This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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Despite the collapse of bank stocks in 2007, few industry observers predict there will be a rash of mergers and acquisitions by regional and community banks.
Deals announced last year are falling through. Targets are holding out for the high valuations their peers enjoyed in the deals of yesteryear. Bidders are sitting on the sidelines hoping for even more dramatic declines in targets’ stocks.
Executives, bankers and analysts say all involved, bidders and targets alike, are discouraged by their own depressed stock prices, weak earnings and credit uncertainties.
”The last thing banks want to worry about is M&A,” said an analyst familiar with the Mid Atlantic region. ”They’re worried about the bottom line.”
An industry executive in the Midwest who has participated in M&A in the past echoed the analyst’s remarks.
”The bigger banks have to get their arms around the credit issues,” the executive said. ”I think you are going to see less and less M&A.” The executive added deals that will go through will be fire sales and those arising from long-term strategic discussions.
The case of two large Ohio-based regional banks seen in the industry as possible merger candidates, National City and KeyCorp, illustrates the current doldrums.
National City, which has USD 154bn in assets, announced early this year it had hired Goldman Sachs to raise additional capital and planned to reduce its dividend 49%. Compared to a year ago the Cleveland bank’s stock is down 58%.
A merger with its cross-town neighbor, USD 97bn asset KeyCorp, might provide a way to reduce costs and improve earnings. KeyCorp has a history of making in-market acquisitions and has publicly expressed interest in M&A.
An industry banker pointed out that although a merger between the two banks would provide cost savings, in the current environment it’s difficult to calculate the projected earnings of the combined institution, making a deal unlikely in the near term.
”People want to push away from the table and hold onto their chips a little bit, see how the world is going to settle out before they make any big moves,” a second industry banker added about a possible National City deal.
Drop down a few asset-size classes to the level of community banks and you’ll hear similar stories from bankers and executives. There’s pressure to consider strategic alternatives, but now is not the right time to follow through.
Targets in the Southeast still want 3x book, a sell-side banker said. A familiar refrain from bidders is that sellers’ price expectations haven’t ”changed to meet the new operating environment”, as one Florida executive put it.
The sell-side banker said a new trend he has seen in the Florida market is that start-up banks are feeling pressure for faster exits. While ten years ago he talked to 10 to 12 year-old banks seeking advice, today on average the banks he talks to are four to five years old.
The fast turnover, however, concerns buyers. ”With a new company they assume there must be issues,” the banker said.
To be sure, there’s always grumbling and prices are always either too high or too low, depending on your viewpoint. Some observers suggest now is the opportune time for certain bidders to do deals.
The Mid-atlantic analyst suggested PNC Financial Services, the Pittsburgh, Pennsylvania-based bank, may be in a position to acquire now that it has digested Riggs National and Mercantile Bankshares, acquisitions it made in 2005 and 2006. Its stock is down only 14% over the past year, giving it a market cap of around USD 21bn.
On a smaller scale, USD 1.3bn asset Bank of Florida is seen as a consolidator in the Sun Shine State, the sell-side banker said. This news service has previously reported that private equity is increasingly looking to make community bank acquisitions.
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