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‘Mergers of equals’ are never truly equal

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BB&T’s deal with SunTrust Banks is the biggest bank acquisition since the financial crisis in 2008, and the lenders’ executives have taken care to position the combination as a “merger of equals.” In practice, such deals are very seldom truly equal, but the companies’ plan to create the sixth-largest US bank comes pretty close.

Executives often try to convince shareholders, politicians, and employees that deals are equal, even when one party is clearly dominant. Stakeholders may try to scuttle a transaction out of concern that the dominant firm will impose painful layoffs for the target company, and investors want to make sure they’re getting compensated fairly.

On several important scores, this combination comes close to a merger of equals, according to Scott Moeller, a finance professor at Cass Business School in London. The post-combination stock ownership is reasonably close to balanced (the companies are proposing that BB&T shareholders will get 57% of the company, compared with 43% for SunTrust). Both banks will get an equal number of the merged bank’s board seats, and the CEO spot will first be occupied by BB&T’s chief executive before rotating to SunTrust’s boss in 2021.

“This ticks a lot of the boxes for a merger of equals,” said Moeller, a former Deutsche Bank deal maker. “It’s pretty close to what they say on the tin.”

For stock investors, the $28.2 billion deal is structured more like a merger than an acquisition. SunTrust shareholders will get 1.295 BB&T shares for each SunTrust share owned, marking a 7% premium from Wednesday’s closing price. Acquisitions typically involve a premium of around 30%, Moeller said.

Culture, a factor that’s hard to capture on paper with numbers, also comes into a play. The strength of management personalities (ie. their egos), and the performance of the previously separate companies after the deal closes, also affect the complexion of the new entity. This factor can also evolve over time, as executives triangulate for power.

Convincing the parties involved that a deal is a merger rather than an outright acquisition is also important for the message it sends to employees, who may understandably panic when they get the memo, and start sending out resumes. When management is more balanced between the two firms, it signals layoffs might be more evenly distributed, rather than only coming from the buyout target. BB&T and SunTrust have told investors that the combination will result in $1.6 billion in savings, net of investments, which signals sizable job cuts down the road.

The combined company’s name is also important in Moeller’s analysis in whether something qualifies as a merger or a takeover. For BB&T and SunTrust, this remains to be seen, as the companies say they will decide on a new name before the deal closes, which is expected to happen toward the end of the year. Post tie-up, the headquarters will be in Charlotte, North Carolina, closer to BB&T’s Winston-Salem base in the same state than to SunTrust’s head office in Atlanta.

Of course, the deal isn’t perfectly equal—the terms of the agreement make clear that SunTrust is “to merge into BB&T.” The companies’ executives say a bigger bank will help them keep up with advancing technology, according to the Wall Street Journal (paywall), as bank branches close and consumers rely on smartphones for more services. It could also help them keep up with larger rivals when it comes to deposits, which are an important source of funding.

Another question is whether more such banking tie-ups will soon be in the making. Crisis-inspired regulations made deals like the all-stock combination between BB&T and SunTrust far more difficult, but the Trump administration has loosened such restrictions. If there’s a revival in financial sector deal making, just take note of the small print when it comes to “mergers of equals.”

 

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