STRATMOR Research: 2021 May Be The Biggest Year For Industry Consolidation In Years
In its September Insights Report, mortgage advisory firm STRATMOR Group points to data that suggest that this year will be one of the biggest years for industry Mergers & Acquisitions (M&A) activity. In “Mortgage Industry Consolidation: Fact, Fiction or Frenzy?” David Hrobon, STRATMOR Group Principal and former Chairman and CEO of Wintrust Mortgage, connects the dots between industry profitability and M&A activity.
“The historical relationship is clear,” Hrobon writes in the report. “When profitability increases, owners hold onto their companies. When it falls, more look to sell. The biggest year in recent history for M&A was 2018 with 33 deals, when the industry only made 13 basis points of net income. By the end of the second quarter of this year, 17 deals had already closed. We expect to see a total of at least 36 deals close by the end of the year.”
Hrobon says that this is happening because, while profitability is still high from a historical perspective, it is already far below what lenders earned last year. STRATMOR expects to see lender net income average about 90-100 basis points by year’s end, compared to just over 163 net basis points in 2020.
Net income is only one of the factors that STRATMOR says is driving increased M&A activity. The other factors include the aging of industry leadership and their desire to retire, the excess capital buyers have on hand, the shifting business mix to the more-expensive-to-originate purchase money lending, and the potential for adverse tax consequences if sellers wait.
When owners decide to put their companies up for sale, the first step is getting an accurate company valuation, Hrobon says. While this can be tricky, a good advisor who is tracking the market can provide the sales price of recent transactions as well as the various bids placed before a winning bid was accepted, making it easier to see where the subject company falls in terms of price.
If a lender wants to build (or add) $1 billion to its annual origination volume, it can begin recruiting and building out the infrastructure to support the new staff, according to the report. “Given a couple of years, good execution, skilled management and a little good luck and timing, a company could achieve its production growth goal,” Hrobon says. “Alternatively, management can go to market, find a well-suited acquisition target and buy the company. Our analysis indicates that after all expenses are tabulated, companies that achieve growth organically via recruiting will pay nearly 1.5 times more for that volume as those that buy it through acquisition,” Hrobon said.
Hrobon outlines is a very specific process that companies should follow as they navigate their M&A journey. He also points to pitfalls that must be avoided and touches on the critical importance of compatible corporate cultures between buyer and seller.
“Be wary of the fiction out there that there are no premiums being paid for mortgage companies,” Hrobon warns in this month’s report. “Don’t think that it doesn’t matter when you sell or that it is remotely possible to grow into a down market with no risk. Our experience and data confirm these are all fiction, particularly in this environment.”
A second report article by STRATMOR Group’s Mike Seminari, “How Lenders Can Create a Winning Culture,” reinforces the importance of company culture and how it touches everyone in the firm. “Some team members have only brief interaction with the customer. Others may not be customer-facing at all. But make no mistake; these employees’ roles in creating a raving fan customer are every bit as crucial as the originator,” Seminari writes in his article. He writes about some of this year’s biggest M&A deals and asks the question everyone has on their minds, “Is there a cultural fit between these organizations?”
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