Bank M&A Deals Rebound Faster than Multiples: Interactive Graphic

Which comes first: A stock rally that emboldens banks to make acquisitions — or a flurry of deals that bid up share prices?

The feedback loop between deal multiples and market multiples makes it hard to disentangle the two, and the historical record is difficult to read. Lately, however, deal announcements have been outpacing gains in both ratios. (See the following graphic. Interactive controls are described in the captions. Text continues below.)

Price to book, tangible book and earnings multiples for the SNL U.S. Bank and Thrift Index surged ahead of the wave of mergers that took place in the late 1990s. Trading price to book and tangible book multiples also took off before deal multiples (as measured by rolling averages for announcements over the preceding year, an approach that acts to smooth out changes and build in a lag).

Later, during a period of about three years that began in late 2004, a running tally of announcements for the previous 12 months dropped off and then recovered unattended by particularly strong moves in stock multiples. (Over roughly the same time, stock price to book multiples drifted lower while price to tangible book multiples were comparably stable, mirroring a surge in goodwill and other intangibles that followed the end to pooling-of-interests accounting for mergers.)

In the run-up to the financial crisis, trading multiples and deal activity plummeted more or less in tandem. Price to earnings ratios, which were perversely inflated by poor results during the recession and its aftermath, were an exception. (For about the last 10 years, deal price to earnings ratios have mostly held well ahead of trading multiples, perhaps reflecting lower profitability among sellers than the universe of publicly traded banks.)

Now, as dealmaking has revived, the pace of announcements — which stood at about 225 over the preceding year in early March — has outrun gyrations in equity-market and M&A multiples.

Some of the drop and rebound in conventional mergers was exaggerated by buyers who were drawn into the market for banks seized by regulators. Including those transactions, the churn of industrywide assets sold held up relatively well through 2009 and 2010 after a short interval during the peak of the crisis in 2008.

Overall, while appreciation in bank stocks is supporting deal activity, the current trends do not look like the upswings in acquisition multiples from previous waves of mergers.