Best M&A Strategy

December 18th, 2018

Best-M&A.pngA.png bank’s M&A strategy is only as good as its latest acquisition.

To identify the banks with the best M&A strategies, Bank Director examined the acquisition activity for each bank over a five-year period ending June 2018. We looked at assets gained via acquisition, both in absolute terms and as a percentage of total assets, which normalizes the category for bank size. We also factored in how many growth markets each bank entered through M&A, based on the Milken Institute’s index of the best-performing cities, which evaluates growing markets.

To understand the financial impact of deals, we looked at how much the acquiring banks paid relative to the average tangible book value of targets for the year. We also looked at how the announcement of each deal impacted the acquiring bank’s stock price. Banks were rewarded as well if their deals were all accretive to earnings in the first year. We also analyzed growth in tangible book value and earnings per share, to understand the long-term impact of each bank’s acquisition strategy. Bank analysts were also surveyed.

Each bank was scored relative to its regional peers. Regional winners were then scored again relative to each other to determine the overall category winner. Due to this second scoring, the overall winner’s final score differs from its regional score.

Two banks topped the overall category for the best M&A strategy: M&T Bank Corp., in the Northeast, and Western Alliance Bancorp., in the West.

M&T gained more than $35 billion in assets—30 percent of its total assets— as a result of its 2015 acquisition of New Jersey-based Hudson City Bancorp, a deal that took more than three years to close due to regulatory concerns around Bank Secrecy Act and anti-money-laundering compliance practices at M&T.

King.pngM&T is a notoriously disciplined buyer, which was reflected in its latest acquisition. It bought Hudson City for a steal: 38 percent below the average tangible book value for the year. Wall Street liked it. M&T’s stock rose almost 3 percent the day after the deal was announced.

Patience isn’t just a virtue at M&T—it’s central to the bank’s culture and strategy, says Chief Financial Officer Darren King. The bank focuses on in-market deals, or those in contiguous markets. It looks for sellers where local management is willing to stay through the integration. And it takes a Goldilocks approach in terms of target size. “We’re cautious not to go too big, because then it increases the risk—because it’s tougher to combine the cultures,” says King. And since some risks aren’t dependent on size, M&T avoids targets that are too small. “If you’re going to take on that risk, it needs to be worth the trip,” he says.

Western Alliance has cultivated a similar reputation as an astute acquirer.

Thirty-six percent—more than $7 billion—of its assets have come from bank acquisitions completed over the five-year period we examined. The bank also saw the highest gain in tangible book value per share over the same period among the banks examined in this category, at 266 percent.

“Everything that they’ve done has been additive,” says Brett Rabatin, a senior research analyst with Piper Jaffray.

The newly renamed Bank OZK (formerly Bank of the Ozarks) was the top acquirer in the South. Its $9.6 billion in assets gained through acquisition account for 45 percent of the bank’s existing assets, with an average stock price increase of 2.74 percent immediately post-announcement, though its stock suffered more broadly in the latter half of 2018, as charge-offs have climbed in its portfolio of out-of-market commercial real estate loans. Bank OZK has been more than willing to expand outside its Arkansas home. It entered 115 growth markets with its acquisitions in Florida, Georgia, North Carolina, Texas, Arkansas and New York.

Rounding out the category, Great Western Bancorp topped the Midwest for its accretive, well-priced acquisition of HF Financial Corp. in 2016. It paid a 35 percent premium to tangible book value, just below the broader industry average for the year of a 37 percent premium.

Signature Bank, Webster Financial Corp., BankUnited, Bank of Hawaii Corp., First Republic Bank and Fifth Third Bancorp were not scored in this category because they did not acquire another bank in the five-year period we examined. (Fifth Third’s acquisition of Chicago-based MB Financial isn’t expected to close until the first quarter 2019.) Excluding these banks from this category does not harm their position in the overall ranking.

How They Ranked: Best M&A Strategy

      SCORE TOTAL BANK ASSETS
GAINED VIA ACQUISITION
(THOUSANDS)
ASSETS GAINED VIA ACQUISITION AS % OF TOTAL ASSETS
WINNER: Western Alliance Bancorp. (TIE)
WINNER: M&T Bank Corp. (TIE)
1.81
1.81
   
           
Northeast
  1 M&T Bank Corp. 1.30 $35,099,327 29.6%
  2 Sterling Bancorp 1.48 $20,655,761 68%
  3 Community Bank System 2.04 $3,072,552 28.6%
Midwest
  1 Great Western Bancorp 2.11 $1,140,169 9.7%
  2 Chemical Financial Corp. 2.22 $9,908,783 51.4%
  3 Huntington Bancshares 2.30 $26,929,025 25.9%
  4 Commerce Bancshares 4.04 $256,220 1%
South
  1 Bank OZK 1.70 $9,624,632 45.2%
  2 South State Corp. 2.04 $8,242,411 57%
  3 FCB Financial Holdings 2.22 $1,541,012 14.4%
  4 Home Bancshares 2.37 $7,582,759 52.5%
West
  1 Western Alliance Bancorp. 1.33 $7,244,498 35.7%
  2 Cathay General Bancorp 1.93 $1,608,804 10.3%
  3 East West Bancorp 2.74 $1,636,209 4.4%

SOURCES: Federal Deposit Insurance Corp., Federal Financial Institutions Examination Council, S&P Global Market Intelligence,Yahoo! Finance, The Milken Institute, Sperling’s Best Places, bank websites, filings and other public information

Bank Director Research Group