To Deal or Not to Deal? That is the Question
By Stpehen M. Klein
July 2, 2008
It is now July and the first six months of 2008 have produced a record low number of merger and acquisition transactions. We have seen a number of proposed deals fall apart due to loan due diligence issues, abrupt stock price declines, tax issues and unrealistic seller expectations in a changing world. This Cyber-Graham is intended to provide insights, based on our first-hand experience, as to the perspective of both buyers and sellers, as well as a glimpse into the future.
The Sellers’ Perspective
Many sellers still have unrealistic price expectations. Given the severe reduction in bank stock prices, as well as the dearth of available capital (can you say “no trust preferred”), sellers can’t expect to attain the level of premiums paid in recent years. Also, sellers are requiring a higher level of cash in the deal and aggressive price protection on the stock side. Finally, sellers are nervous about acquirors’ asset quality and have more aggressively conducted “reverse due diligence.”
The Acquirors’ Perspective
With stock values down, buyers don’t have the rich currency to pay large premiums. Historically to pay those premiums, deal multiples have tracked bank stock trading prices. With prices down, buyers can no longer afford the large premiums. Further, the cash portion of any purchase is much more challenging to fund. The market for pooled trust preferred securities has effectively all but dried up and is pricey where available. Stock offerings are dilutive at today’s bargain basement prices. Nevertheless, several companies are going back to their shareholders for more equity.
The Regulators’ Perspective
These are tough times for the regulators. They really are between a rock and a hard place. They don’t want to miss anything, but realize that if they don’t show some tolerance, they could adversely impact the economic recovery. No doubt, capital is the elixir of the Gods. We suspect deals will be more closely scrutinized with a focus on capital levels, asset quality and the quality of management.
Where Do We Go From Here
Many potential sellers are waiting to see where the deal market will turn. However, there are more than a few seasoned bankers who have worked their whole career with plans to “sell out” and retire. With deal multiples dropping, that “exit strategy” has been postponed or rethought. A dose of reality is that bank stock price and deal multiples probably will not return to the historic levels of the past decade. Realistically, bank stock trading multiples settling out at 1.5 times book and deal multiples coming back to 2 times book may be optimistic for the foreseeable future. Clearly, there will be opportunities for the strong and well-capitalized. Mergers of equals may also come about as banks look for alternative exit strategies or to achieve cost savings and efficiencies to offset thin margins, soft loan growth, regulatory burden, and asset quality challenges.
Conclusion
All in all, we are going through unprecedented times. Now is when bankers, lawyers and investment bankers get to earn their money by engineering creative strategies and solutions in an ever-changing market.
For more information on this topic, please contact Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) if you should have any questions or wish to discuss issues specific to your financial institution.
