Mergers and Acquisitions Review
By Curtis Carpenter, Sheshunoff Management Services
In general, small bank stocks out-performed larger bank stocks. Banks with assets between $500 million and $1 billion increased 6.57%, banks with assets between $1 and 5 billion increased 7.04% and banks with assets between $5 and $10 billion increased 5.72% during the first quarter. The smallest segment of publicly-traded banks exhibited the best performance - those less than $250 million in assets - advancing 8.99%; perhaps in response to the very robust acquisition market for banks of this size. Banks with assets between $250 million and $500 million appreciated 0.70% while banks over $10 billion appreciated only 1.72% in the first quarter.
Transaction values were at all-time highs by several measures. Western banks exceeded national pricing levels with the exception of price-to-earnings which commanded a respectable 19.7x earnings. On a price-to-book basis western banks realized 2.52x book, 3.52% of 7% tangible book, 26.4% of assets and an outstanding 29.9% of deposits.
Over half the US bank transactions reported a price in excess of 2.5 times standardized 7% tangible book, and the median of these transactions was 3.35x 7% book. The price paid on the 7% tangible book metric facilitates comparison of transactions involving sellers with significantly different levels of capital. Sellers generated a median ROA of 1%, were geographically dispersed in desirable expansion markets and all but one had exceptional asset quality. The typical buyer was a publicly-traded bank with $2 billion in assets that used its highly-valued stock as part of the consideration.
The overwhelming majority (71%) of sellers were small to mid-size community banks ranging in size from $50 million to $500 million. Although intense competition, regulatory burdens, margin pressure and other costs are forcing smaller banks to consider a sale, a primary consideration is the very attractive pricing available in today’s acquisition market.
Many buyers used their stock or a combination of stock and cash as currency to pay exceptional premiums for entrance into strategic markets with favorable demographic trends. Nearly 60% of the transactions resulted from buyers’ continued expansion into new markets. As usual, California (8), Texas (8), Florida (7), New York (7) and Illinois (6) topped the charts reporting the most bank and thrift transactions among all the states. The market exhibited a clear preference for cash and stock as the preferred consideration over all cash transactions.
De novo organizations (banks chartered after 1995) were sellers in 32% of the transactions in the first quarter of 2006. During the same time period, western de novos accounted one quarter of all US de novo transactions. Those transactions achieved higher pricing multiples than all US de novo transactions as well as higher median pricing multiples than all US bank transactions. The message is clear: buyers are willing to pay exceptional pricing for the opportunity to enter into new, strategic markets.
Oakland, California-based Golden West Financial Corp. ($128 billion), with its announced sale to Wachovia Corp. ($542 billion) for $25.5 billion in cash and stock is so far this year’s blockbuster transaction This transaction forges Wachovia’s expansion into the new western states of California, Arizona, Colorado, Illinois, Kansas and Nevada. At announcement, this acquisition has indicated multiples of 6.5x earnings, 2.77x book and 41.4% of deposits.