The pace of bank mergers and acquisitions has slowed considerably as the credit crisis has worsened, but even when deals are struck there is no guarantee they will get done.
In the last nine months 20 deals involving banks or thrifts have been called off by the buyer or the seller, including 10 so far this year, according to SNL Financial LC in Charlottesville, Va. In the same nine-month period a year earlier only eight deals were terminated.
Industry experts say they have not seen such a run of deals that have fallen through since the early 1990s, when many banks and thrifts failed before the deals could close.
Though there are exceptions, observers say deals are collapsing for two main reasons: deteriorating asset quality and declining stock values.
Buyers are often terminating agreements after getting a closer look at targets' real estate loan portfolios and not liking what they see. And many buyers can no longer afford to pay what they said they would, because their stock prices have fallen sharply since the deals were announced — as their own loan portfolios have weakened — and sellers have opted to walk away rather than accept a lower price.
"Potential buyers have increasing concerns over the credit quality of the targets, as they just don't have that great of visibility of what's in their portfolios," said Aaron J. Deer, an analyst at Sandler O'Neill & Partners LP in San Francisco. "And for a lot of buyers, their stocks have depreciated, so they don't have the currency in which to do the deals."
The list of collapsed deals does not include the proposed merger of the Federal Home Loan banks of Dallas and Chicago; that deal was negotiated for months but never formally announced. The banks announced Monday that they had broken off their talks, and observers speculated that they did so in part because of the difficulty of determining the value of the troubled Chicago bank.
Analysts do say they expect fewer deals to fall through over the next few quarters — less because the climate is improving, than because there are fewer in the works than in years past.
In the first quarter only 40 deals were announced, according to SNL, compared with 88 in the same quarter last year.
However, observers also say the agreements that are being struck now have a better chance of sticking, because the terms are likely to be more realistic.
"It may be that the first quarter is when reality finally hit," said John Blaylock, the associate director at Sheshunoff & Co. Investment Banking in Austin. "We may not see as many terminations, as the deals now being structured in this environment are at today's terms and today's pricing."
The biggest deal to fall apart was TierOne Corp.'s planned sale to CapitalSource Inc., a Chevy Chase, Md., real estate investment trust. CapitalSource announced the $652 million deal in May, but it teetered on the verge of collapse for months as both companies' market values declined and TierOne's credit problems mounted.
On March 3, TierOne said that it had lost $18 million in the fourth quarter as nonperforming loan volume more than tripled from a year earlier, to $128.5 million, or 4.32% of total loans. Less than three weeks after that announcement the deal was terminated for good.
Similar factors contributed to the March 31 collapse of a $65.2 million deal between the $2.1 billion-asset Center Financial Corp. in Los Angeles and the $220 million-asset First Intercontinental Bank in Doraville, Ga., according to Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville.
Center likely was trying to renegotiate the pricey deal — for three times book value — because First Intercontinental's asset quality had deteriorated significantly since the deal was announced in September, he said.
In addition, several key bankers, including First Intercontinental's former chief executive officer, Daniel C. Lee, were supposed to have joined Center after the deal closed to help expand its Atlanta operation, but they had left the company, Mr. Rabatin said. (Mr. Lee resigned from First Intercontinental in January, citing family issues.)
In addition, Center may have tried to renegotiate its deal with First Intercontinental because its own stock price had fallen more than 50% since the announcement, to $8.78 on March 28, thereby weakening the currency for the deal, Mr. Rabatin said, and Center's moves could have led First Intercontinental to terminate the agreement.
The parting was hardly amicable.
Several of the agreements have been terminated with both sides walking away without paying a breakup fee, but the failed deal between Center and First Intercontinental has ended up in court. First Intercontinental filed a lawsuit accusing Center of breaching the agreement and demanding $3.1 million in damages. Center had previously said that it would not pay a breakup fee, because it was First Intercontinental that had breached the agreement.
Overall weak demand for bank and thrift stocks sunk a deal between two Baltimore thrift companies.
The $578 million-asset Bradford Bancorp announced in March of last year that it planned to go public and use much of the proceeds to buy the $257 million-asset Patapsco Bancorp Inc. for $45.5 million. But Bradford failed to raise the capital it needed, and in January the deal was called off, with Bradford agreeing to pay a $2 million breakup fee.
William Hickey, co-head of investment banking at Sandler O'Neill in New York, said that more institutions may be inserting provisions in their agreements that allow them to adjust the price if there is a material change at either company.
But deals "need to be priced correctly to begin with," Mr. Hickey said.
According to Mr. Deer, in some regions of the country, there still is a gap between would-be sellers' expectations and what buyers are willing to pay. but that could change, particularly if regulators force more banks to sell themselves to stave off failures. "That's going to set a floor, which would lower the bar in terms of pricing expectations for other folks who may be struggling, but not necessarily that in kind of dire situation."
And Mr. Blaylock said some institutions with pending deals may decide that, even if worsening conditions have diluted the value, it still may be better to complete the deal anyway.
That could have been the case when shareholders at the $837 million-asset Washington Banking Co. in Oak Harbor voted to consummate its deal with the $4 billion-asset Frontier Financial Corp. in Everett, even though Frontier had not increased its offer of $191 million, or $21.40 a share.
The agreement had called for Frontier to increase its offer if its average stock price was less than $21 for the 10-day period that ended March 20, about a week before Washington Banking's shareholders were scheduled to vote on the deal. On March 20, Frontier's stock closed at $18.20, but the sellers' shareholders still voted in favor of the deal.
The vote was likely "a recognition on the part of Washington Banking Co.'s shareholders that the long-term business value proposition" of selling to Frontier "was still valid," Mr. Blaylock said.
When the operating environment gets back to "normal," he said, Washington Banking's shareholders who hold on to the Frontier stock they received when the transaction closed "will likely end up with the deal they bargained for when Frontier's stock price goes back up."
