I hope that, by now, I don’t have to remind anyone that my antipathy toward growth-through-M&A banking strategies knows no bounds.
Do I have to repeat the reasons why? OK, here goes: banks that rely on deals for growth almost always a) introduce unneeded complexity to their IT operations as they stitch together acquirees’ systems, b) provide subpar customer service, at least during integrations, and c) have politically toxic corporate non-cultures. What’s more, the whole thing ends up being self-defeating: strictly by the arithmetic, sequential-M&A strategies require that ever-larger acquisitions get done in order to keep going. So deals get bigger and bigger until, inevitably, one turns out to be too big, and the whole thing blows up. If you doubt it, ask Ken Lewis.
And that’s not even the really bad part. The absolute nastiest aspect to the whole, sorry business is that every step of the way prior to that final blowup, shareholders get diluted, and diluted, and diluted some more. If they stick around for very long, they end up owning only a small fraction of what they thought they were getting when they first invested. It’s often as if managements set out to systematically steal from the people that own the company.
So I tend to not like deals, OK? Having said that, I’m not against all deals. I believe one of the smartest things a bank management can do at this point in time is spend a lot of time and resources identifying attractive acquisition candidates.
Like just about everything else in life, you won’t be surprised to learn, banking M&A runs in cycles. Back at the end of the last big credit crackup in the early 1990s, for example, hardly any deals happened, and those that did got done for next to nothing. For the most part, those transactions turned out very well for the buyers. Then, within just a few years, a full-blown, price-is-no-object M&A riot was underway. Take a look at the charts below, and you’ll see what I mean:
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You see where this is headed. Deal volume and multiples are even lower now than they were at the bottom of the last cycle. Acquisitions can be done on very attractive terms. Even buyers who pay a premium to market can do very well—as long as they’re scrupulous about due diligence,
I was at a very worthwhile banking M&A conference a few weeks ago, you may recall. One theme that came through loud and clear is that the environment for unassisted transactions right now is as dismal as it has been in memory. On the one hand, I agree that buyers should be focusing on government-assisted transactions. The risk in those deals is low, and the potential rewards high. But—and this is simply the way these things work—as the recovery and resolution process unfolds, the earliest deals are going to be the best deals. And I worry that would-be acquirers are going to get so hung up on making their acquisitions at the same prices as prior ones that they’ll lose sight of the fact that this is the best environment for bank M&A in at least a generation, and that it doesn’t make a whole lot of sense to fixate over paying the lowest possible price. (Better, as I say, to fixate on due diligence.)
That’s how cycles work. Potential acquirers wait and wait, and watch prices move away from them, until they finally lose their patience and end up making a high-priced, hare-brained, highly dilutive deal at what turns out to be near the top rather than the bottom.
Down that road lies heartache. Smart bank managements will see the opportunity for what it is, and won’t be shy about moving sooner rather than later.