Comerica's High Price for Sterling Could Pay Off

Ralph Babb, you're now on the clock to prove yourself right.

On Thursday your bank, Comerica Inc. of Dallas, finally completed its purchase of Sterling Bancshares Inc. of Houston, and a lot of industry eyes are watching whether you can make it work.

But from the moment the deal was announced in January, the skeptics (and there were many) said you overpaid. Your stock this year had fallen 22.35%, to $32.78, at mid-day Thursday.

Investors and analysts were suspect of the initial $1.03 billion price tag that valued Sterling at around 2.3 times tangible book value, far pricier than the 1 to 2 times book value most banks had been fetching since the downturn.

Sterling certainly took advantage of the fact that Texas is a coveted, growing market and there just aren't many big banks there up for grabs.

Questions about the valuation dominated M&A chatter all year. The negative reaction is said to have influenced everyone else's deal pricing since then — and maybe have contributed, along with the weakened economic recovery, to the dearth of bank deals this year relative to the aggressive forecasts.

You've been under the microscope before — having relocated the bank's headquarters from Detroit a few years ago, steered it through the meltdown and exited from the Troubled Asset Relief Program — and you certainly have a case to make.

As you put it July 19, the deal was a rare opportunity — a "strategically compelling transaction" that triples Comerica's market share in Houston and gives it entry into San Antonio.

And you have promised caution going forward.

Though Comerica "will always look at opportunities" for future deals, you said, it "will be very regimented" because the company feels "very comfortable with our footprint now both in Texas and California."

If American Banker could be so bold, there are other arguments you could make based on a fresh look at the numbers and new information from the latest quarterly results.

The final deal value should be reassessed, you could tell the markets.

Banks' stock performance has waned this year anyway, with the KBW Bank Index down 10.5%.Taking into account the decline in Comerica's stock, the acquisition price is now around $800 million — or about 1.8 times Sterling's tangible book value, according to Wells Fargo & Co. analysts.

Median value for $50 million-plus transactions in the last year is around 1.5 times, and deals in the Northeast — a market similar to Texas in some ways — have been fetching around 1.8 times to 2 times, according to Keefe Bruyette & Woods Inc. research.

So the price isn't as bad as initially expected.

And the financial results at Comerica and Sterling have been decent this year.

Sterling posted a wider than expected loss of $11.8 million in the second quarter, but that was mostly due to a charge involving the sale of MBM Advisors Inc., an investment advisory, pension administer and consulting firm.

Comerica said its loan marks, cost savings and integration expenses have not changed between announcing and closing the deal: It is taking a 12% mark on Sterling's loans and expects to book merger and integration costs in the range of $80 million. The deal is projected to produce $56 million in annual cost savings by the end of 2012.

Meanwhile, your $55 billion-asset bank — which now has about 500 branches in Michigan, Florida, Texas, Arizona and California — in the second quarter reported signs of accelerated loan demand in its core business lending business. Utilizations and commitments were up, though total loans declined due to continued runoff of commercial real estate and loans to car dealers.

The company's relatively low credit losses and strong capital position gives it more flexibility than other large banks to raise dividends, buy back stock or make more acquisitions.

So, there's a case to be made, Mr. Babb. It won't be easy, and how long you have to make it is unclear before investors and other commentators lose patience. The economy is unpredictable right now, and the markets are jittery.

Matthew Monks contributed to this article.

Did Comerica overpay for Sterling? How has that deal affected you? Let us know what you think.