The Story Behind 2018’s Most Transformative Deal

Malcolm Holland, the CEO of Veritex Holdings in Dallas, Texas, wanted to expand in the Houston market in 2017 and was looking for a deal. He pursued three targets, but they were all snapped up by competing buyers.

Just as Holland was resigning himself to expand more slowly through de novo branch expansion, his phone rang. It was Geoffrey Greenwade, the president of Green Bancorp, a Houston-based bank with $4.4 billion in assets.

Would Holland be interested in meeting with Greenwade and Manuel Mehos, Green’s CEO and chairman? Greenwade asked.

Holland thought the executives were courting him. Instead, they asked if Veritex wanted to acquire Green.

It’s a unique story, as the now-$8 billion Veritex was smaller than Green when the deal was announced—Green’s balance sheet was 40 percent larger than Veritex’s.

The acquisition of Green—which closed on Jan. 1, 2019—has more than doubled the size of Veritex, and significantly increased its share in a second Texas market. It’s for these reasons that Bank Director identified this deal as the most transformative of 2018.

A deal as transformative as this—in which the seller is bigger than the buyer—is rare. With good reason: Most banks prefer bite-sized deals to minimize integration risk.

But this kind of deal can work well for the right buyer—expanding its capabilities and markets in one fell swoop.

To measure which of the deals announced in 2018 were the most transformative, Bank Director calculated seller assets as a percentage of buyer assets, using data from S&P Global Market Intelligence. The larger the seller compared to the buyer, the greater the opportunity and the more complicated the integration. We also examined seller size as an absolute value, to represent the deal’s transformative impact in its market.

You’ll find a list of the top ten deals at the end of this story.

Because the list does not award deal size alone, the two largest deals announced last year—Fifth Third Bancorp’s acquisition of $20 billion asset MB Financial and Synovus Financial Corp.’s acquisition of $12 billion asset FCB Financial Holdings—did not make the list. MB represented just 14 percent of Fifth Third’s assets and FCB 38 percent of Synovus.

Despite the difference in size, the deal between Veritex and Green made sense. “What we provided for them [was] a really clean credit history, and our stock had a higher value,” says Holland.

Just as importantly, says Holland, “I needed to mark their balance sheet. If they were going to be the accounting acquirer …. The deal would not have penciled out. So, I needed to acquire them, from an accounting standpoint, and mark their balance sheet down where it was appropriate.”

“Investors viewed the Veritex franchise maybe a little better than Green,” says Brett Rabatin, a senior research analyst at Piper Jaffray who covers Veritex. In 2015, a troubled energy sector resulted in a higher level of charge-offs in Green’s loan portfolio, raising concerns among investors that there could be further credit problems down the road.

Green addressed the energy exposure, and oil and gas represent a small portion of Veritex’s loan portfolio today, says Holland.

The combination roughly doubled Veritex’s branch footprint and has greatly expanded its presence in Houston—from one office to 11, giving Veritex the scale it needs to better compete in that market. The bank also gained expertise in commercial and middle market lending, as well as new treasury management products and services.

Green CFO Terry Earley has stayed on with Veritex in the same role, and Donald Perschbacher, Green’s chief credit officer, also joined the executive team. Greenwade is now president of the Houston market. Six directors from Veritex and three from Green, including Mehos, form the current board.

Holland isn’t afraid to adopt new practices from a seller that will improve his bank. It’s a lesson he’s learned over the years integrating the bank’s six previous acquisitions. “Individually, none of us could probably get where we can get together, and so let’s pick the best of each side, and together we will be better,” says Holland.

He’s also learned that integrating people—not technology and systems—ultimately determines the success of a transformative deal.

“The question is, how do you take that culture, your culture that’s been so successful, and institute it into their culture, yet picking up some of the things they do and putting into yours,” says Holland. The integration team spends time reviewing employee handbooks, for example, picking up new practices from the seller.

Culturally, Holland believes the Green acquisition is the best deal his bank has done. “Everybody pulling in the same direction, everybody working toward the same target. The openness and the collaboration have been unbelievable,” he says.

Veritex is now the 10th largest Texas-based banking franchise as a result of this transformative merger. “We think this bank has the ability to be a Texas powerhouse,” says Holland.

Ten Most Transformative Deals in 2018

Source: S&P Global Market Intelligence
*The score reflects how each deal ranked in terms of the impact of the seller’s size on that of the acquiring bank and the absolute size of the seller.