both before and after closing). The structural balance of power that is created for an MOE can instill an “us versus them” mentality in the board room and management level that can create a significant distraction and facilitate infighting and paralysis. The success or failure of an MOE may depend on the strength of the CEOs who bring the transaction together and their ability to effectively ensure a smooth transition towards a new unified corporate culture. Many will be watching from the outside for signs that the management structure is sufficiently stable and effective to assure that synergies can be realized. No one or easy formula for success exists. Often, the strength of arrangements protecting governance or succession agreements must be balanced against the need to avoid creating a balkanized organization. Accordingly, each situation must be judged on the basis of individual facts and circumstances, with sensitivity to the personalities involved and their respective talents and weaknesses.

At the outset of any MOE, it is essential to recognize that the best legal protections in the world are inadequate substitutes for a deeply held commitment and trust, based on a potential partner’s past performance, behavioral style, reputation and culture. Each organization is unique and differing management styles are common. It is impossible to envision all of the pitfalls and complexities that will arise, so the compatibility of objectives, philosophies and personalities is required.

An essential part of the value and sustainability of any financial services firm is the talent and personal relationships of the firm’s management and employees. Lengthy periods between signing and closing, which are typical in MOE transactions, increase the significance of retention arrangements at both the executive and lower levels, including for employees who will not be retained post-closing, and often include a retention pool. In an MOE the harmonization of employment arrangements and compensation across the senior executives of both organizations who are being retained, as well as an equitable approach to severance for executives and employees who are not being retained, will be of critical importance. Parties to an MOE transaction often seek to enter into new employment or consulting arrangements – which often contain non-competition and other restrictive covenants to the extent permitted under applicable law – with key executives at signing in order to have clarity and certainty around such individual’s post-closing employment. The design of these compensation arrangements must achieve the desired business result regarding retention and succession planning and take into account existing equity awards, the terms of existing employment agreements and retention arrangements, legal limitations under 409A of the Internal Revenue Code and application of the excise tax to parachute payments under Section 280G of the Internal Revenue Code. Parties will also need to take care to appropriately address the existence or appearance of conflicts of interests in negotiating these arrangements.

Arrangements that ensure that community interests are properly protected are also legitimate to consider and are common in MOEs. Community commitments require thought and care in crafting and strong follow-up and communication after a merger closes; local officials, community groups and the press have focused on these commitments and have been quick to jump on evidence that they believe suggests the parties are not fully honoring them.

Once an agreement is reached concerning the key issues, it will be important that appropriate provisions are put in place to ensure that both parties live up to the bargain. Nothing is as certain as the fact that, no matter how close the parties are before the transaction, “things will change after the merger.” While no set of legal rules can fully protect the parties against changes that occur after a merger, some basic protections should be built into the merger agreement, the key executives’ employment agreements and, in some instances, even the new company’s charter and by-laws. Among other areas that may deserve written protections are: principal executive officer successorship provisions, board successorship provisions (both pre- and post-merger for a specified duration) and any super-majority voting provisions. For example, the combined company may adopt by-laws that govern the succession of one constituent’s CEO to CEO of the combined company, the size and composition of the board, the manner in which director vacancies are filled and other social issues, such as the location of the headquarters of the combined company or its key business units. Parties should recognize that all factors should be taken into account, and that overly complicated or elaborate provisions regarding power sharing may be taken by the market as a sign that the two organizations are less likely to meld successfully after the merger. Also, when thinking about amendments to charters and by-laws to become effective upon closing, parties should keep in mind the SEC staff’s views regarding “unbundling” of proposals in the proxy statement and consider whether a given structure can be optimized so that the SEC staff is likely to require fewer separate proposals on the proxy card for shareholders voting on the merger.

The MOE Merger Agreement

The merger agreement for an MOE should be a balanced contract that reflects a high level of commitment by the parties with matching representations, warranties and interim covenants from both parties. MOEs are typically structured as tax-free, stock-for-stock transactions with a fixed exchange ratio without collars or walkaways, and the contract will need to address the standard provisions applicable to stock-for-stock transactions. MOE agreements generally include only limited reciprocal closing conditions. It is also customary for the agreement to contain mutual strong no-shop provisions, force the vote provisions (where each party makes a binding commitment to bring a deal to a stockholder vote, even in the unlikely circumstance where an interloping bid results in the board withdrawing its recommendation of the MOE transaction), and fiduciary duty exceptions limited to those required by law coupled with mutual termination fees at the upper end of what is customary. The merger agreement for an MOE typically contains a high level of regulatory commitments from both parties with each party equally sharing regulatory risk and without any reverse termination fees.

The most difficult negotiations in the MOE context are the negotiation of the key issues that are described above, which are then reflected to varying degrees in the merger agreement and potentially in the charter or bylaws and in the press release and other investor relations materials. Many MOEs include strong commitments and reassurance to communities in terms of maintaining employment levels, charitable giving and locating key businesses in their footprint, as well as top management roles for key executives.

