With Bank Prices All Over the Board, Sellers Stay Off the Board

It was the lowest of prices, and it was the highest of prices in dealmaking in 2011.

The pace of mergers and acquisitions has been slow this year, and pricing has been erratic. Measured in percentage of tangible book value, prices have ranged from the single digits for rescue deals to two times book for attractive franchises.

The disparity is enough to sideline some sellers that are pursuing sales out of want, rather than need.

"If a bank is interested in selling because of things like succession planning or a desire for liquidity, we are advising them to hang on for a better environment," says Charlie Crowley, a managing director at the Cleveland investment bank Paragon Capital Group LLC.

There have been 163 deals announced so far this year, compared with the 215 deals announced in 2010, making 2011 a bust compared with the boom that observers had expected.

The median price for the deals where terms were disclosed as of Dec. 16 was 110%, according to data published by Guggenheim Securities LLC on Monday. Four acquisitions have been announced since then, with prices ranging from 60% to 107%.

Investment bankers predict 2012 will show the same disparity, even if prices improve modestly.

"When the markets were higher, it was pretty typical for selling banks to expect two times tangible book value, but now it is much broader," says Wesley A. Brown, a managing partner at St. Charles Capital, a Denver investment bank. "I do think prices will begin to drift up slowly, though."

Driving the differences, of course, are distressed sellers that are doing whatever they can do to survive.

"There really is no price too low for distressed sellers," says John A. Hamel, a managing director at Roth Capital Partners LLC, an investment bank in Newport Beach, Calif. "If there is a buyer, they are willing to accept what they can."

Though the M&A market of the past may have included strugglers, those banks typically fought to stabilize themselves before selling.

"When banks were sick, they generally didn't sell. They waited to return to relative health and then sold," Brown says of acquisitions prior to the downturn. "It made for a much more solid group of sellers than we have today."

Beyond the varying health of the individual sellers, local economic conditions are affecting pricing, too. Dealmakers can no longer rely on nationwide comparisons in pricing an acquisition, leaving them with fewer data points for comparison.

"In the past, pricing was somewhat of a nationwide phenomenon and required less analysis of geographic data," Hamel says. "Now, it is really difficult to paint a single picture of M&A pricing across the country."

For instance, banks located in regions that have been relatively insulated from the downturn are drawing higher premiums. The four deals this year that were priced around two times book value were in Texas and the Northeast.

"That's the good news. Strong and profitable banks that have nice deposit franchises in attractive markets can still command a strong price," Brown says.

Crowley added the disparity is also clouding pricing for the middle-of-road banks that might not be in the most attractive markets.

"A decent company and a good company might both get something just over book," Crowley says. "The differentiation that should be there, isn't."

Crowley added that some of the pricing is also been driven by buyers' wariness about the quality of the institution and a desire to err on the side of conservatism.

"Sellers are still getting viewed very skeptically by buyers," Crowley said. "And some are just not willing to step up and pay a higher price to book out of fear of overpaying."

The growing popularity of stock deals also affected pricing, as more sellers sold on the upside potential of pairing with a stronger company and were then willing to accept a lower multiple up front, investment bankers say.

"For potential sellers, modestly priced stock-for-stock deals can create good price appreciation potential for the buyers' shares," Guggenheim said in a research note that accompanied its data. "Also, most sellers would see a resumption of cash dividends."

M&A activity will gradually increase in 2012 as smaller banks cave to board fatigue, regulatory pressures, tempered expectations and the need to exit the Troubled Asset Relief Program before the dividend payment increases from 5% to 9%, which will begin in 2013, the note said.