Three $1 billion-plus bank deals in four weeks. Is the M&A machine back in gear?
After a tepid start this year - Capital One-Hibernia, announced in March, was about it - large deals are back in the spotlight.
The tough earnings environment is pushing some players to sell (or buy), and rising stock prices are providing the currency for deals.
"We're seeing fairly strong stock prices and a difficult environment for banks to operate in," said Brian R. Sterling, the co-head of investment banking at Sandler O'Neill & Partners LP. "We are seeing people react to that difficult environment and say, 'We need to get bigger and get more scale to be able to deal with these challenges.' "
The M&A community appears split on whether the three recent deals are an anomaly or the beginning of a merger wave.
"Typically, when the Joneses do a deal, the Smiths start thinking about, 'Gee, what does that mean for my franchise?' " said John G. Duffy, the chairman and chief executive of Keefe, Bruyette & Woods Inc., in an interview. "Generally, I think deals do beget deals - but I don't sense that there is any real sea change going on here in terms of the amount of activity."
Nonetheless, several factors that encourage acquisitions are beginning to gain the upper hand.
Unlike Capital One Financial Corp.'s $5.3 billion deal for Hibernia Corp. - a card issuer buying a bank as a funding source - the latest big deals involve large regionals buying midsize regionals.
BancWest Corp. of San Francisco, a $51 billion-asset unit of BNP Paribas, agreed to buy Commercial Federal Corp. of Omaha. Zions Bancorp. of Salt Lake City, which has $32 billion, is buying Amegy Bancorp. Inc. of Houston, with $7.6 billion. And the $32 billion TD Banknorth Inc. of Portland, Maine, has a deal for the $8.8 billion Hudson United Bancorp of Mahwah, N.J.
In each case, buyers were looking to enter new territory. Commercial Federal would expand BancWest's midwestern presence; Amegy would bring Zions into Texas; and Hudson United would give TD Banknorth branches at the doorstep of New York City.
The prices range from $1.4 billion to $1.9 billion. Two of the deals are for stock and cash; BancWest is to pay cash only for Commercial Federal.
Mike Halloran, the senior partner in Pillsbury Winthrop Shaw Pittman's corporate and securities practice, represented Zions and BancWest in their recent deals. "Basically, the banks are healthy, so they can afford to make acquisitions," he said in an interview.
Rising stock prices are giving companies a valuable currency to do largely stock-based deals, and low long-term rates allow financing of the cash portion relatively cheaply, he said.
Stock price also played a big role in sellers' decisions. In the three recent deals, the sellers' stock prices had been crushed.
Amegy's shares were off more than 30% from their 52-week high of $25.01, reached in late 2004. Hudson United's shares were down about 20% from nearly $22 in late 2004. Community Federal's were down 17% from their late 2004 peak of around $30.
Potential buyers have complained often in the past year that sellers' expectations have been too high. Mr. Duffy and others said such expectations still limit dealmaking.
Throughout the lull, said Brian Shullaw, a senior research analyst at SNL Financial Inc., "our feeling has always been … there have been buyers out there." The problem, he said, is "there are not all that many people willing to sell."
But some say that gap between expectations may be narrowing now.
"You've got rational pricing expectations" among those looking to sell, Mr. Sterling said, and "buyers recognizing that in some markets there are limited ways to get in and the market may merit sharpening the pencil … to get a deal done."
Interest rate movements are also playing a role.
The outlook for rates has created "some uncertainty for banks," said Ed Clark, Toronto-Dominion Bank's president and chief executive, on a July 12 conference call to discuss the Hudson United deal.
"One option would have been to wait it out to see what would have happened with interest rates and how that would affect the acquisition prices of companies like Hudson United, to see if it would bring down the prices," he said. TD Banknorth decided not to wait, however, for fear someone else might have snatched up Hudson United, Mr. Clark said.
There has been talk that the flattening yield curve would drive some companies to the auction block. Amegy acknowledged that it agreed to sell itself partly because its balance sheet is less asset-sensitive than executives had thought.
Asked if Amegy's situation is indicative of industrywide troubles, chief executive Paul Murphy said: "Second-quarter results will give you some real insights into that. If you see weakening margins, fatigue in earnings, or less than expected, then my answer would be yes."
So far Amegy's balance-sheet woes do not appear widespread, said Mr. Shullaw of SNL Financial. There are not many companies "in real big trouble or needing to get into a deal to survive."
The M&A trend also has a distinct credit card component. In addition to Capital One's buying Hibernia, Bank of America Corp. is spending $35 billion for MBNA Corp., and Washington Mutual Inc. is buying the San Francisco issuer Providian Financial Corp.
"Starting in March or April, after a period of very low activity, there was a pickup," said Victor Lewkow, a mergers and acquisitions partner at Cleary, Gottlieb, Steen & Hamilton, which represented Bank of America and Capital One in their deals.
Capital One's deal for Hibernia is the first seven-figure deal since last August. In that month Fifth Third Bancorp of Cincinnati said it would pay $1.5 billion for First National Bankshares of Florida Inc. in Naples, and Toronto-Dominion said it would pay $3.7 billion for control of Banknorth Group Inc.
"The real question is why it was so slow last year," Mr. Lewkow said. "It wasn't only in bank M&A," he noted. There was "a downturn in M&A activity for a while as people dealt with Sarbanes-Oxley; there were also issues in the bank arena as people made sure they were dealing with all the regulatory issues, the Bank Secrecy Act, etc.
"People couldn't bring themselves to quite do deals," Mr. Lewkow said - "and now people have gotten over that."
Will the deals continue? The jury is still out.
"Dialogue is heating up again, so our expectation is that these aren't the last three we are going to see," Mr. Sterling said.