Diligence and Pre-Signing Process; Protecting the Deal

First and foremost, it is important to recognize that the period of greatest vulnerability for an MOE is the period before a deal is signed and announced. Rapid execution is crucial in public company transactions generally and assumes even greater importance in the MOE context. Nothing will kill a low premium MOE faster than a run-up in the stock of one of the merging parties — whether or not the run-up is based on takeover speculation — because no company wants to announce an MOE with an exchange ratio that reflects a substantial discount to market. Leaks or premature disclosure of MOE negotiations can also provide the perfect opening for a would-be acquirer to submit an acquisition proposal designed to derail the MOE talks or pressure one party into a sale or auction.

Keeping the number of involved parties to a minimum and developing a confidentiality protocol may be useful to enforce strict secrecy about a proposed deal. In some cases, outside advisors have been asked to defer bringing on their own external advisors (such as outside counsel), and to specifically identify those within their organization who will be brought into the circle and not to expand that group without prior permission from the client. Defining the appropriate scope of pre-signing due diligence, and confidentiality in general, is a critical issue, since premature disclosures or leaks can seriously jeopardize such typically low-premium deals. Each situation must be assessed carefully to achieve the proper balance of pre- and post-signing due diligence and integration planning, and parties should recognize the risks of either too large or too small a pre-signing due diligence process. A model that appears to have worked well in a number of transactions is to conduct a good deal of the “high level” diligence through meetings among a very small group of the most senior executives — the CEOs and, eventually, the CFOs and perhaps the General Counsels, without any outside advisors or accountants. When agreement on the terms of a transaction appears likely, parties then bring in a broader (but still no larger than necessary) group of the senior teams on both sides to conduct intense diligence sessions in key areas (e.g., key business lines, financial/accounting, risk management, regulatory, legal, operations and human resources) over a compressed period preceding the target date for signing the merger agreement.

MOEs have, in the past, attracted attention from potential interlopers questioning whether there was a way to step forward and acquire one, or in some MOEs even both, of the merger partners. Given the way in which MOEs can instantly reshape the competitive landscape in an industry and the low to no premium nature of MOE transactions together with the equivalent size of the merger parties, such interest is not surprising. However, to date, relatively few U.S. financial institution acquirers have been willing to step forward in an active effort to break up an announced deal — and where they have, the results have been mixed. Such bids should be approached on a careful and opportunistic basis. A strong and unwavering commitment by both parties to a deal will help discourage interlopers, while indication of internal dissension or market perceptions of a weak issuer and dissatisfied investor will encourage intervention. A strong contract and suite of governance arrangements that evidence the parties’ commitment to the deal coupled with an effective market rollout and careful strategy for explaining the rationale of a deal to the market is of critical importance in selling the transaction to investors and analysts.

Fiduciary Issues in MOEs

MOEs usually do not involve a “sale of control” of either company within the meaning of the applicable case law on directors’ fiduciary duties; instead, control remains with the public shareholders as a group (absent a controlling shareholder of the post-merger entity). Accordingly, directors have broad discretion under the business judgment rule to pursue an MOE transaction that they deem to be in the best long-term interests of the institution, its shareholders and its other important constituencies, even if they recognize that an alternative sale or merger transaction could deliver a higher premium to the institution’s current market value.

MOEs are not comparable to sales of control. An MOE can be fair even though the post-announcement trading value of a company’s shares is less than that which could be achieved in a sale of control transaction. It is prudent, however, for a board, as part of its deliberative process, to consider what alternative business strategies might exist, including an affordability analysis of what potential acquirers could pay in an acquisition context. The Delaware courts, have indicated that directors have wide latitude in pursuing long-term strategic objectives through an MOE or similar strategy that does not involve a sale of control. Case law has confirmed that directors will continue to have such wide latitude outside the sale of control context — including confirming the lack of a duty to pursue negotiations of an unsolicited third-party offer — but has emphasized the importance of a process that ensures that directors are well-informed before the agreement is signed and retain reasonable flexibility to stay informed thereafter.

An MOE should be analyzed with active board involvement. Detailed presentations should be made to the boards concerning the benefits of the transaction and the plans for integrating the two institutions. A thorough analysis of the strengths and weaknesses of the merging parties, including a critical assessment of the due diligence results and the projections, forecasted synergies and related accounting and restructuring impacts, is also appropriate. There are far too many examples of failed MOE transactions, and boards considering the benefits of a proposed MOE should carefully consider these lessons of the past. Frequently, a merger partner may be engaged in an entirely different line of business and it is important for a board to gain a comprehensive understanding of that business and the associated risks and opportunities, with which it may not be familiar (including any internal controls, management or compliance issues particular to such businesses). Systems integration issues must also be addressed, as the scale of any needed changes may be massive and successfully navigating them is often a prerequisite to a substantial portion of the planned cost savings. The board should also have a detailed understanding of the regulatory approval process and the likelihood and projected timeline for obtaining approvals.

