Why Big Banks Aren’t Merging

Outside of banking, really big M&A deals appear to be back in vogue. For instance, Finnish telecom-equipment maker Nokia is in advanced talks to buy France’s Alcatel-Lucent, a deal touted by The Wall Street Journal as one that creates “a global networking behemoth” to rival Sweden’s Ericsson and China’s Huawei Technologies. This comes on the heels of Royal Dutch Shell announcing its intent to acquire BG Group for nearly $70 billion. According to a piece by Stanley Reed and Michael J. de la Merced on the New York Times’ DealBook, “if completed, the sale would be a rare bright spot for energy deal makers, as oil and gas companies have largely hunkered down while petroleum prices have plunged… Potential sellers have been leery of making deals during what they consider a temporary dip, creating an often unbridgeable gap with interested buyers.”

Indeed, as I look at these non-bank deals, I’m drawn to several parallels to M&A activity in our industry. For example, figuring out when a bank should be a buyer—or a seller—and who presents the most attractive partner, is a major hurdle. For the multi-nationals, determining how and where to position a combined entity is huge. The same might be said for deals like the one struck by Nashville, Tennessee-based Pinnacle Financial Partners for CapitalMark Bank & Trust in Chattanooga. While much smaller, the fact that Pinnacle felt it was time to do their first deal in eight years shows that knowing thy neighbor pays off, as does knowing the market within which you look to lead.

I see another parallel between non-bank and bank mergers. There is speculation that the size of Shell’s deal could inspire some wavering potential sellers to pursue deals. Indeed, Reed and de la Merced write that advisers expect more acquisitions to be completed this year, particularly once oil prices show more stability. Perhaps that’s wishful thinking on the part of the advisers? After all, they are paid when transactions happen. Certainly BB&T’s announced acquisition of Susquehanna Bancshares last November and City National Corp.’s announced sale to Royal Bank of Canada in January sparked similar thoughts that more big bank deals were on the horizon. However, no such deals have been struck so far.

In this case, the banking world presents a whole other proposition in M&A than other industries. All banks are heavily regulated, and regulators can present a significant hurdle. Just look at M&T Bank Corp.’s efforts to close on its deal for Hudson City Bancorp. That transaction continues to be postponed, thanks to the Fed not making a decision on its merger application. It’s been about 1,000 days and counting since the deal was first made public. Personally, I wonder what’s been going on in Washington all this time—because I’d be shocked if the two institutions haven’t addressed the concerns of the government by now.

Finally, major international banks already are so large, that regulators likely will block any big bank combinations at this point. Federal law prohibits any bank from obtaining more than 10 percent of total U.S. deposits or more than 30 percent of a single state’s deposits. But smaller, regional banks could pare up and presumably achieve significant cost savings with the larger scale. They may be waiting for the right deal to come around, and so are we…