John Roddy learned how to work bank mergers during a ten-year stint at Lehman Brothers, one of the industry's top M&A advisors before its collapse.
Lehman — in boxing terms — was a cruiserweight in precrisis bank mergers and acquisitions: it handled a lot of deals worth $5 billion or less that involved a fairly big bank buying a much smaller one.
Roddy, for instance, helped Zions Bancorp buy Amegy Bancorp for $1.7 billion in 2005. Today, he is out to recreate a Lehman-like M&A outfit for another organization: Macquarie Group, the Australian banking firm that went shopping for U.S. financial services outfits after the meltdown.
Macquarie in 2010 named Roddy senior managing director and head of the U.S. financial institutions group of Macquarie Capital (USA), which was jump-started with the purchase of boutique investment bank Fox-Pitt Kelton Cochran Caronia Waller in 2009. Roddy had left Lehman in 2006 and later joined Fox-Pitt.
Roddy aims to exploit his Lehman contacts and Macquarie's global resources to win small and midsize U.S. deals, particularly those with a cross-border slant. Lehman refugees who have landed at Jefferies & Co., Royal Bank of Canada and Barclays are pursuing variations of that strategy, too.
So far this year, Roddy's team has advised WesBanco in its $71 million agreement to buy Fidelity Bancorp and Tompkins Financial in its $85 million agreement to buy VIST Financial. More deals like those are on the horizon, as small banks surrender to pressures to sell and regulatory concerns keep the largest banks on the sidelines, Roddy told American Banker in a recent interview.
An edited transcript of that conversation follows:
Give me your basic outlook for what you see occurring for bank M&A this year and into 2013.
JOHN RODDY: We are in a clear up-trend in terms of the level of bank M&A, both in terms of number of deals as well as the aggregate volume of deals. We're going to see more deals get announced and some bigger deals get announced as well. Although, clearly, the focus is going to be on the smaller deals and, to some extent, midsize deals.
Define smaller or midsize — what does that mean?
I would say the smaller deals — call it $250-to-$500 million deal value or less. And then midsize deals let's call it half a billion to $2 billion to $3 billion in size. The era of the large deal, megadeal, is not one we're in today. Those are going to be few and far between.
And how do you feel about that? You came up, you were trained — I'm assuming — doing the midsize and larger stuff.
I'll take more of an agnostic view about it from a personal or professional point of view. From an industry point of view, I think there are a number of reasons for that that are not surprising. The largest banks probably in many ways face the greatest regulatory uncertainty about the systemically important significance of [their] institutions, [about] whether they can do further acquisitions of other banking institutions, whether they are going to be at a competitive disadvantage if they do increase their size and scale. They also were the ones that, in many cases, are under the greatest scrutiny given the recent crisis. So I think the true top four or five institutions are really going to be largely on the sidelines for the foreseeable future.
That next tier down are also going to be very hesitant to push themselves into that top four or five realm for some time given the uncertainty from a regulatory point of view.
Let me interject: New York Community Bank. Where is it at? Like $30 billion, $40 billion in assets?
Just under $50 billion, where the regulators have drawn the line … where they would be subject to some of the stress test.
If you look at the numbers, there are not that many that fit that profile, but I think that raises the exact point that I was going at which is that there is a real reluctance to take that next step.
One can argue that there is a regulatory policy objective around this, which is to try to, through policy and regulatory action, to reduce some of the concentration — or at least reduce the growing concentration amongst the largest banks with an intention of creating more middle-tier-sized banks.
There are some [Federal Reserve] governors and other policymakers in Washington that have articulated, in some form or fashion, a notion that having a number of $10 billion, $20 billion banks [by assets], an increasing number of midsize institutions, would be good for the U.S. from a banking policy point of view, from an economic point of view. [They would be banks] that are large enough to be diversified, that have economies of scale, have clear specializations and understand the risks they are taking, but not so large that they create systemic risk for the country as a whole.
Do you think there is enough investor enthusiasm for the super-community banking model to sustain it? They want to get bigger.
There is a natural desire for growth. I think one would look at those types of institutions and conclude those probably are the most highly valued institutions by the marketplace today. When you look at institutions and look at the valuations as premium to book, the greatest premiums are being paid today by the market for midsize institutions. The largest institutions tend to be trading at a discount to tangible book. The smallest institutions all tend to trade around book. And when you get to some of the small-cap indexes, which tend to be a little bit larger, or the midcap indexes, you tend to get something close to one and a half.
What happens with the super-largest banks? Do you think we've hit a peak? Do they start breaking themselves down willfully or by force?
The probability of a regulatory framework coming together that would require the breakup of the largest banks — that seems relatively low to me. The effect of all of the policies that would cause these institutions to in fact voluntarily do this to increase shareholder value — it seems that is a real possibility if not a probability. And you have seen some of the big commentators of the last era weigh in on this, whether it is some of Sandy Weil's comments or Phil Purcell's comments around perhaps voluntarily dispositions of certain business lines that would create value for shareholders. I think that is in fact a likelihood — that a number of the largest will do it on some scale. Whether it is smaller scale or a larger scale is to be determined and probably will vary by institution. But I would suspect that the market share statistics in financial services, certainly in banking and credit, are likely to become less concentrated over the next ten years than more concentrated, which would be the first time — certainly in recent history if not the entirety of history — that you would see a decreasing concentration in the banking industry.
And I think you are seeing them lose market share on the ground. Without M&A these largest banks have been losing ground. Even over the last ten years or so, it is M&A that has kept them increasing market share. So if they stop doing M&A, market share will inevitably decline in my view.
What would that be?
When you look at deposit market share on the ground, and when you look at loan growth on the ground outside the wholesale capital markets, wholesale loan business, I would suggest most community, and super community bankers and even regional bankers would suggest that there has clearly been a market share shift from the largest banks to the next tier down.