Banks under pressure: Tips for digging inside M&A banking activity

By Flickr user Earl R. Shumaker

It’s an exciting time to be a banking reporter. The financial crisis brought sweeping industry changes, leaving plenty of ground for business reporters to cover. While the full implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act are still being fully understood, one thing is sure: banks face pressure on a number of fronts. For reporters, this conflict presents an opportunity to identify and report on a variety of stories.

Jane Yu, a finance reporter for the Orange County Business Journal, thinks more banks will seek partners given the increased compliance costs and capital requirements they face going forward. New regulatory rules require banks to both boost capital and loan loss reserves. That’s proving to be a tall order for many community banks, which have fewer options for raising funds than larger institutions.

Yu said it’s tough for reporters to get advance notice of bank mergers and acquisitions, but sometimes a bank will offer a reporter a sneak peek of the announcement. This advanced look often comes with an agreement from the reporter to keep the information embargoed until the official announcement. In most cases, the news release announcing the deal is the best starting point.

The press release typically contains the nuts and bolts of the deal: What’s the value of the bid? Is the entire bank being acquired, or are only segments of the overall business up for bid? How is the buyer paying for the deal? Is the buyer using cash, stock, or both? If both cash and stock are on the table, what’s the percentage split? What’s the overall impact on earnings and when will the impact be realized for shareholders?

But the release is just a starting point, Yu said. If at least one of the banks involved in the deal bank is publicly traded, she usually begins by checking the stock price. It’s a great way to gauge how satisfied investors are with the bid price. It’s usually trickier to report on banks that aren’t publicly-traded so Yu relies on local consulting firms that specialize in community banking for commentary.

Valuation is an important consideration for both bank sellers and the buyers. “Companies that are selling don’t want to be sold too cheaply,” Yu said. Usually, one bank is buying the other bank even if the banks try to spin the news as a merger of equals. A good way to determine which bank is the buyer and which is the seller is to figure out which shareholders are being compensated for agreeing to the merger.

Focusing on the people involved in the deal, and not just the numbers is a great way to add depth to a story about M&A activity, according to Yu. What does the deal say about the success, failure and ambitions of the chief executives of both banks?

Reporters also often overlook what the offer means for the bank that survives going forward. Who will lead the newly-merged bank if the offer is accepted? Executives often change and new positions are created after an acquisition. “These changes that occur alongside M&A tend to be overlooked,” Yu said. Reporters should always try to score an interview with sources from both the acquiring bank and the seller. Executives, members of the board, their consultants and advisers are all possible sources of information for developing the story and delving beyond the initial release, Yu said.

Analysts who closely follow the banks involved in the transaction can also provide colorful commentary on a transaction. Securities firms and investment bank analysts can tell you why they are recommending buying or selling the stock, Yu said. Have they changed their estimates and recommendations because of the announced deal? Why? Reporters should remember analysts often own stock in the companies they cover. This detail should be disclosed to the reader.

It’s also important to look at the background of the acquiring bank. “There are some banks that are very acquisitive in nature, and that’s their style,” Yu said. “At some point, that calls for a deeper look.” Banks that are serial acquirers can run into trouble if they attempt to grow too quickly. “Where are they getting all of this capital?” she said. Are they borrowing the money? If so, that could mean the bank is taking on too much leverage.

Local banks have tried to distance themselves from troubles in the industry. Photo by Flickr user Gino

It’s important for reporters to remember that just because a deal is announced, doesn’t mean it will go through. Banking deals often face regulatory and shareholder approval.

Reporters interested in writing enterprise stories on the M&A market in their geographic region may want to reach out to firms like financial information provider SNL Financial  and Keefe, Bruyette & Woods Inc., an investment bank focused on the financial services industry.  Both are a great resource for getting local and regional data on M&A activity.

Don’t despair if your local market lacks activity. When SNL Financial crunched the numbers and told me that Memphis (my local market) hadn’t had a single banking deal since 2004,  I dug a little, and found local banks have been slow to mark their loans down to the current real estate market. That led to a story on why the local market hasn’t had any banking M&A activity since 2004.

Acquisitions can be a lot of fun to cover because they are usually one of the most important events in the life of a company. But taking a step back, and looking at the market from a broader perspective can also lead to great enterprise reporting like this story from American Banker on how M&A is reshaping the banking landscape of the Southeast.