The New Bank M&A Paradox

Bank consolidation is poised for a rebound, but the fact is getting a deal completed is going to get even tougher.
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) -- Bank consolidation is poised for a rebound, but getting a deal completed will become even more difficult for the foreseeable future.

Regulators will be combing bank acquisition agreements with fine-tooth combs to carefully examine the impact of a deal on the acquiring institution, something that started as the financial crisis hit but will only increase as the

financial reform measures

are implemented in the coming months.

Meanwhile, deal premiums - if any - will be significantly lower as buyers look to find acquisitions that are quickly accretive to earnings, observers say. Selling banks will have to rethink pricing, period. The heady days where some bank acquisitions reached as high as 4 times the seller's book value are unlikely to return, particularly in a low-growth environment.

"What you have is a bid-ask spread where buyers are ready to do things, sellers are not quite there yet," says John Chrin, Lehigh University's Global Financial Services Executive-in-Residence and the former head of JPMorgan Chase's financial institutions' M&A group.

"You still have differential in price expectations, which is why


First Niagara (FNFG) deal

, with a 24% premium is encouraging. ... But it's not going to be something that's going to be a catalyst to have a lot more deals happen," Chrin says.

So far 113 bank acquisitions have been announced this year, according to SNL Financial, with First Niagara purchasing

New Alliance


for $1.6 billion by the largest. As of August 31, the average deal price to book value was 1.09 times book, down from 2.24 times book in at the height in 2006, according to SNL.

Future deals will not only have to be accretive relatively soon after the transaction closes, but "materially accretive," says Nancy Bush, an independent analyst in Annandale, N.J. "It has to be worth the extra risk that you're going to put on. The last thing in the world that the regulators want to do right now is create riskier institutions," she says.

Bush says that her "theory" regarding bank M&A over the past 15 years is that buyers paid more for deals and then accepted greater earnings dilution in order to complete them. "What we saw was that the earnings dilution wasn't temporary, it was permanent and to get past that dilution

the banks would take on more risk," she adds.

Still, given the tough position that banks will be put in as a result of financial reform measures and continued economic challenges will cause some banks to make the decision to sell despite the financial drawbacks.

"As regulation starts being churned out under Dodd-Frank you will see banks start crying 'Uncle' and saying 'We've had enough,'" says Chip MacDonald, a partner in the financial institutions group at Jones Day.

Deals will likely gradually increase in frequency as buyers become confident in the balance sheets of troubled banks and as sellers and the government work to clean up their troubled loans and dispose of assets. That will set the stage for a gradual increase in M&A, which will likely be more pronounced in the second half of 2011, MacDonald says.

Richard Bove, an analyst with Rochdale Securities, believes that a wave of bank consolidation will come after the November "Group of Twenty" finance ministers meetings take place, in which international capital requirements for banks will hopefully be more settled.

"Many banks are selling below their book values. Acquisitions of many of these companies would be accretive to the acquirer. The holdup is the failure of the government to clarify its capital and liquidity requirements. This is expected to be done in November. If so, that is when the acquisition wave in banking will begin. This is because the acquirers will be able to determine the costs of buying companies more clearly," Bove wrote in a note last month.

Still observers say that the multibillion dollar M&A frenzy seen last decade and that began as far back as the late nineties is unlikely to be repeated. The largest four banks -

Bank of America

(BAC) - Get Report


Wells Fargo

(WFC) - Get Report



(C) - Get Report


JPMorgan Chase

(JPM) - Get Report

-- are going to stick to organic growth in order to limit their size in the U.S. or focus on international growth.


large and mid-size regional banks



(BBT) - Get Report



(PNC) - Get Report


U.S. Bancorp

(USB) - Get Report


First Horizon(FHN) - Get Report


Huntington Bancshares(HBAN) - Get Report are seeing plenty of opportunity

these days.

The ironic part about all the controversy surrounding 'too big to fail' is that for smaller banks it is now a question of do they acquire or get acquired?

"There are a number of banking companies that are trying to figure that out," says bank consultant Bert Ely."If you're under $10 billion in size you get a lot of exemptions. If you're over $50 billion then you're going to be subject to greater scrutiny. The Dodd-Frank introduces a new factor in terms of regulatory burden and scrutiny that wasn't there before."

MacDonald called it a "too small to survive" bank.

Banks "will really be looking to spread their compliance and regulatory costs over larger asset bases," he says.

--Written by Laurie Kulikowski in New York.

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Laurie Kulikowski


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