I recently read a report from FIG Partners, an investment bank, that says “M&A pricing is actually much stronger than investors realize given the fact the capital levels are twice—or at least significantly higher—than the past cycle and now price-to-tangible book values are rising.” So if pricing is, in general, improving from a seller’s perspective, it is easy to see why a bank’s board of directors would consider putting the bank up for sale.
But my question is: Why sell now when better times might be ahead?
True, addressing this issue largely depends on how the institution is positioned, geographically, by product line and yes, asset size. Further, I realize a bird in hand is worth two in the bush, and this wait-and-see approach is one that a number of advisers warn boards from taking. However, while the pool of potential buyers is larger than previous years, I don’t see it as aggressive as some would lead you to think.
Still, figuring out when a bank should be a buyer—or a seller—has been on my mind since the Royal Bank of Canada announced a deal for “Hollywood’s bank,” City National Corp., for $5.4 billion. This is the most expensive large U.S. bank deal announced since the financial crisis, based on a price-to-tangible book value of 262 percent. Since that announcement, various media outlets have speculated that buyers will pay a premium for trophy properties like City National. Many anticipate banks that cater to the wealthy will be front and center. But I’m not so sure that institutions with a similar clientele, like San Francisco-based First Republic Bank, should sell, even if approached with a huge multiple.
If you’re not familiar with First Republic, I find the bank’s story fascinating. Jim Herbert founded the bank in 1985, sold it to Merrill in 2007 for 360 percent of book value, took it private through a management-led buyout in July 2010 after Merrill was acquired by Bank of America, then took it public again in December through an initial public offering. A few years ago I sat down with Jim in their New York City offices and came away impressed: not only is the bank solely focused on organic growth, it’s also focused solely on private banking.
So I wonder. Members of First Republic’s board have a fiduciary responsibility to shareholders; however, does a short-term premium trump sustained long-term potential? For a bank that caters to the wealthy, business executives and owners, I’m sure the U.S. Department of Labor’s announcement that the U.S. economy created 257,000 jobs in January—making this the longest stretch of sustained monthly growth since the early 1990s—was well received. While the unemployment rate ticked back up to 5.7 percent, from 5.6 percent in December, The Wall Street Journal reports that the climb was likely because more Americans said they were looking for jobs, a sign of growing confidence. As the tide begins to rise, why sell the proverbial boat?
Moreover, a recent report from Deloitte’s Center for Financial Services says that, “the encouraging M&A activity seen in 2014 is likely to continue through 2015, driven by a number of factors: stronger balance sheets, the pursuit of stable deposit franchises, improving loan origination, revenue growth challenges, and limits to cost efficiencies.” However, their 2015 Banking Outlook also acknowledged that “as banks move from a defensive to an offensive position to seek growth and scale, they should view M&A targets with a sharper focus on factors such as efficiencies, growth prospects, funding profile, technology, and compliance.”
So rather than consider an exit, isn’t now the time to double down on your growth efforts?