Regulatory Considerations

Due to their size and complexity, MOEs are likely to result in heightened regulatory scrutiny and a lengthy review process, especially for larger transactions. Accordingly, MOE transactions are rarely announced in challenging regulatory environments. We are optimistic that the recent presidential election will result in a return to a normal regulatory environment that is more receptive to bank mergers and could result in more parties exploring MOEs, although that may take time as many institutions are currently in the regulatory penalty box. The most recent public supervisory report from the Federal Reserve shows that two thirds of institutions with over $100 billion in assets did not have satisfactory ratings across all 3 LFI rating components, meaning they would be restricted from engaging in significant deal activity. The Federal Reserve report also showed a growing trend in the number of institutions below $100 billion in assets with unsatisfactory ratings and supervisory issues. We are optimistic that personnel and regulatory policy changes under the Trump administration appointees could alleviate some of the more overbearing regulatory edicts.

However, that does not mean that MOEs will be rubber stamped by the regulators and there are a number of important regulatory considerations. As an initial matter, if the merging parties have different primary regulators it will be important to evaluate prior to signing the preferred regulatory end-state and the impact that will have on the regulatory approval process and take that into account in structuring the transaction. Regulators can have different levels of receptivity towards bank mergers and have differing views on supervisory risks, such as commercial real estate, all of which should be considered. Merger parties should also take into account expected regulatory timelines for processing the merger application. Data shows that approval timelines by the Federal Reserve (which has generally been the most receptive to bank mergers in recent years) have been significantly longer (and growing) during the Biden administration with the average processing time for a bank merger application in the first half of 2024 increasing by 45% (from 69 days to 100 days) compared to 2020. This reflects M&A transactions of all sizes and processing time for larger transactions, particularly MOE transactions, would be significantly longer due to the complexity and receipt of public comment letters. According to a recent Financial Times article, based on a review of data from S&P, transactions with deal values over $500 million have averaged 10 months to closure under the Biden administration compared with six months under the first Trump administration, even though deal volume has been down significantly under the Biden administration. Extended approval timelines have a number of negative effects on a transaction. A lengthy approval timeline increases transaction costs, delays the economic benefits of a merger, creates increased risk of employee attrition and distraction for the management team during the pendency of a transaction, puts a halt to capital investment and other strategic initiatives by the parties and creates risk that a macroeconomic event or supervisory issue arises that derails or changes the calculus for a transaction. We are again optimistic that personnel and regulatory policy changes under the Trump administration appointees will result in a return to shorter and more predictable processing timelines for merger applications.

Advance preparation for parties evaluating an MOE is of paramount importance. Parties to a merger should expect that any bank merger that results in the combined institution crossing a regulatory threshold under the tailoring rules (such as becoming a Category IV institution at $100 billion in assets) will require the parties to demonstrate that they are prepared, with little to no grace period, to meet the additional regulatory requirements and perhaps more importantly, the heightened supervisory expectations for a large institution. As discussed above, MOEs have important implications for the communities of each merging institution and merging parties should evaluate how community groups are likely to react to the transaction and develop a thoughtful plan for engaging with these organizations and rolling out a community benefits plan that helps assuage community group concerns and demonstrates to the regulators that the transaction will satisfy the requirement to meet the convenience and needs of the community.

MOEs are also more likely to raise potential competitive concerns. Historically, competition concerns by the DOJ and bank regulators have been focused on geographic branch overlaps with branch divestitures as an accepted remedial measures to address any problematic competitive overlaps. This approach provided merging parties with the ability to analyze the competitive risks associated with a transaction and identify a remedial package that would provide a path to closing. The DOJ under the Biden administration announced that it was skeptical of this traditional competitive analysis focused on branch overlaps and was skeptical of divestiture remedies generally and in 2024 officially departed from the 1995 Bank Merger Guidelines in favor of the industry-agnostic DOJ 2003 Merger Guidelines. The Federal Reserve declined to follow suit. The DOJ’s actions created substantial uncertainty regarding the competition analysis that would be applied to bank mergers and had a chilling effect on bank mergers. In light of the recent election, it remains unclear whether any of these DOJ policy or procedural changes from the Biden 10 administration will remain intact, and if they do, how they will be enforced by the new administration. The consensus is that the second Trump administration will be friendlier to M&A and we are optimistic this will lead to a return to a more favorable and predictable antitrust review of bank mergers. However, the politicization of antitrust policy may be here to stay and merger parties should be thoughtful around the implications for how different bank regulatory agencies are likely to implement competition analysis and on impacts to communities and employees that may draw political attention.

Concluding Thoughts

Any institution considering a potential MOE transaction should be prepared for a deliberate and painstaking process. MOEs are rarely put together overnight and often involve months, and sometimes years, of preliminary exploratory conversations before getting to the detailed diligence and execution stage. Given the complex business considerations and personality issues presented in an MOE transaction, it is not surprising that many MOE discussions never result in a transaction. In light of this fact, institutions should not place too great a weight on early exploratory meetings, and should be cautious to avoid external leaks and the build-up of internal expectations. As history has shown, a poorly planned or executed MOE can be a recipe for disaster. When all things fit, however, an MOE can be the most successful form of business combination. With the benefits of size and scale in banking never having been more apparent combined with a return to a normal regulatory environment and improved economic and business factors, we expect that more institutions will evaluate whether an MOE could be their best avenue to remain competitive and create value for their key constituencies.