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Mergers Gone Wrong
Mergers of equals are famously hard to get right. But they can work in certain circumstances.
The banking industry has seen a number of high-profile transformative deals in recent years, such as the BB&T Corp.-SunTrust Banks and First Midwest Bancorp-Old National Bancorp combinations as well as the recent announcement that Pinnacle Financial Partners and Synovus Financial Corp. would merge. At times, deals such as these are billed as mergers of equals (MOEs), though it’s commonly argued that no such thing as a true MOE exists. “Somebody has to win,” said Frank Sorrentino, a managing director at the investment bank Stephens, during a presentation at Bank Director’s recent Bank Board Forum hosted in Marco Island, Florida. “There has to be one quarterback. It's NFL season, so we can use that.”
To gauge the success of these types of deals, Stephens looked at 15 transactions announced since 2021 where the selling bank’s assets were at least half of the buying bank’s assets. The analysis found that almost two-thirds of these deals underperformed when comparing the resulting institutions’ stock performance with that of the KBW Nasdaq regional banking index.
There were two common characteristics among the deals where the banks underperformed. First was when a high-performing bank bought a struggling institution with the intention of boosting performance. “It's very hard to pull that off,” he said. The second was when the deal included significant overlap between the buying and selling institutions. That can be good in terms of stripping out costs, but that also means these institutions could be losing a lot of revenue producers.
However, the analysis did show that a about third of these substantive deals led to strong performance. “[T]he third that worked well … they worked really, really well,” Sorrentino said. The deals that did work well tended to involve banks that were complementary to each other with little overlap in terms of branch networks and business lines. That meant the deals added new geographies and revenue opportunities to the resulting institution.
All of this is likely to be incredibly important to remember as the industry anticipates an uptick in bank M&A. Dealmaking is likely to include more of these transformative deals, but the institutions involved in any such transaction must be certain of the decision. “This is a bet-the-bank kind of move,” Sorrentino said.
• Jackie Stewart, executive editor for Bank Director
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