Ralph W. Babb is back to uttering a four-letter word Wall Street may or may not be ready to hear: "Deal."
The chief executive of Comerica (CMA) in Dallas — whose takeover of Sterling Bancshares in Houston last year irked investors — has quietly begun floating the idea of returning to the M&A game.
Babb said in a meeting with investor research firm Discern on Aug. 30 that Comerica is ready to entertain deal talks again, Discern Managing Director David Bugajski wrote in a research note to clients this week. Yet Babb stressed that his top priority is to boost profits by selling more loans and services, the note said.
Comerica would consider small deals for small consumer lenders that could add to its presence in the five states where it already has 493 branches: Texas, Arizona, California, Florida and Michigan, Bugajski wrote. Comerica may also look at acquisitions of well-run business banks in growth markets where Comerica does not operate, Babb said, according to Bugajski.
Those were slight but notable tweaks to the strictly organic-growth-first mantra that Babb and his deputies have been repeating since closing the $780 million purchase of Sterling in July 2011.
The change in tone matters because bankers in general — and Babb in particular — choose their words carefully when talking about what they might want to buy. When twice asked about M&A in discussing earnings in July, Babb pledged to focus on making the best of what the company already has. "We're focused on the communities that we serve and opportunities that may or may not arise in those communities," Babb told analysts on July 17.
A Comerica spokeswoman echoed that cautious openness.
"Comerica is pleased with our current footprint. The key for us is that an acquisition has to fit our customer relationship strategy as well as geographically within our growth markets of Texas and California," Wendy Bridges, national communications director, wrote in an e-mail Friday. "While an acquisition that accelerates growth could be appealing, it is important to know that our business model does not rely on it."
Why the change in tone?
Hard numbers and shifting perceptions are among the possible explanations, Bugajski says. Babb was the one big-bank CEO who dared to pay a precrisis-level premium for Sterling at a time when the market was demanding that buyers seek discounts. Comerica's shares still have not recovered from the sell-off the deal spurred, despite the company's fairly strong performance in the first half of the year.
Comerica closed Friday at $32.23, or about 99% of tangible book. It traded at $42.25, or 132% of tangible book, just before its acquisition of Sterling.
That deal pegged Comerica as something of an M&A risk because the deal was heavily dilutive to book value and shareholders. Most deals tend to just dilute one or the other, not both.
While Babb is not apologizing for that deal, he may be seeking to change the perception that Comerica overpays.
"It's hard when you march to a different drummer — they are the only ones" who paid a high multiple for a bank, Bugajski says. "The last time they did a deal was nine years before. This was not a bank that you are used to seeing do deals. You have got to prove your way out."
Babb may also be simply turning the page and looking long; his new M&A guidance is similar to his pre-Sterling M&A outlook. He would earnestly like to bulk up and wants investors and potential sellers to know that. Buying branches can be more efficient than opening them, and Comerica wants to expand into new attractive territory such as Denver or Phoenix.