Comparing Pricing for Failed Banks and Whole Banks: A Statistical Analysis

Measuring pricing in purchases of failed banks against traditional acquisitions is complex.

There is no shareholders equity, or proper track record of earnings, for the dismembered pools of assets and liabilities sold off after seizures, and hence no price to book or price-earnings multiples conventionally used as valuation benchmarks.

One common perspective across both categories, however, involves weighing goodwill (in some cases negative) against the fair value of assets acquired.

Under this measure, the bargain pricing, and sometimes the windfalls, engendered by the crisis stand in clear contrast with the latest set of headline transactions (see chart).

Among the group of large acquisitions considered here, East West Bancorp Inc.'s transaction with the Federal Deposit Insurance Corp. for most of United Commercial Bank in late 2009 came at the largest relative discount.

The Pasadena, Calif., banking company recorded an after-tax bargain purchase gain of about $300 million from the transaction, reflecting the amount by which the value of acquired assets exceeded liabilities. The pretax gain was equal to about 5% of the assets.

At the other end of the spectrum, Comerica Inc. has projected it will book about $745 million of goodwill in connection with its planned purchase of Sterling Bancshares Inc., or about 15% of assets to be acquired after accounting for an estimated $164 million markdown against the target's loan portfolio. (With the markdown, Comerica reckoned that it had agreed to pay about 370% of tangible book value, and investors punished its shares after the announcement amid criticism that it had bid too much.)

To be sure, bargain gains have hardly been automatic in acquisitions of failed banks, even during periods of severe weakness. (For example, BB&T Corp. recognized about $500 million of goodwill as a result of its purchase of most of Colonial Bank in 2009, though that amounted to a relatively slim 2.7% of the fair value of acquired assets.)

Further, a transaction's merits do not hang on a single measure.

Among other caveats, fair value estimates involve imperfect assumptions, and the transition from positive to negative goodwill is jagged: Accounting rules require that other intangible assets, and some tangible assets, be written down before booking a bargain gain.

Still, the recent trend toward higher premiums offers another view on an apparently slipping advantage for buyers.

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