M&T Bank a Buy, Despite Hudson Merger Delay

NEW YORK ( TheStreet) -- There's a saying among Wall Street analysts: "This deal makes too much sense to not happen." That, however, has never stopped federal regulators from taking their sweet time to grant a merger approval.

Although there's been another delay in M&T Bank's (MTB) bid to acquire Hudson City Bancorp (HCBK), I don't believe frustrated investors should suddenly throw in the towel. This recent holdup could end up working in the companies' favor.

The original deal, which was expected to have closed sometime in the past six months, was announced a year-and-a-half ago for an estimated $3.7 billion in cash and stock. At the time, I thought it was a bold move by M&T. It an expensive deal relative to BB&T's (HCBK) (BBT) buyout of BankAtlantic, and picking off Hudson placed M&T right in the crosshairs of both Bank of America (BAC) and Wells Fargo (WFC).

Never lacking confidence in the M&T's management, investors cheered the news, sending M&T's stock soaring more than 45% since the deal's announcement. This reaction was far from a surprise. What was clear from the onset -- and still is today - is the value that M&T management will be able to create once all of the costs were stripped out.


Although concerns were raised about some of Hudson's "tainted" portfolio (including what some consider as an unattractive residential mortgage business), I believe Hudson's market reach in the northeast, particularly in greater New York, is more than an offsetting advantage. And I believe that was one of the reasons M&T management had to make this deal.

Given M&T's long track record of strong expense control and returns on capital, management would have extracted above-average value in a relatively short period of time. And this is what investors were banking on. That was the case until management announced last April that the merger holdup was due to the Federal Reserve having identified "certain regulatory concerns" with M&T's compliance programs. The type that include anti-money-laundering and secrecy act.

Not to make light of these requirements, they do, however, sound more serious than they actually are. It's worth noting that every bank merger is subjected to these tests, especially in the post-Enron and "too-big-to-fail" eras.

Having now experienced two delays since the announced deal, last week management of both companies were somewhat non-committal about when they expect this deal to be finalized. "There can be no assurances that regulatory approval will be obtained," the announcement said, "or that the merger will be completed" by the new "walkaway" date of Dec. 31, 2014 that allows both banks can escape the agreement with penalty.

Nevertheless, there's a chance that this new imposed deadline might get the ball rolling once and for all. I don't believe the Fed's "regulatory concerns" are valid enough reasons to hurt what is truly in the best interest of not only both banks, but also shareholders, given the accretion potential that is on the table.

Investors should expect more details Wednesday when M&T is due to report fourth-quarter and year-end earnings results. The Street will be looking for $1.92 in earnings per share on revenue of $1.10 billion, which would represent year-over-year revenue decline of 1.4%. As impressive as these numbers may appear relative to what's expected from the likes of Bank of America, news related to the Hudson deal will be what moves this stock.

The good news in all of this is that M&T has been posting exceptional loan growth, while boasting one of the best spreads among the regional majors, which includes U.S. Bancorp (USB) and PNC Financial (PNC). And despite the fact that M&T stock does carry a premium above both USB and PNC, I would be a buyer here ahead of earnings. Even with this recent holdup to the merger, these shares should continue their ascent towards $130 per share and beyond on the basis of M&T's own execution.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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