While the volatility in the stock market garners the attention of investors, it is also a worrisome topic for bank boards. As the Federal Reserve considers its first rate increase in close to 10 years—and China’s growth outlook continues to wane and impact economies around the world—bank boards have to consider the impact on their growth strategies, including any planned capital raises, IPOs or mergers and acquisitions.
Certainly, unexpectedly large swings in daily share prices make it difficult to price a potential M&A deal. This comes in an environment where bank M&A volume has not increased much, if at all, depending on how you look at the numbers. As you can see in the chart below, we have had just 34 deals with a value of more than $50 million year to date through Sept 7, 2015, which puts us slightly below the rate of 2014, according to Mark Fitzgibbon, a principal and the director of research at investment bank Sandler O’Neill + Partners.
Most bank deals are smaller than $50 million in value, however. In an upcoming article for BankDirector.com, Crowe Horwath LLP, a consulting and accounting firm, looked at all deal volume through June 30, 2015, and found 140 deals, slightly above last year’s volume in the same time frame of 130 deals.
Clearly, the lion’s share of the transactions has been small bank deals, and we have not seen many large transactions this year. Fitzgibbon is of the opinion that there are three dynamics that have slowed the pace of consolidation: (a) recent market volatility makes it tough to price deals, (b) large banks have generally been more internally focused than M&A focused, and (c) regulators have been slow to approve some deals, giving pause to some buyers.
This complements the perspectives of Fred Cannon, executive vice president and global director of research at Keefe, Bruyette & Woods, who reminded me that the pace of M&A “is simply a lot slower than it was prior to the crisis, and those of us who remember pre-crisis M&A, it will likely never be the same. We don’t have national consolidators buying up banks, and regulation does not allow the same speed of consolidation we previously had.” In Cannon’s words, “volatility certainly slows deals a bit, but it postponed deals rather than stopped them.”
Contrast that with initial public offerings, which can really take a beating in a volatile market. Depending on the market and the individual bank’s potential value, it may no longer make sense to price an IPO, or it may make sense to delay it.
Here, I agree with Cannon’s assertion that a weak market is “more detrimental to IPOs than M&A. With M&A, the relative value of the buyers’ currency is often more important than the absolute level.” So if values fall for both the buyer and seller, the deal may still make sense for both of them. For potential deal making, market volatility is rarely good news, but it may not be as bad as it seems.