Mirror, Mirror on the Wall … Wait, Let's Make a Deal Instead

Bank mergers are like courtship, C. R. "Rusty" Cloutier says: Your prospects depend on more than what you see in the mirror.

"Every deal is different and unique," the president and chief executive of MidSouth Bancorp (MSL) of Lafayette, La., says. "It's like dating women: Some want to date you and some don't. There are very unique reasons. When I first started dating I thought it all had to do with looks."

MidSouth in December completed the purchase of First Louisiana National Bank of Breaux Bridge, La., and also bought a branch in Tyler, Texas, from Beacon Federal. The 40-branch bank is "aggressively" looking for banks in Louisiana and East Texas with assets between $100 million and $500 million.

Small banks are poised to fall in price, and their executives need to start looking past the value of their equity when considering a sale, Cloutier said in an interview following his presentation at American Banker's M&A Symposium this week.

Here is an edited version of that conversation:

You've said that banks are going to get cheaper because it is a buyer's market. Why?

CLOUTIER: What is going to happen is that every bank that is a buyer has a limited amount of capital.

So you can't keep doing deals forever and ever and ever. If you run into a situation where there are more sellers than there are buyers, you're going to end up in a situation where prices are going to come down. Because for you to be attractive — to say, "Give me a better offer" — then you've got to be in a market that I'm really dying to be in. And that's a challenge. And I mean, it is going to become a bigger and bigger challenge down the line.

That's interesting because people have been pointing to some fairly high-priced deals in Texas and California as signs that valuations are on the rise.

Every deal is different and unique. It's like dating women: Some want to date you and some don't. There are very unique reasons. When I first started dating I thought it all had to do with looks. But it depends upon what age a woman is. Maybe she wants somebody to have fun now but ten years later she's looking for somebody to marry. Every deal is different and every deal falls into itself as to why it gets done.

Just because a bank fetched this much, that doesn't tell you how much another one is worth?

There are some banks that I wouldn't pay 80% of book for, and there might be some I'd pay two times book for. But the question, too — how good an earner is it? If a bank isn't earning a lot of money — I mean we looked at one the other day that talked to us. When we ran the numbers we couldn't get to 50% of book. But there are other ones I look at that may be 170% of book. I think everyone looks at book and says: Everybody's equal . It's like saying that Drew Brees and Peyton Manning — the NFL quarterbacks — and every other NFL quarterback are worth the same amount of money. They're not.

So how do sellers figure out what's a fair price for their operations?

Sellers are slowly figuring out that they can't concentrate on book anymore. I think the investment bankers have been out there and saying, "Look, with this accounting mess, you really gotta look at how much goodwill are you going to take." You've got to think about it.

So look past whether getting a big discount or premium to book?

The question you gotta ask yourself is: Long term is it better for me to stay where I am and ride what I got, or is it better to take somebody else's currency and move on. But if you get 50% of book but the [buyer] could double its stock price in the next two years, aren't you better off than selling for book and a half for a stock that goes down 100%?

What you are looking for when it comes to acquisitions?

We're looking at Louisiana, and Texas — East Texas. We're very aggressive out there. Knocking on a lot of doors. Talking to a lot of people. Taking a lot of phone calls. Seeing what's happening. We think we're a good home for a bank — we're going to treat their people right. I think the people that have done deals with us like the way they've been treated.