Deal Driver- Financial Services
Financial Reform Act will push smaller banks to sell, while FDIC deals get tougher to do.
As the Financial Reform Act is put into action, buyers and sellers will approach M&A cautiously.
The sweeping reforms, signed into law on July 21, 2010 by President Obama, will significantly alter the regulatory environment, covering everything from mortgage reform to the newly established Bureau of Consumer Financial Protection.
“[The financial reform law] adds to the regulatory burden and aging board members and CEO s are going to throw up their hands and say, ‘I don’t need this anymore,’” said Jeffrey Wishner, managing director at KBW.
“There will be a lot of M&A activity but not in the next six months. Buyers still have options to merge via assisted deals with the Federal Deposit Insurance Corp (FDIC),” he added.
In the past six months, the FDIC forced many banks in the Midwest and Northwest into receivership. The banking regulatory body is moving from market to market, Wishner said, adding that Colorado could be the next wave of multiple bank failures.
But those deals are slowing down in terms of large-scale opportunities and pricing has increased, making traditional M&A more appealing, several industry sources said. Bank divestitures will be particularly appealing into 2011 because “buyers want branches, deposits and good loans,” one of the sources said. In July, for example, NBH Holdings announced the acquisition of 38 Bank Midwest branches in Kansas and Missouri from Dickinson Financial, one of the largest community bank divestitures in eight years, the source said.
FDIC deals will continue to make sense for MB Financial, Wintrust and First Midwest, but most buyers may only complete one or two assisted deals, the source said.
Stressed survivors will sell for a low premium or no premium to larger players, said Jeff Brand, principal at KBW. Given the new financial overhaul, it makes sense to partner up and cut costs, he said. For the next several years, it will be difficult to be a US$250m-asset bank in the US and those players will have to change their business plan or merge. Smaller banks with less than US$2bn in assets will attract large
private equity investors, Brand said. “Expect activity like Sun Bancorp and WL Ross & Co. deals in the Midwest in the coming months,” Brand said. On July 8, 2010, Sun Bancorp announced a US$100m equity investment from WL Ross.
At the same time, an increase in capital gains tax next year will push small-to-mid-sized players to merge with larger players. Tax rates on long-term capital gains and dividends is set to increase from a 15% maximum this year to 20% next year, and another 3.8% in 2013. That will result in increased deal activity in the insurance brokerage space, said Kevin Donahue, managing director at Mystic Capital Advisors Group. Players such as Hub International and USI Holdings will be dominant buyers. Most micro-cap players are entrepreneurs and if they wait until next year to sell, they will have to grow EBITDA at least 8% just to avoid feeling the effects of the capital gains tax increase compounded with a soft market. “All of the major strategic players will be rolling out the cash,” Donahue said.
In the financial technology space, M&A will be driven by three groups of sellers: entrepreneurs who went through hard times and have pent-up desire to sell, private equity firms who see opportunities to get liquidity, and corporations divesting divisions, said Ken Marlin, founder of Marlin & Associates, an investment bank that advises fintech companies. Marlin said his firm expects a lot of activity in the US$50m - US$200m range, with strategic players able to fund such smaller deals using their own cash and borrowing capacity. But private equity remains cautious in the financial technology space, he added.
by Monique Lewis
Deal Drivers – FINANCIAL SERVICES