Betting the Whole House
As merger and acquisition activity returns to the bank space, one transaction is experiencing a revival: the merger of equals.
On paper, MOEs look great: They often feature substantial cost savings, turbocharged earnings and low premiums that minimize dilution. Those are crucial outcomes, especially in an environment with low interest rates, tepid loan demand and a greater emphasis on digital channels. These peer mergers offer two banks a way to get big, fast. Perhaps it’s no surprise that these deals are having a moment.
“[Banks] recognize that … the environment was changing more rapidly than it usually does. It’s time to be bold and aggressive and do something that looks higher risk — otherwise you’re going to get cast to the side,” says Brett Rabatin, director of research at Hovde Group. But he’s cautious amid the excitement of these transformative and strategic announcements.
Rabatin covers Tupelo, Mississippi-based BancorpSouth Bank, which announced on April 12 that it would merge with Houston-based Cadence Bancorp. Rabatin is optimistic about the deal’s value, but his report had questions about what other growth options BancorpSouth considered and whether the two banks can effectively combine credit cultures.
“We think investors could take a ‘show-me’ approach on many MOEs, as the potential synergies of lending platforms and ability to deepen relationships can easily be masked by what appears to be just a vanilla scale and ‘bigger is better’ approach to regional franchises,” he wrote.
A week later, Stephens Managing Director Matt Breese struck a similarly cautious tone in his April 19 note following the announcement that Waterbury, Connecticut-based Webster Financial Corp. would merge with Pearl River, New York-based Sterling Bancorp. Although not a low premium deal, the similarly sized institutions advertised it as a merger of equals.
Breese wrote that Webster had not historically been active in whole-bank M&A, and was focused on its home markets in Connecticut and Boston compared to the New York metropolitan area.
And while any deal carries risk for both the buyer and seller, Rabatin points out that these types of transactions bet the whole house of two franchises on a brighter, bigger and more profitable future. The deal risks are ambiguous and hard to nail down: The pro-forma company looks promising, but management teams can’t account for a potentially rocky integration or an unsatisfactory ending.
“With a regular acquisition, the first thing that’s going to [draw criticism] is the tangible book dilution payback,” Rabatin tells me. “In the MOE world, it’s more: Does the narrative make sense? Did they do this for the right reasons?”
Time will tell if these deals, and other transformative merger announcements waiting in the wings, deliver on their stories.
• Kiah Lau Haslett, managing editor of Bank Director
