Mostbankers expect to engage in M&A activity within the year, and one hurdle toclose a deal appears lower as courts crack down on frivolous shareholderlawsuits.
AtD.A. Davidson's Financial Institutions Conference in Denver, analysts said May9 that a recent survey showed 72% of bankers expect to acquire a company within12 months. During one panel, lawyers said courts have begun dismissingshareholder suits that are clearly only meant to generate legal fees.
JoshuaDean, a partner with Sheppard Mullin Richter & Hampton LLP, said law firmsroutinely issue press releases alleging a breach of fiduciary duty beforeM&A details are even announced. He said acquirer banks often set aside$250,000 to $500,000 to essentially pay off the law firms in a disclosure-onlysettlement in exchange for a full release of liability. He said judges havestarted rejecting those settlements on the justification that banks need tochange deal terms to satisfy any breach of fiduciary duty allegation. Sinceacquirers are unlikely to change deal terms, law firms appear to have ditchedthe strategy, Dean said.
"We'realready seeing transactions — we announced one 10 days ago, a $300 milliontransaction — [with] not a single announcement alleging a potential breach offiduciary duty," Dean said. "Six months ago, there'd have been 10,and they all would have said the same thing. So I think that is a real positivestep for M&A transactions."
However,the panel of lawyers said similarly frivolous protests from community activistspersist. In one case, a lawyer said the community activist group failed tochange the name of the bank in a boilerplate protest letter, but federalregulators still considered it a valid protest that needed to be addressed.
Regulatoryapproval remains key to closing M&A deals, said panelists and attendees atthe conference. During a panel focused on M&A, the CEOs of two acquisitivebanks, Kalispell, Mont.-based Glacier Bancorp Inc. and , both saidthey approach regulators about a deal before even engaging with the targetbank. Both CEOs said they see more potential deals, but rich valuations and adesire to stay off the regulatory radar could dampen activity.
"Unfortunately,we didn't take into consideration that Washington might be interested and say,'Who's this bank doing three deals in one month?'" Wintrust President andCEO Edward Wehmer said, referencing the bank's activity last year. "So, they've asked us tospoon-feed it a bit more. I don't want Washington involved — just keep themaway. But we are seeing more deals."
Asfor pricing, the executives and the investment bankers on the panel said therich, pre-crisis valuations will not return, even though pricing is on the rise.
"Idon't think the earnings power is there to support that. So I think a premiumvaluation for clients — I'll call it the new 'five times book' — is somethingnorth of two times book," said Rory McKinney, an investment banker withD.A. Davidson.
BothWehmer and Glacier President and CEO Michael Blodnick said they never winauction-style M&A deals because they generally are not willing to submitthe highest and best price. Rather, they pitch target banks on proper culturefit, a secure future for the target bank's employees and surety of close.Investment bankers on the panel said that strategy can work, as long as the bidis still within 10% of the highest price. And for structure, the panelists saidsmall banks will often want at least 50% of the deal value in cash in forsecurity, as opposed to before the crisis when bankers were more willing to doall-stock deals.
Theexecutives and other speakers at the conference preached conservativeacquisitions, advising bankers to never pay a higher premium than where theirstock trades. Wehmer said certain banks become desperate for M&A, drivingup the price to the point where he expects it will slow his company'sacquisitions.
"Onething the accounting does do, and you need to be careful of, is the accretion.Accretion is like dope. You get it, it runs out and then you gotta get anotherhit. … I think that's how you can justify paying [2.4x book] for a bank,"Wehmer said.
Throughoutthe conference, speakers and attendees said they expect the recent spate ofbank M&A to continue. John Eggemeyer, founder and managing principal ofCastle Creek Capital LLC, said he believes the industry is"mid-innings" in the consolidation trend.
In awide-ranging presentation on the state of banking, investor Eggemeyer saidacquisitive banks have posted stronger returns over time. He said banks withhigh cost burdens are the most likely targets.
"High-costbanks are going to get absorbed by their more efficient peers," Eggemeyersaid, "and I think that that trend will accelerate in the future."