Too Many Deals, Bad Timing Doomed John Koelmel at First Niagara

Build with care.

That is the lesson for other serial acquirers from the fate of John Koelmel of First Niagara Financial Group (FNFG), who lost his chief executive job after more than quadrupling the Buffalo, N.Y. company's assets to $37 billion since 2006.

Koelmel was heralded as an out-of-the-box thinker during the buildup. His deals stood out because they were large and, perhaps more importantly, they happened when M&A activity was at its low point.

His image changed as First Niagara failed to realize as much profit as hoped and a flat yield-curve environment plagued deposit-heavy deals such as those for branches of HSBC and National City.

Meanwhile, First Niagara's fortunes and the overall market headed in opposite directions. Its shares have fallen 42%, while the S&P Bank Index has risen 18%, in the last few years.

For bankers hungry for dealmaking, First Niagara's performance and Koelmel's departure are good reminders that there are no do-overs in M&A.

"If you're going to be a serial acquirer, you better make sure your back office and integration plans are top notch," says Bob Kafafian, president of The Kafafian Group, a bank advisor in New Jersey. "You can't afford too many hiccups."

First Niagara under Koelmel tried to digest three whole-bank acquisitions and two branch deals in short order. That was a tough assignment, made harder by the combination of bad decisions and bad timing tied to its purchase of roughly 100 HSBC Bank branches (excluding those resold to other banks).

The company needed to raise some money to complete the HSBC deal announced July 31, 2011, which held the promise of $9.8 billion in deposits and $1.6 billion in loans. It wanted to wait for a more favorable environment to go to market for the money, but that moment never came.

It held back until December to raise $1.1 billion in equity and debt. The raise included $467 million in common equity, priced at $8.50 per share, a 30% discount to where the stock was trading on the eve of the HSBC deal announcement. The raise also included preferred stock and debt that carries a dividend and has been a drag on earnings per share.

"They took on market risk in waiting to fund the deal," said Casey Haire, an analyst with Jefferies. "If they had just raised the equity when they announced the deal, it would have avoided a lot of their problems." Some major macroeconomic forces intervened between the deal's announcement and the raise, Joseph Fenech, an analyst at Sandler O'Neill, pointed out. Shortly after the deal was announced, the crisis over the U.S. debt ceiling peaked, the Federal Reserve cautioned that it would be two years before rates increased and the European debt problem intensified. The stock market fell precipitously and remained volatile for an extended period.

"There have been strategic missteps, but there is also an element of extremely bad luck," Fenech said. "There were a few once-in-a-generation things that happened in six months. I think that puts them in a unique situation."

Although First Niagara may have been at the whim of the iffy economy, investors and boards are still going to hold chief executives responsible for disappointments.

"It reiterates something that we've known all along: if you do the acquisition the wrong way, it is going to cost you your company or your job," says Matthew C. Schultheis, an analyst at Boenning & Scattergood. "This may give other CEOs some pause in pricing, structure. …If they are thinking about a transformative deal, they should make sure their investors understand and are comfortable with a deal like that."

First Niagara said in a press release that it is committed to remaining independent, but Schultheis said the possibility of First Niagara becoming a seller was among his first thoughts after hearing about Koelmel's departure.

Given its size, the pool of buyers would be limited, but some potential names could be KeyCorp (KEY), PNC Financial Services Group (PNC) or several of the large Canadian banks, Schultheis said.

"There are only a few ways to fix the balance sheet," Schultheis says. "They can do something fast and painful, but they don't have the capital for that. They can push through and try to turn the ship around, but that is painfully slow. Or they could let someone else do it."

First Niagara's plans are unclear, but the ouster of Koelmel this week means the options are wide open.

"The company is taking a hard look at obviously everything and is not sitting around hoping it will just work itself out," Schultheis says.