Prospective Buyers Beware
Buyers can make deals work in this tough market, but only a select few are expert enough to do it.
That's the M&A takeaway from banks' results in the second quarter.
Five banks — M&T Bank Corp., PNC Financial Services Group Inc., Hancock Holding Co., People's United Financial Inc. and First Niagara Financial Group Inc. — countered early criticism of the prices and rationales of their recent acquisitions with hard data.
They reported higher fees, lower credit marks, stable expenses, signs of loan growth or sales of a target's unwanted loans at decent prices.
Will their early success compel others to ramp up their merger-ambitions?
No, experts say: The better-than-expected merger gains show that those banks are good at buying other banks. That credibility helps strengthen the price of their stock, a vital currency for future deals.
In the bigger picture, deals happen — and work out for the best — when buyers and sellers can settle on a price that makes financial sense for both of them. Bank mergers have slowed to a crawl because the rocky employment and housing markets are wreaking havoc on bank profits and stock prices. Good news for an M&T or a PNC on the deal front does not change that.
"It is unlikely that we are going to see a meaningful pickup in consolidation for another 12 to 18 months," said Todd Hagerman, an analyst with Sterne Agee & Leach Inc. who covers large banks. "Sellers expectations still seem to be a little too lofty in the current environment. … You can't afford to overpay for any of these transactions."
Some market watchers were worried last fall that M&T was overpaying when it agreed to buy Wilmington Trust Corp. for $350 million plus the assumption of its $330 million in bailout money. The price tag was equal to one times the tangible book value of the $11 billion-asset Delaware bank. The problem was that huge construction loan losses had begun hurting Wilmington's credit rating and scaring off customers in its all-important trust business.
M&T's chief financial officer, Rene Jones, said both issues had been working out better than expected since the deal closed on May 16.
Its credit marks on Wilmington Trust's loans ended up coming in about $350 million lower than the $1 billion it had initially expected. That contributed to a $42 million after-tax gain on the transaction and made Wilmington seem like a better buy.
Wilmington also delivered $50 million in trust fees as it held onto more clients than it had expected.
"We were actually able to recapture a lot of business … with people that couldn't do business with Wilmington because of their credit rating," Jones said Thursday.
The deal was immediately accretive to earnings, and M&T managed to grow loans and keep expenses flat excluding the transaction, which impressed analysts because the cost savings of the transaction have not kicked in yet.
PNC, of Pittsburgh, offered positive updates on its deal to buy the 425-branch RBC Bank USA in June and its 2008 acquisition of Cleveland's National City Corp.
The profit-boosting prospects for its $3.45 billion deal for RBC have improved dramatically because PNC said it is confident it can generate enough capital to pay for the deal solely with cash, debt and an issuance of preferred shares. It had initially said it may have to issue shareholder-diluting common shares to bolster capital, which would have delayed how soon the deal translates to higher earnings. It could be immediately accretive if it avoids a common stock issuance.
PNC's capital levels should be higher by the time the deal is scheduled to close in March than they were at the time it was announced, James Rohr, PNC's chairman and chief executive, told analysts in a conference call on Wednesday.
PNC's is generating capital on strong profit and revenue growth, a key driver being sales of corporate loans and services in Midwest territories it entered through its purchase of National City.
"We're comfortable that we don't think that we have to issue any common," Rohr said. "It appears as if our capital ratios will be just fine."
Hancock, of Gulfport, Miss., lowered by 40% its projected costs from the acquisition of Whitney Holding Co. Also, CEO Carl Chaney said Friday that the deal will fuel growth in commercial and industrial lending.
Peoples United of Bridgeport, Conn., meanwhile, closed its purchase of Smithtown Bancorp of Hauppauge, N.Y., in mid-June and of Danvers Bancorp, of Danvers, Mass., in July.
Two weeks of ownership of Smithtown bolstered quarterly results by contributing to commercial loan growth, and boosting noninterest income by about $2 million thanks to gains selling some of Smithtown's loans.
First Niagara, of Buffalo, expanded loans and deposits organically outside of those it acquired taking over NewAlliance Bancshares Inc. of New Haven, Conn., in April. That showed that the serial acquirer can effectively compete for customers amidst the legal and technical distractions of a major merger.
David Darst, an analyst with Guggenheim Securities LLC, said First Niagara and People's United are proving naysayers of its strategic moves wrong while showing that they have the ability to do more deals.
"While some deals were initially thought to be too expensive, the management teams have shown they can make them work," Darst said.