In December, shareholders of Chicago-based PrivateBancorp postponed a vote on whether to accept a $3.8 billion acquisition offer from the Canadian Imperial Bank of Commerce. So what scrubbed the decision, given that the deal had been announced only five months prior?
Market reaction following a populist wave that rumbled global politics played a key role—with the loudest thunderbolt heard in the U.S. presidential election.
Since Election Day, the value of commercial bank stocks has enjoyed a “Trump bump,” observers say. The complexion of the CIBC-PrivateBancorp deal, which involved a mix of cash and stock, changed after the voting because the acquirer is based in Canada, where stock values did not experience a jolt, notes Stephen Morrissette, adjunct professor of strategic management with the University of Chicago Booth School of Business.
Like PrivateBancorp, some banks are putting off M&A. They might conclude it’s better for their shareholders to keep a bank independent or determine that the timing for a sale would be more favorable in the future because prices keep rising, Morrissette says.
At the same time surging stock values herald the potential for increased banking M&A. Higher stock prices allow banks to pay more for targets, Morrissette says.
The value of banking stocks has jumped between 20 and 40 percent since the election, says Steven Hovde, chairman and CEO of the Inverness, Ill.-based investment bank bearing his name. Data from analytics firm SNL Financial confirm increases in the price-to-tangible-book-value (PTBV), a valuation metric, of banking stocks.
For instance, banks with assets between $5 billion and $10 billion had PTBVs of around 2.15 on the eve of the election, the data reveals; they’ve increased to 2.78 since then. And it isn’t just the big boys, as banks with small and mid-size asset bases also saw PTBV values bounce.
The sweet symphony of thriving bank stocks could rise to a crescendo, because the new administration favors reduced bank regulations and corporate tax cuts, observers note.
“They won’t get punished for growing,” Morrissette adds.
For instance, banks with assets in the $8 billion to $9 billion range have avoided crossing the $10 billion threshold because additional regulations kick in–a consequence of the Dodd-Frank law passed in the wake of the Great Recession, Morrissette says. The same holds true for banks with assets just shy of $50 billion. Now increased acquisition activity to grow assets are more possible.
The appetite to buy is already apparent. Most bank deals have recently ranged between 1.4 and 1.7 times book value, Morrissette says. Now there is interest in acquisitions for twice book value.
And some deals are pushing even higher, Hovde notes. Earlier this month, Tacoma, Wash.-based Columbia Banking System announced an agreement to acquire Eugene, Ore.-based Pacific Continental Corp. for $644.1 million, a price tag that works out to three times book value, he says. There was a similarly high multiple in December, when Pine Bluff, Ark.-based Simmons First National Corp. announced the $564.4 million buy of Stillwater, Okla.-based Southwest Bancorp, Hovde adds.
M&A overall settled in 2016 against the previous year’s record totals; nevertheless it remained at an elevated rate. Last year’s 4,951 deals totaled $1.464 trillion in value, according to Mergermarket, a newswire. Still, that’s the second-highest since the news site started tracking volume in 2007: 2015’s 5,298 deals added up $1.898 trillion.
As executives sort through these issues, other areas of banking could see increased M&A activity, including financial technology, Hovde said. In December, the Office of the Comptroller of the Currency announced it would consider applications from FinTech companies to become special purpose national banks. As a result, these organizations could offer more competition to traditional banks, Hovde says—and see increased M&A activity as revenues grow.
Consumer confidence is strong but wage growth soft, she notes. As a result, there is a need for credit that traditional banks cannot fulfill. Automotive finance and insurance, as well as general insurance, are expected to enjoy solid deal flow, Cocking says.
Going forward, it remains to be seen what shape deregulation will take or which banks will leap to the fore in the current M&A climate. Regardless, it’s putting it mildly to say that the climate is ripe for a 2017 for a lightning storm.
A journalist for 24 years, Craig Barner has written for the Chicago Sun-Times, Mergermarket, Engineering News-Record and other publications as a staff writer and freelance contributor. He lives in Chicago.
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