M&T Bank Makes An Excellent Acquisition By Acquiring Hudson City Bancorp

| About: M&T Bank (MTB)

M&T Bank (MTB) announced on Monday that it will acquire Hudson City Bancorp (HCBK), in a deal valuing the firm at $3.7 billion. Shares of Hudson City Bancorp rose 15.7% to $7.45 per share.

The Deal

M&T Bank announced that it will acquire Hudson City Bancorp, in an attempt to expand its premier community banking franchise in the Eastern part of the United States.

Shareholders of Hudson City will receive a consideration of 0.08403 shares of M&T. They can elect whether they would like to receive either stock or cash, subject to pro-ratio in the agreement. M&T Bank will finance the deal with 60% in stock and 40% in cash, for a total value of $3.7 billion. The deal values Hudson City at $7.21 based on Friday's closing price. Shares of M&T Bank rose 4.6% in Monday's session to $89.82 per share, valuing Hudson City at $7.55.

CEO and Chairman Ronald Hermance commented on the deal, "This merger creates tremendous opportunities to build on the successes that each company has achieved individually in its own markets. Hudson City recently embarked on a diversification of our product lines and our balance sheet. This transaction accelerates that transformation."

At the end of the second quarter, Hudson City has total assets of $44.2 billion. The company reported second quarter earnings of $72.3 million, and $145.3 million for the first six months of 2012. Earnings for the first six months of 2012 came in at $0.29 per diluted share. Based on an annual earnings estimate of $0.60 per share, the offer values Hudson at 12 times estimated earnings. The offer values the company at 0.8 times its tangible book value of $9.08 per share.

The transaction is expected to be accretive to capital ratios, tangible book value per share and operating earnings per share.

The transaction is subject to regulatory approval.


M&T Bank reported second quarter net income of $215 million, and $403 million for the first six months of 2012.

Currently, M&T Bank is valued at $11.4 billion. Based on a full year earnings estimate of $800 million, the bank is valued at 14 times annual earnings. In comparison, M&T pays a mere 12 times annual earnings for Hudson City, and reaps the full synergies.

Currently, M&T Bank pays a quarterly dividend of $0.70 per share, for an annual dividend yield of 3.1%.

Investment Thesis

Year to date, shares of M&T have risen some 18%. Shares steadily rose from $75 in January to highs of $90 today. The bank expanded its asset base from $66 billion in 2008, to $81 billion at the moment. Net income rose from $556 million in 2008, towards $860 million for the full year of 2011.

For the full year, Hudson is on track to earn almost $300 million, while M&T Bank is expected to earn $800 million. Combined, the firms are on track to generate earnings of $1.1 billion. This excludes the estimated 25% decline in operating costs at Hudson after the transaction.

M&T needs to raise roughly $2.2 billion in new equity to finance the deal. The number of shares outstanding will increase from 127 million at the moment, to roughly 152 million shares. At this rate, the company could earn $7.25 per share, excluding synergies and financing costs. This values the firm at 12 times annual earnings, and realistically a bit less.

Dilution is not always a bad thing for shareholders. Hudson is acquiring assets at cheaper valuation multiples, despite the inclusion of the acquisition premium. Furthermore, M&T Bank is expected to achieve sizable synergies. Investors are pleased with M&T Bank today, and they should.

I see shares hitting $100 later this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.