Lenders can reap big profits from shrewd mergers and acquisitions: Stratmor

Mortgage players mired in a depressed market can produce a 30 to 50 basis point shift in operating profits with a shrewd merger or acquisition, according to research from Stratmor Group.

Nearly 50 sectoral mergers and acquisitions are expected close by the end of the year, surpassing the previous record of 33 in 2018, according to Stratmor’s October InFocus report. A transaction between companies with well-aligned cultures and models could produce a significant change in fortune, the consultancy said.

“This means that a lender operating with a 10 basis point loss has the opportunity to match another business and convert bottom line performance into a 20 to 40 basis point profit,” wrote David Hrobon, Group Director at Stratmor Group and author of the report. “Well-matched relationships can and should result in a ‘one plus one equals three’ transaction.”

Expected margin compression over the next two years is driving consolidation, Stratmor said, citing data from the Mortgage Bankers Association’s October 2022 forecast and its Q2 2022 Quarterly Performance Report. and acquisitions could stem from pent-up retirement demand from aging business owners who have reached their net worth goals, the report said.

Origination projections continue to decline as MBA last month projected $2.257 trillion in volume in 2022, down from its September forecast of $2.324 trillion for the year. Production is expected to bottom out in 2023 with a volume of $2.047 trillion before rebounding to $2.311 trillion in 2024, according to the association’s latest assessment.

Merger and acquisition activity is increasing as the industry is expected to be within 2 basis points of profitability this year, from highs of 82 basis points last year and 157 basis points in 2020. Last year there were 29 M&A deals, while the industry saw 13 such deals in 2020. The 50 M&A deals expected this year would be about 50% more than the 33 deals in 2018 , the next busiest year for such deals in the last three decades.

Agreements have been reached in all sectors of industry, with brokers, lenders, services that merge or grab competitors. Some transactions have been massive, such as the ongoing Intercontinental Exchange Purchase of $13.1 billion of Black Knight, while others have failed to closesuch as the alleged Guaranteed Rate negotiations for Finance of America’s sentenced term mortgage issuance business.

Stratmor warned that structuring successful mergers and acquisitions was more difficult than in previous years, when lenders had more flexibility. Companies considering a deal need to be aligned with their corporate culture, Hrobon wrote. The study defined three types of lender corporate cultures, including firms that limit risk and avoid costly non-compliance costs; companies with entrepreneurial leadership willing to accept a little more risk; and businesses that operate “by their own set of rules,” resisting formality and structure.

“A sure way to drain value from an M&A event is to combine two culturally mismatched companies,” Hrobon wrote. “Of all the things that can go wrong in one of these complex transactions, a cultural mismatch is the most damaging aspect to post-transaction value.”