The key is being big enough so that you can support all of the costs of regulation.
That is John Thain, the CEO of the $35-billion asset CIT Group, after he announced the biggest bank M&A deal of the year, the purchase of Pasadena, California-based OneWest Bank for the equivalent of $3.4 billion in cash and stock.
Isn’t it curious that a bank that large would want to get bigger in part because of the costs of regulation? There are other benefits to the deal:
- The transaction is immediately accretive to CIT’s earnings per share;
- CIT’s total assets will increase to $67 billion and its total deposits will increase to $28 billion; and
- The deal combines CIT’s national lending platform with OneWest’s 73 regional branch banking network in Southern California.
CIT has no plans to become a “serial acquirer,” of financial firms, Chief Executive Officer John Thain said on Bloomberg Television last week. Still, could this be the beginning of more traditional M&A activity, as banks try to get bigger to manage costs better, including the costs of regulation such as the Dodd-Frank Act? Thain seems to think so.
Every year, we have our mergers and acquisitions conference in Phoenix in January, Acquire or Be Acquired, the biggest event on our calendar in terms of attendance. Last year, the topic that returned again and again was the so-named mergers-of-equals (MOEs). As we discussed from the stage in Arizona, the market for such strategic mergers appeared ideal. With many noting that banking is an economy of scale business, historically low valuations meant less opportunity for a premium in a sale. With a lack of organic growth plaguing many institutions, I wasn’t surprised to see other MOEs announced in the subsequent months. (Good examples include the merger of $2-billion asset VantageSouth Bancshares and $2-billion asset Yadkin Financial Corporation, which will result in North Carolina’s largest community bank with more than 80 branches). But that environment is changing. Bank valuations are increasing, asset quality has improved, and deal premiums are making a come-back, along with the banks able to pay them.
Of course, no two deals are alike—and as the structure of certain deals becomes more complex, bank executives and boards need to prepare for the unexpected. The sharply increased cost of regulatory compliance might lead some to seek a buyer; others will respond by trying to get bigger through acquisitions so they can spread the costs over a wider base. So as I consider last year’s MOE with this summer’s CIT deal, I see a real shift happening in the environment for M&A.
I see larger regional banks becoming more active in traditional bank M&A following successful rounds of regulatory stress testing and capital reviews. Also, it appears that buyers are increasingly eyeing deposits, not just assets. This may be to prepare for an increase in loan demand and a need to position themselves for rising interest rates.
In the end, no one knows what will happen with bank M&A in the coming months, but we can guess. As Crowe Horwath LLP pointed out in a recent post, 2014 may actually turn out to be the year of M&A.