Why 2014 Will Be the Year of Mergers of Equals

Among investment bankers, Sterne Agee has long been known more for research than for dealmaking. But that may soon change. It has been aggressively building out its stable of community banking M&A advisors over the past year, taking advantage of an opening created by the recent merger of two heavyweight rivals, Keefe, Bruyette & Woods and Stifel Nicolaus.

Daryle DiLascia came over to Sterne Agee from KBW in late 2012 to lead its depository institutions group. Michael Barry joined from Stifel Nicolaus several months later to lead the group's bank M&A group. Overall, Sterne Agee has built the team to 23 bankers from eight in just over a year, poaching more than a few bankers from its recently merged rivals in the process.

Sterne Agee advised on nine bank mergers last year, just two more than the year before, but the deals were bigger, a total of $733 million compared to $108 million the year before. And the company's momentum picked up as the year went on and the noncompete agreements of its new hires expired, DiLascia said. The two dealmakers spoke with American Banker about the soft-touch management that goes into a successful deal, what the stock market means for banks on the block, and why 2014 really will be the year of the merger of equals. Below is an edited version of the conversation.

What kind of deals do you plan to focus on, and why?

Michael Barry: The theme right now is the strategic merger, or the merger of equals, whether large or small. Frankly, I have never seen such a consensus that size really does matter in this business. It's a difficult operating environment for banks and thrifts in general: there's low loan growth, increased costs from regulation, increased capital requirements. There's a lot of reasons on the regulatory side why banks and thrifts should think about merging together.

We expect to see a lot of activity among banks between $1 billion and $10 billion in assets. That's not to say we don't call on banks above that, because we do. But the bigger guys are somewhat more limited, because regulators don't want them to get much bigger. The real activity on the M&A side right now, I think, will be in the strategic mergers between $1 billion to $10 billion and well as those guys buying anything below $1 billion in assets.

Daryle DiLascia: We also see a number of smaller companies that have been limited in their ability to pay dividends, partly because some of them have taken on debt either from [the Troubled Asset Relief Program] or the [Small Business Lending Fund that has restrictions on paying dividends. So [these companies' desire for] access to a steady stream of income via dividend has been another area that we expect to facilitate M&A.

Last year investors drove up the stock price of buyers. Will that continue?

Barry: I've been in this business for 25 years, this is the first period where that response has been pretty consistent. Right now, most of the buyers are [touting] their stock price and performance, as well as, hopefully, a positive performance after the deal. Almost all buyers' stocks have outperformed the relative index following deals — and for MOEs even more so.

Now, we've seen a pullback in stock prices over the past couple of weeks, and we're waiting to see what impact that has. I think it will be manageable, but if it continues, obviously, it's the wild card that could materially impact dealmaking in the coming year. I'm working on a deal right now, which is a stock-for-stock transaction, and it's certainly impacted the discussions, as far as the range that a client can offer.

What are the difficulties in organizing a merger of equals, and how can you, as an advisor, help overcome them?

Barry: Absolutely the toughest part of mergers of equals is the social issues. We, as investment bankers, can propose a lot of things make sense on paper, but you've got to get the two parties to agree, and ultimately it starts at the top. The two CEOs have to decide to come together in a common mission, and each company has to make a sacrifice.

I'll be honest, with M&A, a lot of these are not the most novel ideas in the world. A lot of the complexity is, Is this right time for the merger? Culturally does it work? You can run all the financial stuff and all these things can look good, but do the cultural things look good? As an investment banker, you're going back and forth with the principals and trying to facilitate communication between them. You have to spend a lot of time knowing each side.

Are these deals billed as "mergers of equals" truly mergers of equals?

Barry: Some people say there's no such thing as a true merger of equals. But the United Financial — Rockville Financial deal? That is by far the most true merger of equals transaction we've ever had the opportunity to work on. (The $369 million deal, announced in November, would create a company with roughly $4.8 billion of assets. United is based in Springfield, Mass., and Rockville is headquartered in neighboring Connecticut.)

First, it's a natural combination if you look at the map. Second, it really starts with the two CEOs. Bill Crawford, Rockville's CEO, really pushed the agenda with Dick Collins, United's CEO. Dick is retiring as part of the deal, so that worked from a management perspective. But I'll be honest, neither company was interested in selling out. They also understood that they needed to get bigger, and this is one way to get to that sweet spot a lot quicker. And more importantly, they spent a lot of time together in the process here and they realized that they could work together.

The thing about these MOEs is that they're tough to put together, and sometimes they've had a mixed result in terms of execution. But when that happens, it's because people haven't made the tough decisions before the merger. And that's not the case in this transactions

You also worked on Simmons First National's deal to buy Metropolitan National through a bankruptcy auction. Will the aggressive bidding in this case become the norm in these types of auctions, or is this a one-off deal?

DiLascia: We've seen a shift in these bankruptcy-type transactions away from a pure financial buyer and more toward a strategic buyer. Simmons First [in Arkansas] clearly had a lot of overlap with Metropolitan and a lot of knowledge of the local marketplace. They had the ability to extract synergy out of the transaction and put together a very nicely accretive deal at a higher price than a pure financial buyer could afford.

But generally speaking, the health of the industry has improved over the last couple years, and that leads to the conclusion that we'll probably not see a lot more of these types of transactions.

Barry: Simmons First was the first one of these auctions where someone had come in and beat the stalking horse. Obviously, Simmons First thought Metropolitan was a natural fit for them. So what does it mean? There will be more of these transactions, but it's not a floodgate. These deals only work if you have actual value in the bank at the end of the day.

How cutthroat is the competition among bank advisors, and what do you do to stand out?

Barry: It's extremely competitive — in the community banking space you have Keefe and Sandler and several others. We positioning ourselves to be a competitor, in the top three. Of course, we want to be No. 1, but we are positioning ourselves for [top three].

How do we compete? It's the individuals Daryle has been able to add here. We're pretty comfortable when we walk into a client or a board room that we can provide good advice at the end of the day. I think the other thing is that we're very good at dealing with conflicts, and there are a lot out there.