Gobble, Gobble
By Stephen M. Klein
November 21, 2011
Pac Man is Dormant
“Where have all the deals gone?” a colleague of mine asked. Well, so far in 2011 there have been just 140 whole bank deals and 88 FDIC-assisted deals done. The much ballyhooed consolidation of the banking industry predicted in the beginning of the year has yet to materialize … and Pac Man is asleep.
Why Are We Treading Water?
There is no doubt in my mind that there are willing buyers and sellers, but four major impediments have limited the whole bank deals this year. One, bank stocks are simply undervalued, making it too expensive for acquirers to use stock as currency. For instance, one bank stock index is down 100% since 2007. Two, uncertainties continue to linger about the economy, real estate values, and asset quality as a whole. Three, purchase accounting marks can be significant. And, four, securing regulatory approval is still a challenge.
What is it Going to Take to Move the Needle?
I think that until the world economic situation is stabilized, a plan is in place to reduce the U.S. budget deficit, and bank stocks return to some reasonable price level, whole bank deals will continue to be sparse. Probably, only private equity groups who still have about a third of the $20 billion they raised available in “powder” will be significant players until this changes.
It is clear that the larger, healthier banks see acquisitions as a means of growth in a stagnant economy. It is equally clear that many smaller banks, particularly those that are stressed, are looking for a liquidity event. To get down to the 5,000 bank figure prognosticated by many, it would take 165 deals a year through 2020. With 90% of bank assets already held by billion dollar or larger companies, this trend is inevitable. It is just a matter of time.
History as Our Predictor
It is no great surprise that whole bank deals are down. For instance, when we had 475 mergers in 1998, bank stocks were trading at well over twice tangible book value. They are trading at less than tangible book value now, making bank stock a very pricy currency. Not surprisingly, merger premiums have tracked bank stock trading prices with current deal multiples at an average of 91.7% of tangible book value. However, the forces that have been driving consolidation in the industry from a peak of approximately 14,500 banks are more prevalent now than ever, with regulatory burden and operational fatigue at all-time highs.
What is a Bank to Do?
Ironically, both buyers and sellers need to be patient as deal obstacles recede over the coming year. Obviously, the conditions of sellers may dictate their ability to be patient. For the sellers, clean up your balance sheet. For the buyers, keep your war chest and regulatory relations strong. We have never experienced the environment we have all navigated since 2007, but we seem to be learning. So, as we approach this Thanksgiving season, many of you will be thinking “Gobble, Gobble” beyond the turkey context. The good news is that you can be thankful you are still part of the conversation.
