Corporate America is again splurging on mergers, as swelling CEO confidence, frisky financial markets and a friendlier global economy have energized the acquisitive urge.
Yet banks and other financial companies – usually among the most avid shoppers for deals – have been conspicuously subdued amid the corporate coupling. In prior merger-and-acquisition cycles, bank mergers have produced increasingly gargantuan institutions and progressively more byzantine financial conglomerates. A popular infographic illustrates how the components of the largest four U.S. banks were 35 separate companies in 1990.
A firm regulatory commitment to keep the largest banks from getting any bigger or more complex is keeping this activity in check. The authorities intend for banking to stay boring – and this is how the sector will remain for consumers and investors. While headlines have noted global M&A is running at its busiest pace since 2007, financial deals have accounted for only 5.5% of transaction volume this year, according to Dealogic. This is despite financial stocks representing 16% of U.S. market value. In the peak deal years of 2007 and 2006, finance was the most active sector, making up 15.4% and 13.1% of dollar volume, respectively.
The financial takeovers that are occurring have been quite small, too. It’s telling that the largest proposed bank merger so far this year is one valued at $680 million, between First Citizens Bancshares (FCNCA) of Raleigh, N.C., and First Citizens Bancorp (FCBN) of Columbia, S.C. That’s as daring as such deals get these days: a sub-$1 billion transaction of banks with nearly identical names in adjacent territories. So far this year, the average deal value of finance-sector deals is $81 million and last year it was $88 million. In ’07 the average was $228 million – in a stock market worth significantly less than today’s.
There are few signs this will change anytime soon. Strategists at Goldman Sachs maintain a “strategic M&A basket” of companies that its analysts deem likely candidates to be acquired. The list now numbers 133 companies, but only three of them are in finance, and none of the three is in the Standard & Poor’s 500. (They are asset manager WisdomTree Investments Inc. [WETF] and regional banks First Republic Bank [FRC] and Synovus Financial Corp. [SNV].)
Fred Cannon, director of research at financial-sector investment bank Keefe Bruyette & Woods, points out that, among the very largest “universal banks” – the biggest of the too-big-to-fail cohort – the prospects of deals to make them bigger are “minimal.” Federal Reserve Governor Daniel Tarullo, who is in charge of bank supervision, has said such banks operate under a “presumption of denial” of proposed mergers of significant size. What’s more, both Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) are at the limit of 10% of national bank deposits.
The institutions one step down in size – the “superregional banks” on down to regionals with $50 billion in assets or so – are where “normally you would expect” plenty of deals, given their strong capital bases and the attractiveness of growing efficiently through mergers, says Cannon. Yet here, too, the perception of a heavy regulatory resistance seems to be dissuading bank CEOs from pulling the trigger. M&T Bank Corp.’s (MTB) effort to acquire Hudson City Bancorp (HCBK) has been awaiting regulatory clearance for close to two years. And while Capital One Financial Corp. (COF) was allowed to buy online bank ING Direct in 2012, the review was unusually painstaking and prolonged.
Very small institutions have had an easier time joining forces, and have been rather busy doing so. Their shares trade at substantial valuation premiums to larger banks’ stocks for this exact reason; the chance of being taken over is seen to apply almost exclusively to little institutions. The largest banks can offer investors little more than a broad play on a healing economy, boring net-interest income fattening capital levels and the hope to one day to raise dividends.
If anything, Cannon points out that banking giants might well be more likely to shed pieces of themselves – the accruals of decades of acquisitions – than to bulk up. Citigroup Inc. (C) has said it will likely part with its OneMain Financial consumer-lending unit. BNP Paribas (BNP.PA), which just agreed to a record $9 billion fine with U.S. authorities, could elect to shop its U.S. regional bank units First Hawaiian or Bank of the West, which would draw plenty of interest. Activist investor Nelson Peltz just took a 2.5% stake in Bank of New York Mellon Corp. (BK). While he didn’t publicly advocate any action he wants management of the custody bank and asset manager to take, some sort of split of the business could be on his wish list.
As Cannon says, “One might think that the focus on too-big-to-fail institutions might be fading as we get years past the financial crisis.” Yet with the psychic wounds of the crisis still raw and the likes of Sen. Elizabeth Warren seeking to contain their capacity for mischief, he adds, “that doesn’t seem to be happening.”