Bank Director is expecting record attendance at our 2011 Acquire or Be Acquired conference which starts on Sunday, Jan. 30, in Scottsdale, Arizona, and the driving factor is probably more than the forecasted sunny skies and temperature in the low to mid-seventies. Bank merger and acquisition activity finally picked up in 2010 after two down years, and the outlook for 2011 is even better.
It was extremely difficult to sell a bank in 2008 or 2009 because the recession brought about a significant deterioration in loan quality throughout the industry. It’s hard to put together a deal when neither buyer nor seller has confidence in their loan portfolios. The buyer worries that it could end up overpaying if the acquired institution’s loan book performs worse than expected after the deal has been consummated – and in a declining economy, asset quality tends to be a moving target. Meanwhile, the seller worries that the buyer’s currency in an all-stock deal could end up being worth less than it thought if that organization’s asset quality deteriorates unexpectedly after the transaction has closed.
As you would expect, M&A deal volume in recent years has reflected this pricing dilemma. There were 296 bank and thrift deals in 2006 with an aggregate value of almost $109 billion, according to the research mavens at SNL Financial in Charlottesville, Virginia. Total deal volume dropped slightly to 288 and the aggregate value more sharply–to $72 billion– in 2007. Then an economic tsunami washed over the U.S. banking industry and the M&A market practically disappeared. There were 144 deals in 2008 for a total of $35.6 billion and 120 deals for a paltry $1.3 billion in 2009.
The past year shows that the trend has begun to reverse itself, with a total of 176 deals for an aggregate value of approximately $12 billion, according to SNL.
Banks get sold for a variety of reasons in a normal economy. The institution’s financial performance could be lackluster and the board might lack confidence in management’s ability to improve its profitability, so it decides to reward long-suffering shareholders by selling out. Perhaps the CEO is retiring and the board doesn’t have a qualified successor in place. Or the institution might be a relatively recent start-up that had always intended to provide its investors with an exit strategy after it had been in business for a few years.
These are all valid reasons to put a bank up for sale, but that option becomes less viable in a recession when the board might not be able to find a buyer at a price that it’s willing to accept. But now that the U.S. economy seems to be on a more solid footing and the industry’s asset quality has finally stabilized, buyers and seller alike are more confident about doing deals. And the normal demand from potential sellers who were bottled up in 2007 and 2008 – when the recession acted like a cork – should help drive deal volume in 2011.
I occasionally run into the misconception that bank CEOs and directors come to AOBA to do deals, but that’s not the case. Most bank M&A transactions are a local phenomenon involving institutions in the same or contiguous markets and are negotiated behind the scenes, often by the CEOs first and later by the boards of directors.
Most attendees come to this conference to learn. How do you determine a fair value for your institution? What are buyers looking for when they scout for acquisitions? Is this a good time to sell? How do you ward off a hostile takeover attempt if your board doesn’t want to sell?
Each year we try to put together an agenda that provides CEOs and directors with the kind of knowledge that will help them make better decisions. The event is taking place at the Hyatt Regency Scottsdale Resort at Gainey Ranch and will conclude on Tuesday Feb. 1. I’ll be spending most of that time talking to CEOs and directors, listening to presentations and trying to soak up some of that same knowledge (and a little sun, truth be told), which I will share in a post-conference blog.
So stay tuned!