Green light on bank deals harder to come by with stocks tanking
The steep decline in bank stocks has turned shareholder votes on mergers — often viewed as a formality — into something worth following.
That became clear earlier this week when PacWest Bancorp, an experienced bank acquirer, announced the end of its deal to buy El Dorado Savings Bank in Placerville, Calif., after the would-be seller's shareholders failed to approve the sale. The $2.2 billion-asset El Dorado was unable to secure the required support from two-thirds of voting shares.
A number of other banks have shareholder votes scheduled in coming weeks. While other factors certainly play a role, a decline in stock prices will force bank executives, especially those at underperforming acquirers, to expend more effort to get shareholder support and move one step closer to closing.
"Buyers and sellers need to recognize that they will have to work harder for the same result," said Artie Regan, president of the proxy solicitation firm Regan & Associates.
"When you have a market that goes through what happened in November and December — it rattles everyone," Regan added. “When shareholders see prices falling, they tend to vote less frequently or abstain."
The terms of a merger agreement, or a company's bylaws, are a critical factor when a vote is expected to be tight.
At El Dorado Savings, the merger required a super-majority vote, which can be challenging to obtain even in good times, said Jonathan Hightower, a lawyer at Bryan Cave Leighton Paisner.
Ownership structure is another key factor.
While shareholders of ATBancorp will vote Friday on the Dubuque, Iowa, company's sale to MidWestOne Financial Group, Charles Funk, the buyer's CEO, is optimistic about the outcome even though his company's stock is down about 25% since the deal was announced in late August. Funk noted that a vast majority of the shares are owned by the Schrup family. Roughly two-thirds of the shares are held by directors and officers.
Union Bankshares in Richmond, Va., also feels confident about next week's shareholder meeting for Access National. Union's stock is off nearly 8% since the deal's Oct. 5 announcement.
"Everything is moving ahead normally,” said Bill Cimino, Union's director of investor relations. The El Dorado vote "in no way impacts us. We're looking forward to the vote."
Regan, whose firm is working with Union and Access ahead of their shareholder votes, also said he sees no reason for concern.
"I am very comfortable that the banks approached the process properly," Regan said.
To be sure, the swoon in bank stocks has had bankers working harder to sell investors on their vision.
Access National has sought to put the matter into perspective, directing investors to look at overall bank indices that have suffered bigger declines, said Michael Clarke, the company's president and CEO.
Access has “never run our company focused on day-to-day stock prices,” Clarke said. The company focuses more “on the longer-term strategy and the value we expect that to generate. In the period since the announcement, I have grown more confident in the ability of the combined organization to generate attractive returns than would be achieved independently.”
Shareholders also consider the long-term value of a merger, cost saves and succession planning when they vote on a deal, industry observers said.
“There is no doubt that when a buyers’ stock price goes down, that causes heart burn among shareholders — but it really shouldn’t,” Hightower said. “Markets move up and down. It’s disappointing to think that a good deal could fail just because of a momentary pullback in the market.”
Looking beyond shareholder votes, lower bank stocks could also create challenges for some deals that are nearing their completion dates.
Though each transaction has unique terms, merger agreements with a publicly traded buyer often have so-called double-trigger termination provisions. In most cases, they allow a seller to terminate a deal at any time before completion if a buyer’s stock falls by a preset amount and underperforms a widely accepted bank stock index by a preset percentage.
If both triggers occur, a seller must consider whether it is in its best interest to walk away.
Deals don't always have those terms, including Fifth Third Bancorp's pending acquisition of MB Financial.
A Fifth Third spokesman confirmed that the merger agreement does not have such triggers. He declined to discuss the status of the deal.
MidWestOne's purchase of ATBancorp had triggers, but they expired when it filed its final proxy statement on Nov. 28, Funk said.
Buyers often have the opportunity to increase the exchange ratio to sure up pricing when their stock sinks.
Cadence Bancorp sweetened its offer for State Bank Financial in Atlanta after its stock fell by more than 40% between the deal's May announcement and late December. The Houston company increased the exchange ratio for State Bank in Atlanta by nearly 10% to make sure the acquisition closed. The deal was completed on Jan. 1.
Funk, for his part, said he was sympathetic to banks like PacWest and Cadence that have been forced to pivot.
“No one I know forecast the decline we saw, particularly in December,” Funk said. “While we’re not setting up the next deal now, we always take time to think about the triggers. Sometimes [something unusual] does happen.”
Laura Alix, Paul Davis and John Reosti contributed to this report.