A stagnant stock price drove the frustrated board of Southwest Bancshares in Stillwater, Okla., to look for a buyer.
Internal discussions about selling began in June 2016 as directors fretted over a stock price that “had been relatively flat” since late 2013, according to a regulatory filing tied to the $2.6 billion-asset company’s pending sale to Simmons First National in Little Rock, Ark.
The story that unfolds in the filing is a lesson in timing. However, it’s in the eyes of the beholder as to whether it’s a good lesson or a bad lesson. Unforeseen events several months later — the election of Donald Trump as president and the huge lift it gave to bank stocks — would completely change economic conditions after deal negotiations had begun.
Southwest’s stock price shot up last fall after the election as part of the overall run-up in bank stocks. By that time, the company was well into talks to sell itself to the $8.6 billion-asset Simmons. The deal, announced on Dec. 14, was the ninth-largest bank acquisition of 2016 and one of the year’s richest by premium paid.
Mark Funke, Southwest’s CEO, first mentioned a potential deal to George Makris, Simmons’ chairman and CEO, just days after the board decided to explore a sale. But Southwest approached other banks, too.
In July of last year Funke discussed the potential of a transaction with a large, unnamed bank in Texas. A month later, Southwest executives met with the CEO of another Texas bank to revisit a prior discussion from 2015 about a potential merger of equals.
In the meanwhile Southwest continued to manage itself as though it would stay independent, approving a series of cost-cutting moves and pursuing an acquisition in Texas. The acquisition target, however, declined Southwest’s letter of interest in early August.
By mid-September, Simmons and the larger Texas bank entered confidentiality agreements with Southwest. The second Texas suitor was still operating under a 2015 confidentiality agreement.
Simmons and the larger Texas bank quickly submitted letters of interest, making offers that were not detailed in the filing. Simmons, when pressed by Southwest’s investment bank, said it would be willing to raise its bid; the other bank would not budge.
Simmons followed through with a higher bid, proposing in late September to pay $457.4 million in cash and stock. A revised letter of interest was signed on Sept. 26, along with an exclusivity agreement that paved the way for the companies to conduct due diligence.
Simmons’ executives made several trips to Oklahoma City in October and November to conduct in-person interviews. A day after the presidential election, Southwest representatives traveled to Little Rock to do the same.
Directors at Simmons and Southwest approved the transaction on Dec. 14. By that time, the value of Simmons’ offer had risen by 23%, to $564 million.
The deal is expected to be accretive to Simmons' earnings per share in the first year. It should take about two and a half years for Simmons to earn back any dilution to its tangible book value. Simmons plans to cut about 35% of Southwest's annual noninterest expenses. It also expects to incur $12.8 million in after-tax merger-related expenses.
As for the lagging stock that Southwest’s directors lamented at their mid-2016 meeting? It appreciated by nearly 50% between that meeting and the day before the deal’s announcement, with much of the gain taking place after the election.
That fact raises the question whether, in hindsight, the board would have been better off keeping Southwest independent. Then again, the escalating stock prices helped increase the deal’s value, and Southwest ended up a little ahead of other banks that suddenly were forced to consider more seriously if it was time to sell given that buyers would be armed with stronger currencies.
Funke, meanwhile, is expected to become president of a newly formed Southwest division, where he will be responsible for Simmons’ banking operations in Oklahoma, Texas, Colorado and Kansas. Russell Teubner, a Southwest director, is expected to join Simmons’ board.
“Most of the officers and other employees of [Southwest] expect to be retained after the … merger, and such employees will then participate in the employee benefit plans of Simmons and receive credit for prior service,” the filing added.