Clearing the Way for M&A

October 17th, 2018

asset-10-17-18.pngOn May 24, 2018, President Donald Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act, bringing regulatory reform to community banks across the country. Two key provisions in the bill increase the threshold for systemically important financial institutions, or SIFIs, from $50 billion to $250 billion in assets, and exempt banks with assets between $10 billion and $50 billion from mandatory stress testing. We believe both provisions will change the M&A playbook for banks up and down the asset food chain, which is already starting to happen.

An uptick in M&A
The same week the bill was signed into law, Cincinnati-based Fifth Third Bancorp announced its acquisition of Chicago-based MB Financial. The $4.6 billion transaction represents the largest bank M&A deal since 2008 by a U.S.-based buyer. All told, there have been six transactions exceeding $1 billion in value announced since May 1, including acquisitions by Synovus Financial Corp., Cadence Bancorp. and Independent Bank Group, among others.

The increase in the SIFI threshold impacts only 15 publicly-traded institutions, but we think the benefits will trickle down to banks below $50 billion in assets, as the removal of a future regulatory speed bump could incentivize deal-making. There were 22 publicly-traded institutions in the second quarter with between $25 billion and $50 billion in assets, and 74 publicly-traded institutions with between $10 billion and $50 billion in assets. Acting as an additional catalyst, we believe potential for lower compliance costs will enable banks to allocate more resources toward M&A.

BB&T Corp. offers a case in point. On the bank’s second-quarter earnings call in July, Chairman and CEO Kelly King said when BB&T gets back in the M&A game, it will focus on targets with $20 billion to $50 billion in assets. It would be the first time in two years that BB&T, the 10th biggest bank in the country, will be active on the M&A front. Its last deal was in 2016, when it paid $1.6 billion to acquire National Penn Bancshares, a bank based in Allentown, PA.

Gauging the market’s response
While there appears to have been an initial uptick in deal activity since May, the market has often penalized the buyer’s stock price in the wake of an announcement. The average one-day stock price performance of a bank after announcing a deal was a negative 5.6 percent, which only worsened over time.

The day after Fifth Third announced its acquisition of MB Financial, for instance, its stock declined 7.9 percent, roughly equivalent to the anticipated 7.7 percent dilution to its tangible book value per share. The impact on Synovus Financial’s stock was even more severe. It fell 8.7 percent the day after its acquisition of FCB Financial Holdings was announced, even though Synovus projected a mere 3.3 percent dilution to its tangible book value per share. Indeed, this has been the case across all six of the $1 billion-plus deals disclosed since May 1.

The net result is that, while there appears to be an uptick in the velocity of deal-making, acquisitive public banks must remain mindful of the market’s perception of overpaying. On deals less than $1 billion in value, buyers that have structured and priced them appropriately have generally been rewarded by the market. But on deals greater than $1 billion in value, there does not appear to be a correlation between a deal’s metrics and a positive reaction of the market. Thus, the jury still seems to be out on whether or not the markets want to see large bank M&A.

Information contained herein is from sources we consider reliable, but is not guaranteed, and we are not soliciting any action based upon it. Any opinions expressed are those of the author, based on interpretation of data available at the time of original publication of this article. These opinions are subject to change at any time without notice.

rmckinney

Rory McKinney is the Head of Investment Banking at D.A. Davidson & Co., where he leads the business with over 80 professionals in 9 offices throughout the United States. Since joining D.A. Davidson in 2007, he has successfully advised numerous public and private companies on merger and acquisition and capital raising assignments.