Want To Know Which Banks Have Been Smart Acquirers? Start By Looking At Goodwill [View article]
You may be thinking of Jamie Dimon's quote with respect to JPM's purchase of Bear Stearns, which was "Buying a house and buying a house on fire are two different things", a quote I love. At announcement, BAC was paying Merrill Lynch a 35% premium to stated book value. Couldn't they have put the fire out for less money?
Want To Know Which Banks Have Been Smart Acquirers? Start By Looking At Goodwill [View article]
Had BAC waited a quarter or two, it could have bought Merrill Lynch for a fraction of what it paid. Acquisition price matters. I'm not sure who BAC thought would steal Merrill Lynch away from it. Did BAC's financial advisers not read Merrill's desperation? How could they have missed it?
Want To Know Which Banks Have Been Smart Acquirers? Start By Looking At Goodwill [View article]
With respect to your earnings comment, I have to disagree. What you're saying is that high P/E companies should buy low P/E companies. But P/Es reflect growth prospects. Should Facebook pay 30x earnings for a bunch of banks because its high P/E would make these deals accretive? Of course not. Now, since there isn't that much variance in bank P/Es, in general smartly priced deals will turn out to be EPS accretive. But a bank that has cash available for acquisitions can pay a large P/E with this cash and still show EPS accretion. So my view is that EPS accretion is a useful measure only if used carefully, with a recognition of its pitfalls.
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You might want to consider comparing JPM to the other banks on a price/tangible book value basis, rather than on a price/stated book value basis. Stated book value is inflated by intangible assets usually added because of acquisitions. Not all of the banks on your chart have been equally acquisitive. Also, the higher the price an acquiror pays in an acquisition, the higher pro forma stated book value per share will be (assuming a 100% stock deal), which is sort of a perverse outcome.
The FirstMerit/Citizens Republic Deal: A Return To Reason In Bank Deals? [View article]
You are welcome. A few thoughts. First, given how large CRBC is relative to FMER, if FMER has in fact underpaid for CRBC, CRBC shareholders who hang onto their FMER shares should benefit. Second, while I estimate that 20% synergies would create $11 per CRBC share of value, that level of synergies is a stretch, given how lean CRBC runs now. It looks like FMER is giving $4-$5 per share of credit to CRBC shareholders for synergies. I think "steal" is an overstatement.
How Much Might Citizens Republic Bancorp Fetch In A Sale? [View article]
Thanks for your note.
I agree with your math; if CRBC were to sell assets yielding 2.48% pre-tax, EPS accretion would be substantially higher than what I suggested. As long as CRBC sells assets with a taxable yield lower than 7.69% (5% preferred yield/(1-35% tax rate)) to fund the TARP retirement, such retirement is EPS accretive. But I'm hesitant to use a rate as low as 2.48%. Besides Treasury securities, what other assets yielding 2.48% can CRBC sell at par? But the bigger issue is still that the capital impact of paying down the TARP preferred wouldn't be pretty. I think that's why CRBC hasn't already done it.
With respect to acquirors, I wasn't implying that only three banks would be interested in CRBC. If you're selling a bank via auction, and you want to drive the price up, all you have to have is two bidders, although the more bidders you have, the better. Bank of Montreal's market cap is $37 billion. I agree that their ownership of Harris Bank and their acquisition of M&I implies that they might be interested in MI. They'd probably take a look at CRBC, but my guess is that they'd like something bigger.
How Much Might Citizens Republic Bancorp Fetch In A Sale? [View article]
In terms of absolute size, I do not believe that CRBC is too large for HBAN to acquire. I just rechecked deposit overlap between HBAN and CRBC on a Fed market basis, and I don't think required divestitures would be anywhere near high enough to dissuade HBAN from pursuing a deal. Which markets do you believe would be problematic?
