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R. Eugene Taylor's Capital Bank would have to pay nearly $4 million more for F. Scott Bauer's Southern Community in a new, all-cash deal thanks to market swings that complicated their earlier cash-and-stock agreement.
June 26 -
The final price Grandpoint Capital would pay for National Bank of California depends on the seller's loan losses, expenses over two years and other contingencies.
June 12
June has been a busy month for all-cash deals, as greenbacks trump bank shares as the more reliable bear-market currency.
At least six of the 16 bank and thrift mergers announced through Thursday were to be paid for entirely in cash, according to data from SNL Financial, Keefe Bruyette & Woods (KBW) and public disclosures.
The figures exclude a cash-and-stock deal announced in March — Capital Bank Financial's agreement to buy Southern Community Financial (SCMF) —
All-cash deals had been almost nonexistent in the two previous months. There was one in May and one in April, according to SNL Financial. March, which was the busiest month for deals so far this year, had the most all-cash deals with at least seven.
Why the flight to cash in June?
It all comes down to the recent market volatility, a need for more certainty for both sides and the quirky mechanics of how banks buy other banks.
Deals tend to take two or three months to come together, so transactions announced in June likely began gestating in March or April. The KBW Bank Index of 24 of the country's largest banks has fallen about 9% since the beginning of April.
The attraction of cash for bank sellers in that climate is evident: immediate liquidity and clarity about the price they will be paid. Though stock-based deals are often tax-free for the seller,
Southern Community and its shareholders were pleased to be getting cash over stock because all-cash deals deliver peace of mind, says F. Scott Bauer, the chief executive of the Winston-Salem, N.C., bank.
"A total cash consideration — there are not too many" deals like that, he says. "It's certainty on both sides. It does definitely provide more certainty, definitely."
Buyers have been stingy with cash in recent years. For bank deals worth at least $50 million announced since July 2010, 75% of the median value was paid in stock, according to KBW data.
Issuing shares dilutes the acquirers' shareholders and lowers returns on equity. But it preserves capital, which regulators have been hounding banks to stockpile since the crisis.
Paying with cash preserves shareholder returns by keeping the share count low but exhausts capital. Many of the buyers in the all-cash deals tend have a lot of excess capital.
In the past two months bankers have lost some clarity about where the economy — and their share prices — are headed. But they have gotten a better feel for how much loss-absorbing capital they will need to keep on hand, with the
Both factors make banks more willing to part with their cash.
A dollar is worth a dollar from the day the deal is signed until it closes six to nine months later. That is not the case with bank stocks, which tend to fall faster and further than other stocks when weak jobs reports and European debt concerns spook investors.
Buyers are less inclined to issue shares in a falling market, as stock deals tend to be based on a fixed exchange ratio that results in a buyer's having to issue fewer shares if its stock increases in value, and more if it decreases. Nobody wants to issue more shares.
Also, low interest rates have muddled bank profit forecasts for the rest of this year and into 2013. With revenue in the gutter, there are no guarantees that banks can drive earnings per share growth even if they keep outstanding shares low.
