Bank M&A Breakups: When Emotions Collide, the Risks Soar

Breaking up is hard to do, and that is especially true when bank M&A deals go awry.

Customers Bancorp (CUBI) in Wyomissing, Pa., and CMS Bancorp (CMSB) broke off their $21 million merger agreement in December, citing regulatory delays that had prolonged the engagement period to 16 months. Cue in the inevitable fight over money.

Next week CMS is expecting a $1 million check — the breakup fee — from Customers.

"We believe we didn't terminate the agreement," John Ritacco, president and chief executive of CMS, said in early January. "Customers had certain responsibilities to extend the agreement through March 31. We honored the agreement and we fulfilled all of the necessary parts of that agreement."

But Customers describes the separation as a mutual decision and refuses to pay.

"All I can say is that we always honor our commitments," Jay Sidhu, the outspoken chief executive of the $3.9 billion-asset Customers, said in an email to American Banker. "We cannot let them just take advantage of us. We both agreed to mutually terminate the agreement. There is no fee owed under those circumstances."

The disagreement illuminates the importance of both parties fully understanding their agreements. It also speaks to the need for patience — and pragmatism — in an environment where regulators are laser-focused on compliance at both the buyer and the seller.

"Not having a lot of clarity and taking things for granted can bring some unwanted surprises later on," says C.K. Lee, a managing director at Commerce Street Capital. "As the merger wave grows, we'll see more and more terminations from things like regulatory issues or pressure from community groups, so the more the parties understand ahead of time the better."

Moreover, in an already arduous time for banking and M&A overall, distractions like disputed termination fees add an unneeded layer of complication. Analysts of Customers say they'd prefer Sidhu to set aside his view of who's right and just be done with it.

"He doesn't believe he owes this fee, and he is a CEO with clearly defined opinions," says Matthew Schultheis, an analyst at Boenning & Scattergood. "But there is a shareholder argument that this is a distraction from running the bank. It is best to put it behind you."

The $1 million fee would equate to a three-cent hit to earnings, says Bob Ramsey, an analyst at FBR Capital Markets. For comparison, Ramsey is projecting Customers will earn 36 cents in both the fourth quarter 2013 and this quarter.

"I wouldn't fault Jay for deciding to pay it," Ramsey says. "It is better for all involved parties to get together, work it out and move on."

At the root of the delay is the Justice Department's investigation into Customers' fair-lending practices that was made public in August. In addition to the CMS deal termination, regulatory delays also killed Customers plans to buy the $1 billion Ameritas Mutual Holding in Falls Church, Va. in early 2013.

Sidhu has been a prolific bank buyer. He built Sovereign Bancorp from a tiny thrift into an $89 billion-asset regional player in the Northeast. Sovereign grew primarily through M&A, but Sidhu has pledged to rely more on organic growth at Customers and selective acquisitions.

Still, having had two deals collapse could tarnish Customers' reputation among would-be sellers, Schultheis warned in a research note.

An ugly fee dispute arguably would add to the reputation risks.

Customers executives say the company is unconcerned that other banks will shy away when it is ready to buy again.

"There are unique circumstances associated with this given what we are going through in the regulatory environment," says Robert E. Wahlman, the chief financial officer of Customers. "It is unfortunate that one of the parties lost its patience. Otherwise, it could have been seen through to the end. With the right partner and in the right circumstances, it is easily explained."

In the meantime, Customers is focused on organic growth. Sidhu does not "envision any significant M&A activity until we are trading at or above our peer-group valuations," he said in the press release announcing the termination of the CMS deal.

The good news, Ramsey says, is that the company is booking loans at a fast clip.

"We never considered M&A necessary for [Customers] to grow, and its organic growth is far superior to the industry," Ramsey said in a research note in late December.

Jackie Stewart contributed to this article.