If the early M&A announcements are any indication, 2013 will be the year of deals that build out rather than bail out.
There have been 28 deals since Jan. 1 — including three brokered by the Federal Deposit Insurance Corp. — with an aggregate deal value of $1.4 billion. That compares with 39 deals valued at $1 billion, including nine brokered by the FDIC, during the same period last year, according to data from Phil Weaver, a partner at PricewaterhouseCoopers.
Though the volume is down slightly when failed-bank deals are excluded, observers say the increased value shows that the merger market is moving away from buyers' rescues of troubled banks to deals that result in a stronger combined organization.
"Sellers are looking for a strategic partner now more than a financial lifesaver," says Bob Jones, the chief executive of Old National Bancorp (ONB) in Evansville, Ind. "It is moving away from 'how do you survive?' and toward 'how do I grow?'"
Some of the largest agreements announced this year back up Jones' comments. United Bankshares' (UBSI) deal for Virginia Commerce (VCBI), F.N.B.'s (FNB) for PVF Capital (PVFC) and SCBT's for First Financial Holdings (FFCH) involve buyers who are looking to expand their earning assets and market presence by pairing with banks in complementary, if not exactly overlapping, markets.
The sellers, meanwhile, had cured their credit woes but were concerned about their long-term prospects as independents. Those deals were priced at premiums to the seller's tangible book value ranging from 132% to 183%.
"We are seeing in-market deals with big expectations around cost savings with banks that are trying to get to that $10 billion-asset threshold," says Weaver, who lead PwC's U.S. bank M&A practice. "They are looking to do deals that fit that profile and are willing to pay premiums above what we've seen to do that. The benefits of getting larger have never been greater."
M&A chatter is moving from the executive suite to the boardroom, Jones says. Management teams that may have pushed for a deal a few years ago were doing so because they feared for their company's survival. "If you look immediately post crisis, if you're a CEO, you're going through banker hell. You're fighting hand-to-hand combat," Jones says.
Board members may have been reticent then because they wanted to protect their investment. Now their banks are in better shape, but the prospects of a rosy future are poor.
"There was some premature euphoria," Jones says. "Maybe last year they were more energized about the recovery and [now] see this slow, sluggish economy. They are planning 2013 and want to know where the potential is and if maybe there is a better solution."
Building scale to combat the tough lending, interest rate and regulatory environments is a familiar idea. But those forces are combining with stronger balance sheets and a more stable stock market to cultivate a favorable M&A environment, observers say.
"Asset quality has mostly recovered, balance sheets are incredibly healthy, there is not as much volatility in stock prices and then you have the slow-growth and slow-rate environment — it is all just a perfect storm for the beginning of a robust M&A cycle," says Chris McGratty, an analyst at KBW. "I know the industry has been pounding the sand as to when it is going to start, but to me, it feels we are at the start of steady M&A."
M&A in the broader corporate world has surged among companies that survived the downturn but are looking for ways to prosper in the ongoing malaise. So far this year, Warren Buffet's Berkshire Hathaway agreed to buy ketchup maker H.J. Heinz, American Airlines agreed to buy US Airways and Michael Dell has bid to take his namesake company private.
Others agreed with McGratty that the relatively larger bank deals are a sign that 2013 might be a good year in dealmaking.
"It certainly seems like the dam may be starting to break," says John Moran, an analyst at Macquarie Equities Research. "It appears to be more of a willingness to have a conversation. Some of the guys who have been logical buyers say the chatter is back."