Banks agree on acquisitions to boost shareholder value, but how do investors value acquisitions?
Joseph Stieven, chief executive of Stieven Capital Advisors in St. Louis, manages an eight-year-old stock portfolio that includes investments in 60 banks across a wide variety of asset classes and geography. His $200 million portfolio is teeming with banks that have emerged as buyers or sellers in the past year.
In an interview Wednesday, Stieven, a former director of financial institution research at Stifel Nicolaus and a one-time bank examiner, discussed what he views as the drivers and trends of bank consolidation.
Here is an edited transcript of that conversation.
What is your take on the current state of bank M&A?
STIEVEN: We view bank M&A as having cycles. We believe that we are in the early innings of this cycle — first or second innings, maybe.
Banks are experiencing more and more pressure to gain operating efficiencies because of the regulatory burden caused by the Dodd-Frank Act, the Durbin Amendment and Consumer Financial Protection Bureau. I'm not saying those things are bad, but there is a true cost that comes with them.
There is also the legal pressures and accounting pressures that are causing all banks to search for operating efficiencies, and I believe it will manifest itself in an increase in M&A. That is especially true as the asset quality cycle appears behind us.
How does M&A play into your overall investment philosophy?
We've been anticipating this for a long time. There are several ways to be involved on both sides [of a deal].
In the last couple of months, there have been several acquisitions where the buyer's stock has gone up once the transaction is announced. SCBT (SBCT) announced its deal for First Financial [in South Carolina] and its stock rose probably 15%. Same thing happened with Renasant [when it agreed to buy First M&F].
Of course, you can make money on the seller's side, too. We own Sterling Bancorp (STL), for example. You can make money on both sides; you just have to be choosey. It comes with grey hairs and scars, but if you know how to sift the information you can make money
Why do you think the market is warming up to buyers?
The buyers are using their excess capital in highly accretive to earnings deals while having an acceptable level of book value dilution. I think the market is pleased to see that.
Are other potential buyers watching this trend?
It is a little bit like getting dates for the prom. My guess is that everybody is watching everybody right now. The chitter-chatter is at a very high level.
How can buyers avoid making bad deals?
The failures of past acquisitions will be the same failures today. The number one key to success is culture. There has to be a dominant culture that everyone buys into. I've also found that whenever banks do acquisitions for asset growth sake alone it leads to unsuccessful transactions. An acquisition to enhance franchise value that doesn't enhance shareholder value is simply a lie. If you look at some of the big asset aggregators of the last five, 10 or 15 years, you find a highway littered with the shares of bad deals. It is like driving through a junk yard.
Good acquirers make sure that their shareholders benefit when they do a transaction. The yardstick to measure everyone by is the acquirer's share price after the deal.
What do you think of current deal prices?
Smart buyers have come out of their foxholes a little bit faster, but are making sure their deals are well received by the market. If someone thinks they deserve the same pricing from 2005, that's great, but they aren't going to the prom. Life's changed dramatically, but we are all big kids.
We've seen two shareholder lawsuits filed this week that question the value of recent deals. With prices where they are, should banks who want to sell stick to auctions?
I don't know the merits of the suits, but unless I'm mistaken, we still live in America. If you want to sue 'em, sue 'em. But I don't think people have to avoid negotiated transactions. They have to fulfill their fiduciary duties. I think the value that should be ascribed should reflect the combination. When you swap stock, it is very important that you consider the value and potential appreciation value.
We are seeing more publicly traded companies announcing plans to make acquisitions. What's driving that?
The economy is on better footing. It is a bit like the spring thaw. Everyone's starting to come outside. When asset quality was questionable, buyers stayed in their holes. They are more confident now in the transactions and the metrics.