Merger and Acquisition Strategies for Today’s Mortgage Lender [Insider Analysis]

With the pandemic receding, mergers and acquisitions (M&A) and IPO activity are heating up in the mortgage industry. As part of our quarterly webinar series, we sat down with mortgage veteran and capital markets consultant Rob Chrisman to discuss recent M&A headlines and strategies for lenders considering buying, selling, or going public.

Mergers & Acquisitions 101
‘M&A’ is a catch-all term used to describe the consolidation of companies or assets through various financial transactions, including mergers, acquisitions, consolidations, tender offers, purchases of assets and management buyouts. Oftentimes the motivations of a mortgage buyer and seller differ significantly. A seller could be ready to switch gears into a different business or perhaps ready to retire. A buyer, on the other hand, might be interested in growing its geographic footprint or expanding into a new business channel, as illustrated by these recent mortgage industry deals:

  • Guild Mortgage Became Bi-Coastal
    San Diego-based Guild Mortgage recently announced the acquisition of Portland, Maine-based Residential Mortgage Services. At 3,100 miles apart, the two companies’ headquarters were about as far apart as you can get in the continental United States. The acquisition allowed Guild to instantly reap the benefits of an established brand in its desired market.

  • Guaranteed Rate Went Consumer-Direct
    Guaranteed Rate only solidified its position as one of the country’s largest lenders with the recent acquisition of Owning Corporation. The deal gave Guaranteed Rate a direct-to-consumer channel that originated $20 billion in total loan volume in 2020. And just one month before the Owning deal, Guaranteed Rate had broken into wholesale in a big way with the acquisition of Stearns.

What’s a SPAC, anyway?
Another popular term circulating headlines is SPAC, short for Special Purpose Acquisition Company. A SPAC is a business entity explicitly created to facilitate a company’s public debut. As Rob explains, SPACs are typically owned by venture capital funds or other investor groups, who treat the SPACs like empty buildings waiting for a tenant. It’s faster and often less costly than hiring an investment bank. SPACs have been around for a long time, but they’ve only recently become part of the public parlance.

Why M&A Activity is Heating Up in the Mortgage Industry
As we get further into 2021 the effects of 2020 are unveiling. Last year M&A activity slowed down significantly due to travel restrictions that made face-to-face meetings difficult. Mortgage business owners earned record profits, and as a result, sellers weren’t in a hurry to offload, nor were buyers eager to pay hefty multiples.

Now, large segments of the economy are flush with cash. Families and individuals stayed home during the pandemic, saving on shopping and travel expenses to the point that the savings rate for Americans has reached historic highs of nearly 20% (BEA). After the dearth of M&A action last year, private equity and venture capital markets have plenty of liquidity. All that money has been sitting on the sidelines, waiting for the right opportunity. With the economy opening back up and the cyclical nature of the mortgage industry, investors are hunting for good opportunities and eager to put their capital to work.

3 Areas Mortgage Lenders Should Test for Fit When Contemplating an M&A Deal
If you’re considering a merger or acquisition, Rob urges you to consider company compatibility across three areas:

  1. Culture Compatibility
    It’s fairly straightforward for a prospective buyer to review a company’s revenue, customers, technology, and procedures to determine if those elements fit the buying criteria. Cultural fit is harder to assess – but equally important to the success of a deal. The last thing a buyer wants is to see half their LOs leave for a competitor because they don’t like the new management or policies. 

    Face-to-face meetings are the best way for counterparties to get a feel for one another’s respective cultures and make a plan for reconciling any cultural differences. Bear in mind that the pandemic has radically transformed the work culture at many companies, so make sure your understanding of your counterparty’s culture is current.

  2. Compensation Structures
    Understanding each business’ compensation plans is the skeleton of any deal, Rob says. For instance, a company that wants to enter a new market through acquisition needs to understand if there is a significant geographic pay differential. By gathering this information up front, the buyer can make a plan to combat the compensation difference for a much smoother transition after closing. Products like CompenSafe™ provide a clear roadmap of how employees are incentivized and compensated – information that is essential for buyers in an M&A scenario.

  3. Operational Efficiency
    A true merger of equals is rare. Even two companies that post similar revenues and assets will likely look quite different under the hood – which is why insight into operational efficiency often provide the impetus for an M&A deal in the first place.

    A company that closes twice as many loans with half as many back-office personnel will often acquire a less efficient firm on the premise that its well-oiled operations will quickly improve the acquired company’s financial performance.

Whether you’re looking to acquire or merge with another company now or in the future, culture compatibility, compensation structures and operational efficiency are three core components of any deal. It’s beneficial for mortgage business owners of all stripes to strengthen these areas of their business. With tools like CompenSafe™ and LimeGear™ compensation plan structures and operational insights are always at your fingertips.

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