The merger between Keycorp and Society Corp. took many industry observers by surprise. While rumors abounded of a merger of Fleet and Nations-Bank, Keycorp and Society created a new top-10 bank covering 18 states, and took a major step toward creating a national bank. The new entity is a significant contender on the national scene and one of a handful of institutions that are positioned to become true national banks.
What are the implications of this merger? Should all community banks give up? Does it mean that consolidation is unavoidable? Perhaps it means that we are at the end of an era and the M&A window is about to close yet again.
I believe the Keycorp-Society merger is a signal that the M&A wave will continue for depository institutions. This wave has crested and ebbed several times since the mid-'80s, and now mergers and acquisitions are hot again.
Banks have strong currencies in the form of high stock multiples and can afford to buy other institutions as their stock multipliers improve along with performance, profitability, and fundamentals. The balance sheets of banks are stronger than ever. At the same time, overcapacity is still a fact of life, and economies of scale are essential to sustain competitiveness.
Small and large banks alike need to access economies of scale in different banking businesses, and mergers are a natural way to achieve that. At the same time, it seems that some of our banks are looking to grow for growth's sake. That by itself may not be a wise decision.
Several recent mergers appeared to be priced for a very long payback period. With the First Eastern and Constellation acquisitions, albeit turnaround banks, the multiplier and the price paid for the stock were high relative to the fundamentals as known to outside observers.
The acquiring companies may know more about it than we do and find the franchise and its income prospects more valuable than they appear. Nonetheless, the prices recently paid for some medium-size community banks seem to indicate that not all players in the acquisitions market are rational. Some appear to seek growth for growth's sake, which may not optimize shareholder value or franchise enhancement, even in the long run.
Don't Rush to Sell Out
What are the implications of the merger hunger of some companies for small and medium-size banks? Does that mean that now is the time to sell, while demand is high and the acquiring companies are prepared to make many concessions? The answer is "not necessarily."
Selling out does not necessarily optimize shareholder value, which is the primary objective of all for-profit companies, banks included.
Though many factors enter into the decision to sell, it is incumbent upon senior management to determine whether the company has the potential to enhance share value long term as well as produce current earnings in a way that will outstrip the performance of a sales price.
Most banks should seriously consider whether they can and should stay independent. They should analyze the impact of the shareholder value of immediate sale, a future sale, and staying independent. The decision to sell or buy should be based on the results of this analysis. This will not only fulfill the fiduciary responsibility of senior management and the board, but will also maximize performance.
Time is Ripe
Today is indeed an attractive time to buy and sell. Many banks enjoy all-time high stock prices and multipliers, and many can demonstrate strong fundamentals. The result: There are many buyers with potent currencies and many sellers that can command high prices for their franchise.
The implications is continued merger and acquisition activity, not only because overcapacity calls for it but also because this is an opportune time for many buyers and sellers to enter the market.
Though most bankers I meet profess a commitment to staying independent, there is still no such thing as an unfriendly offer, just an unfriendly price. I therefore do not foresee a decline in the M&A activity in the coming year, as long as the industry continues to perform.