The deal is done after months of work. Now comes the hard part delivering on the handsome estimates it promised.
Provident New York Bancorp (PBNY) completed its acquisition of Sterling Bancorp (STL) last week, with the Sterling brand continuing on. On paper the deal, announced in April, is a knockout, with a 20% boost to earnings expected in 2014 and 31% in 2015. Moreover, the combined company is supposed to save 18% of costs.
But that is only half the story, says Jack Kopnisky, the chief executive of the combined organization. Deal projections in M&A are basically calculated by combining the earnings expectations of the two companies and then backing out expected cost savings.
The real goal of M&A is revenue growth the compounded muscle that is greater than either company could have on its own. That is what makes it worth it in the long run.
"As we integrate this over the next 18 months to two years, we are looking for the best practices out of the companies that are ultimately going to drive revenue enhancements," Kopnisky says. "An acquisition is more than a one-time event. For us, it is more about how do you create multiples of revenue over expense."
Essentially, the new Sterling is looking for positive operating leverage, where revenue grows faster than expenses. Kopnisky wants revenue growth to outpace expense growth by two to three times.
Creating or enhancing positive operating leverage is the ultimate reason for M&A, says Jeff Marsico, executive vice president of the Kafafian Group.
"M&A should be a propellant to achieve earnings and book growth that they couldn't achieve independently or done so in a reasonable amount of time," Marsico says. "Many banks have fallen on their sword and haven't delivered. Hearing that Providence is talking about positive operating leverage is heartening."
Revenue growing faster than expenses means more profit and that enhances shareholder value. At the end of the day, investors judge the success of deals simply: is their interest in the combined company more valuable than it was before the transaction.
"Without achieving that shareholder value increase, you've just wasted your company's time and resources," Marsico says.
A focus on earnings power is also important because the industry is getting back to valuing banks on earnings instead of tangible book. Additionally, a company with the trading volume and market capitalization of Sterling is likely to attract more institutional money, and those types of investors are particularly focused on earnings power.
So far, the market has given the combined company the benefit of the doubt. Sterling's stock price has risen 35% since the deal was announced; its shares closed at $11.87 on Tuesday.
The old Provident operations will benefit from the addition of Sterling's commercial products, Kopnisky says. Those products include asset-based lending, payroll products, factoring finance and warehouse lending. Provident was an emerging commercial lender, but Sterling was a longtime player with roots in lending to clothing manufacturers.
"Sterling has been in a lot of those businesses for an awfully long time," Kopnisky says.
The Provident side of the deal, in turn, brings more consumer banking products to Sterling.
Another key to achieving positive operating leverage is continuing Provident's strategy of adding lending teams, says Matthew Kelley, an analyst at Sterne Agee.
Provident was already increasing loans at an annual rate of 20%, compared with an annual rate of 4% to 5% for most of its peers in the Northeast. The company wants to add two to four teams a year to further its growth, Kelley says.
The lending teams and the deal "are the special sauce that give them the ability to hit the operating leverage target and separate themselves from the pack," Kelley says. "The deal in itself is wrapped around cost saves, synergies and adding scale, but it is now time for round two of the organic strategy."
Joseph Fenech, an analyst at Sandler O'Neill, said in April that he was wary of the combined company's ability to reach the targets because Provident had so far fallen short of its own goals under Kopnisky's leadership.
A call to him was not returned, but he said in a research note that he will follow the integration closely. He currently has a hold rating on the stock.
"We'll be tracking the progress with the integration pretty closely, and we're also spending some time with management on the road next month," Fenech says. "If we get the sense that things are progressing better than we're currently expecting and/or there is a setback in the stock, we might be inclined to reconsider our stance."