Deciding Whether to Sell or Go Public

There is no match.com for banks—finding and attracting the right merger partner takes time, effort and skill. While the decision to sell a company weighs heavily on every CEO, there comes a point where a deal makes too much financial and cultural sense to ignore.

Finding the right merger partner means being realistic, as two bank leaders shared with me during a recent Bank Director conference in San Francisco. David R. Brooks, the chairman and CEO at $3.7-billion asset Independent Bank Group based in McKinney, Texas, and Jim Stein, the former CEO of the Bank of Houston and now vice chairman of Independent Bank, talked about their experiences and decision to merge their banks.

While there has been an increase in bank IPOs in 2014, as Hovde Group described in a recent article, credit might be paid to one of the few banks to take the path in the wake of the financial crisis. The story of Independent Bank Group’s combination with its peer, BOH Holdings Inc. and its subsidiary bank, the Bank of Houston, begins in the summer of 2012, when Independent Bank decided to do an IPO based upon a belief that many banks would have to consider strategic alternatives coming out of the Great Recession and possibly sell.

At the time, the bank’s board placed a bet that this would result in an opportunity to consolidate significant market share in the major Texas metro areas. Brooks and his team had successfully completed four smaller bank acquisitions in the previous three years, from 2010 to 2012, ranging in assets from $40 million to $180 million—paid primarily in cash.

As Brooks explained to an audience of CEOs, CFOs and board members at the Ritz-Carlton San Francisco during Bank Director’s Valuing the Bank conference, he wanted to buy larger institutions in the $300-million to $1.5-billion asset range, but the purchase price would be significantly higher and would exceed the company’s ability to pay using cash. There also was significant resistance to sellers taking privately held stock as consideration. So, his objective was to have a strong public stock “currency” to use as a tool to execute strategy. Since the IPO, it has been clear he and his team have had success with this strategy.

The IPO raised $100 million at 2.2 times tangible book value in 2012, and the stock rose from $26 per share at issue to more than $45 per share as of last week. The company has announced eight acquisitions since 2010.

While this was going on, Jim Stein observed the success of Brooks and his team. Indeed, Stein was plotting a similar path. A de novo in March 2005, the Bank of Houston’s board found the lack of a liquid currency proved to be an impediment to successful M&A. Like Independent Bank, BOH Holdings considered an IPO in the spring of 2013 and began the process of gearing up to go public. Concurrently, Stein’s conversations with Brooks became more frequent.

For Stein, the rationale behind joining Brooks as opposed to pursuing an IPO or another suitor was simple: As Independent Bank was already public and well received, Bank of Houston could grow faster, and return better shareholder value, by teaming up with Independent Bank. Indeed, Stein knew the bank needed to expand in markets outside of Houston to achieve the highest franchise value. Doing so, however, would necessitate rebranding and loss of focus on the Houston market the bank knew very well. Thinking about the execution risks of entering new, unknown markets, the timing seemed to be ideal for the two to join forces.

Based on their relative sizes and geographic locations, Brooks and Stein both believed a deal would represent a game changing event, as adding the Metro Houston market to Independent’s existing footprint in Texas would be a huge driver of franchise value. Bank of Houston would add more than $1 billion in assets to Independent Bank when the deal closed in April 2014. The acquisition was valued at $170 million and included $34 million in cash and 3.6 million shares of Independent Bank Group’s stock at roughly $37 per share. Most importantly, the two shared similar cultures and that was vital in sealing the deal. This was especially true at the leadership level, where the two banks had similar goals and ideas and the two teams’ recognized each other’s strengths. Two Bank of Houston directors joined the board of Independent Bank Group.

It was not an easy decision to sell Bank of Houston but it has turned out well. As in dating, knowing the qualities you are looking for and being patient helps a lot.