How Much Might Citizens Republic Bancorp Fetch In A Sale? [View article]
Even though Wells Fargo (WFC) is ranked 11th in Michigan from a deposit market share perspective, I didn't include them in the list of potential buyers for CRBC because of how large WFC is. At the market close on Friday, WFC had a market cap of $179 billion. Assuming that CRBC is worth $28 per share to an acquiror, if WFC were able to buy CRBC for $26 per share, WFC would capture about $82 million of value ($2 per share x 41 million CRBC shares outstanding) for its shareholders. This translates into $0.014 of value per WFC share outstanding. I'm in favor of banks buying other banks when price is less than value, but I can't deny that $0.014 isn't really enough to get WFC excited. I think if WFC were interested in expanding its Michigan presence, it would prefer a larger acquisition, like CMA, FITB or HBAN.
Why Investors Bancorp's New Deal Is A Bad Template For Future Bank M&A [View article]
I'm glad you found it informative. From the target's perspective, there's no such thing as "overpaying" (when a commentator says "pay up", that's what I hear), but from the acquiror's perspective there certainly is. It's useful to point this out, if only to encourage acquirors to be careful.
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The only thing that's wrong with it is that if you buy an overvalued stock, you're more likely to earn a subpar return, perhaps even a negative one. There are far more attractive stocks to own in the bank space.
Why Investors Bancorp's New Deal Is A Bad Template For Future Bank M&A [View article]
ISBC is paying cash for Marathon. If ISBC earns 2.96% after-tax on the cash it uses to buy Marathon, it could pay Marathon's pro forma earnings divided by this yield ($10.9 million/2.96%, or $369 million) and not realize earnings dilution, because Marathon's earnings would exactly match the lost yield on cash. That's not to say that paying such a price would make any sense. A similar principle applies if ISBC were to issue shares for Marathon, but in that case the break-even price would be one that didn't lower ISBC's EPS rather than total earnings. The math is more complicated, but the result is that if the acquiror pays more than its own P/E for the target's pro forma earnings, it will experience EPS dilution.
Want To Know Which Banks Have Been Smart Acquirers? Start By Looking At Goodwill [View article]
Want To Know Which Banks Have Been Smart Acquirers? Start By Looking At Goodwill [View article]
Want To Know Which Banks Have Been Smart Acquirers? Start By Looking At Goodwill [View article]
Want To Know Which Banks Have Been Smart Acquirers? Start By Looking At Goodwill [View article]
3 Exceptional Mega Caps To Consider On A Broad Market Pullback [View article]
The FirstMerit/Citizens Republic Deal: A Return To Reason In Bank Deals? [View article]
How Much Might Citizens Republic Bancorp Fetch In A Sale? [View article]
How Much Might Citizens Republic Bancorp Fetch In A Sale? [View article]
I agree with your math; if CRBC were to sell assets yielding 2.48% pre-tax, EPS accretion would be substantially higher than what I suggested. As long as CRBC sells assets with a taxable yield lower than 7.69% (5% preferred yield/(1-35% tax rate)) to fund the TARP retirement, such retirement is EPS accretive. But I'm hesitant to use a rate as low as 2.48%. Besides Treasury securities, what other assets yielding 2.48% can CRBC sell at par? But the bigger issue is still that the capital impact of paying down the TARP preferred wouldn't be pretty. I think that's why CRBC hasn't already done it.
With respect to acquirors, I wasn't implying that only three banks would be interested in CRBC. If you're selling a bank via auction, and you want to drive the price up, all you have to have is two bidders, although the more bidders you have, the better. Bank of Montreal's market cap is $37 billion. I agree that their ownership of Harris Bank and their acquisition of M&I implies that they might be interested in MI. They'd probably take a look at CRBC, but my guess is that they'd like something bigger.
Regards,
Harvard
How Much Might Citizens Republic Bancorp Fetch In A Sale? [View article]
How Much Might Citizens Republic Bancorp Fetch In A Sale? [View article]
Why Investors Bancorp's New Deal Is A Bad Template For Future Bank M&A [View article]
Capitol Federal Financial, Inc. - The Most Overvalued Depository Institution? [View article]
Why Investors Bancorp's New Deal Is A Bad Template For Future Bank M&A [View article]
A similar principle applies if ISBC were to issue shares for Marathon, but in that case the break-even price would be one that didn't lower ISBC's EPS rather than total earnings. The math is more complicated, but the result is that if the acquiror pays more than its own P/E for the target's pro forma earnings, it will experience EPS dilution.
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