Stake's in Play, But M&T Likely Isn't

Though nearly a quarter of its shares are up for grabs, M&T Bank Corp. is uncommonly well positioned to maintain control of its destiny.

The Buffalo lender already averted a bid by a large foreign lender for a big stake last week. Other domestic and overseas banks may be interested in the 22.5% of the company that is for sale, but market watchers say the rocky global economy and M&T's strong financial position make it more likely that the shares will go to a friendly institutional investor like a mutual fund or asset manager. It certainly helps that M&T has a high stock price and the power to block certain deals.

"I guess the question is: is there a possibility that this stake moves into the hands of another bank? And that's possible," said Collyn Bement Gilbert, managing director with Stifel, Nicolaus & Co. Inc. "My personal view is that the greater likelihood is it will fall into the hands of investors rather than a commercial bank. That would be the ideal resolution [for M&T]. It's a cleaner transaction."

Analysts say M&T will probably come out strong no matter who ends up with the stake, which is being unloaded by the struggling Allied Irish Banks PLC. Having weathered the recession better than most other large banks, M&T has the credibility and financial strength to ensure the shares end up in friendly hands, they say.

That was underscored last week by reports that Banco Santander SA of Spain had sought to purchase the stake — which has a market value of about $2.2 billion — as part of a plan to merge M&T with its U.S. arm, Sovereign Bank. The deal reportedly fell through over disagreements about control of the merged entity.

Though other banks may make a play for the stake with an eye toward a strategic partnership, Gilbert said M&T's shareholder history suggests that it also appeals to investors that favor conservative, long-term plays. Its largest shareholders at the end of March included Warren Buffett's Berkshire Hathaway Inc. and T. Rowe Price, among others. Hedge funds have tended to avoid M&T because it's known as an appropriately priced, slow-growth stock.

M&T does not have the capital to buy the stake itself without issuing stock, something it is not likely to do. It still owes the Treasury Department $600 million in federal aid, and its loan losses — while low in comparison with other banks — remain elevated.

The stake may go to market in several ways, including a widely dispersed offering, private placement or direct transfer to one or multiple parties.

Allied Irish took the stake in 2003 when it sold Allfirst Financial Inc. to M&T. In March it announced that it would sell its interest in M&T as it deals with issues in Europe. M&T has the right of first refusal if Allied Irish wants to transfer the stake to another owner.

M&T has not said publicly how it wants the stake resolved, and it declined to comment for this story.

With $68 billion of assets and more than 750 branches from New York to Maryland, M&T is considered one of the country's healthier companies. It has stayed profitable through the recession, benefiting from a conservative operating strategy and the fact that the Northeast has not suffered as much as other regions.

Chief Executive Robert Wilmers noted in his shareholder letter in March that M&T has stayed profitable for "33 consecutive years and 134 consecutive quarters." That accomplishment, he said, "should not go unnoticed" in light of the crisis.

M&T's strength is a key reason a bank like Santander was interested in doing a deal, analysts say. It may also be why that deal did not happen.

Christopher Nolan, an analyst with Maxim Group LLC, said M&T is able to call its own shots after steering clear of blunders that hobbled most peers. M&T does not need a suitor, he said.

"I think they are generally a consolidator. I think that they want to be in control over whatever acquisition they make," Nolan said. "And, quite honestly, I think management has demonstrated an operating capability where they should be the ones in control."

M&T's robust market value is also a barrier to strategic buyers, he said. M&T's market capitalization was $9.7 billion at Thursday's closing share price of $81.48. That would value the 22.5% stake at around $2.2 billion. It is tough for any bank to justify doling out a massive amount capital right now, Nolan said. Doing so for a passive stake in another company would not make a lot of sense.

"The valuations on this [company] are at a premium relative to other banks. It's hard to see someone buying them and making a deal accretive," Nolan said. "If you want a strategic hookup with M&T you can probably do it a lot cheaper. I don't think you need to buy 23% in M&T to do something jointly strategic with them if that deal makes sense on it its own."

One bank multiple analysts say would make a perfect match is People's United Financial Inc. in Bridgeport, Conn. People's management is in flux after its chief executive recently stepped down. The company, which largely operates in New England, has one of the industry's largest stockpiles of capital. A merger with People's could give M&T the power to repurchase that stake. The combined company would have instant reach from Maine to Maryland.

"That combination would take care of most of the Northeast," said Amanda Larsen, an analyst with Raymond James & Associates Inc. For its part, People's has indicated it's not on the market for a partner. Its chairman, George Carter, told Bloomberg News on Tuesday that it wants to remain "independent" as it looks for a new CEO.