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Institutions with solid, but underperforming assets and lagging stock price valuation multiples are vulnerable to activist investors. Address problems before they are attracted to your bank.
January 28 -
Community banks' prospects will improve if they accept that the financial services industry is changing. They must re-examine strategies and business models, and experiment and improvise to exploit new opportunities.
December 17
The financial crisis and its aftermath have profoundly altered banking. Curtailed growth and increased regulatory costs from
The end result of this consolidation will be the creation of a new class of regional bank champions in the depleted $10 billion to $50 billion market segment. This is similar to the consolidation wave following the
It is understandably difficult to create shareholder value buying publicly held banks at a premium. Nonetheless, the right buyers at the right time can succeed by targeting smaller, undervalued banks provided they can generate synergies exceeding the acquisition premium.
Bank M&A currently remains tepid, despite a recovery in capital positions and resolution of legacy asset quality problems. Bank stock prices, while improved, still trail pre-crisis multiples. The lag reflects a weak economy. Additionally, it reflects regulatory changes in the industry's cost structure especially at the community bank level. The changes affect the economic viability of the community banking model for institutions lacking sufficient scale. Banks able to consolidate sub-scale institutions in attractive markets at reasonable prices can create substantial valve.
One of the factors inhibiting this development is the belief that M&A is a loser's game with most acquisitions failing to add value for the acquirer's shareholders. Hubris or overconfidence is frequently given as the explanation for this phenomenon. This explanation is troubling as it assumes those managers continuing to acquire are collectively and consistently irrational.
An alternative explanation is that most acquisitions do not fail. Rather, they have been miscalculated. Academic
Recent
Furthermore, caution against making a possibly over-priced acquisition (a
M&A is a high risk activity and many things can go wrong. Each deal must be evaluated on its merits. You can improve your chances by focusing on three key questions. First, are you the best owner of the target? This means you are capable of extracting the most improvements through strategy and execution changes. Weak buyers gambling for redemption rarely succeed.
Next, is your bid premium less than credible cost savings as opposed to incredible revenue synergies? Absent that, no value creation is possible. Finally, have you adequately considered integration risks? Buyer M&A experience, smaller targets and limiting the number of post-acquisition changes reduce integration risk.
Post-crisis structural changes will trigger a wave of community bank M&A, creating new regional bank powerhouses. Investors will pressure management to do something acquire, sell or return capital through dividends or repurchases. There will be no runners-up in the coming consolidation wave. Those failing to act risk falling further behind. In this environment, being too cautious is just as dangerous as being too aggressive.
All bid winners are not cursed, but those who hesitate to bid may be.
J.V. Rizzi is a banking industry consultant and investor. He is also an instructor at DePaul University Chicago.