Cascade Bancorp (CACB) has a message for likely sellers: Join us now before the market realizes how good our last deal was.
The $2.3 billion-asset company's stock is still down 20% from last October when it agreed to buy Home Federal Bancorp in Nampa, Idaho, for $266 million. The price was $69 million more than the deal Home already had pending with Banner Corp. (BANR).
Cascade's offer was considered pricey, but well worth it if management could accomplish goals that included a 24% reduction in expenses at the combined company. The deal closed last month and the company converted Home to Cascade a week later.
If all goes well some of the expense cuts could start to show up in the next couple of quarters. The Bend, Ore., company, which is considering more deals, views the potential upside in its stock as a carrot to offer targets.
"My belief is that our currency is a positive for us," says Terry Zink, Cascade's president and chief executive.
"People haven't recognized any of the upside of the Home deal," he adds. Sellers "would be getting our value at this point in time and the potential upside that is up there once people recognize the transformational nature of" the Home deal.
Zink says he'd like another deal to happen this year, but the company is not exactly on the prowl.
"We're not beating the pavement, but as things come across my desk, we've been looking," he says. "And we're getting more phone calls than we did last year."
Though several of last year's most-notable deals were marked by an immediate increase in the buyer's stock price, Zink says it is important to note that about 93% of its stock was owned by the investors who led its $177 million recapitalization in 2010, leaving 7% to trade on the open market.
"It doesn't take a lot to move our stock around," Zink says. The Home deal brought liquidity to the company's float, with Home shareholders receiving 24.3 million shares.
Cascade will need to be assured in its ability to execute in order to sway sellers with the upside from Home, analysts say.
"If they are confident in the strategy and the ability to execute on it, I can see" management's point about the stock having potential to appreciate, says Jeff Rulis, an analyst at D.A. Davidson. "There is upside in the stock if they realize the goals that they laid out and deliver on them."
Selling anyone on upside potential might be tricky, but analysts say the company's current valuation is high enough to accomplish a deal even if it is down from before the Home deal.
"The upside potential is a bargaining chip, but they are trading at 1.5 times tangible book value," says Jacquelynne Chimera, an analyst at Keefe, Bruyette & Woods. "That is not a bad valuation for M&A. It is in line with most of their peers."
As it mulls more M&A, Cascade is forging ahead with integration of Home. The deal closed on May 16; Cascade completely converted the systems a week later. It has already closed 13 overlapping branches in the Boise, Idaho, market and in Oregon.
The branches were within walking distance of each other, Zink says. Closures were relatively balanced, including seven Bank of the Cascades branches. About 200 jobs were cut, representing about two-thirds of Home's workforce, but 40% of the cuts came from the Cascade side.
Cascade worked with KPMG to manage the conversion and had circled Memorial Day weekend for the switch. The companies decided against pushing back the conversion although the deal's closure, originally set for March 31, was delayed by questions from the Securities and Exchange Commission. Cascade also began sending letters to clients about branch closures as the deal was pending.
System conversions can range from three months to more than a year depending on a deal's size, analysts say, making the timing of the Home conversion a rarity.
"I personally have never heard of a bank moving that quickly, but they are well on their way now," Chimera says.
The companies used the delay as an opportunity to get everything lined up, Zink says. Given the higher level of cost cuts in the deal the average deal boasts a 25% to a 35% reduction of just the target's expenses it was critical to move quickly so Cascade could unify the remaining employees.
"Until people feel comfortable with what is going to happen with them it is impossible to have the cultures blended," Zink says.
The ability to get a large chunk of the expense cuts completed should help sell the market on the transaction in the back half of this year, Zink says. "We've done a great job at positioning this merger and we've been out talking to investors and asking them to judge the results in the third and fourth quarters," he says.
Rulis says the cuts are just the first part of a successful deal. Cascade will need to show that it was able to successfully integrate the companies' cultures and build value going forward.
"There are some hazards in pulling off a deal that is more aggressive with cost saves," Rulis says. "The next layer is a successful integration where the cultures blend and they are able to get some good momentum."