Look for Acquisition Targets as Bank M&A Activity Picks Up

Like most of the corporate world, bank mergers and acquisitions (M&A) drastically slowed when the novel coronavirus hit the economy, as most banks were forced to focus on internal issues and put growth initiatives on hold.

The pandemic even forced many banks to terminate previously announced deals. Independent Bank Group and Texas Capital Bancshares called off their planned $3.1 billion merger, while Ally Financial terminated its planned $2.7 billion acquisition of CardWorks. However, as states began to reopen their economies and banks got deeper into the second quarter, M&A began to pick up. It's still way down from 2019 levels, but with more activity, it may be a good idea to start looking at some potential acquisition targets.

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Deals are starting to happen

According to S&P Global Market Intelligence, there were 50 bank M&A deal announcements during the first half of 2020. That's the lowest level of bank M&A activity since the first half of 2009 and down from about 120 deals through the first half of 2019.  

But after only one announced M&A deal in May, things started to get back on track. The Department of Justice dropped its investigation of Charles Schwab's planned $26 billion acquisition of TD Ameritrade, and Schwab shareholders approved the deal on June 4. There were also six other M&A deals announced in June, and the targets seemed to get bigger as the month pressed on.

Since the novel coronavirus hit the markets, many bank stocks are trading at a significant discount, so a deal right now might not fetch a premium over book value or tangible book value.

For instance, on July 1, Bridge Bancorp and Dime Community Bancshares announced the biggest bank deal of June, a $489 million merger to create an $11 billion bank. Even though the all-stock deal is considered a merger of equals, Bridge Bancorp can technically be considered the buyer because it's issuing shares and exchanging them for Dime Community Bancshares. Bridge plans to issue 0.648 of Bridge shares for every Dime share, suggesting the deal values each Dime share at $14.80 based on Bridge's June 30 share price.

That's not a premium, considering Dime's book value per share and tangible book value per share at the end of the first quarter were $16.93 and $15.29, respectively. But Dime's stock opened trading on June 30 at $13.14. The deal price is still 12.5% higher over where Dime shares started the day, so it's not as if an investor can't make money off a merger or acquisition just because there's no premium over book value.

Where to look

Compass Point Managing Director Laurie Hunsicker recently said in a research note that deals happening in the near term will likely be discounted, while deals resulting in a premium could still be a ways off. Still, there are probably a few ways to approach acquisition candidates right now.

The first option is to look for a bank that may get acquired soon and hope the acquirer pays over its current share price. For this play, I personally would look for banks trading around or slightly below tangible book value. The fair value of some banks' assets may not be what it once was if accountants and bank management teams determine they've permanently lost value because of the pandemic. 

Take a bank like Seacoast Banking Corporation of Florida (NASDAQ: SBCF). Bank management has said they're open to getting acquired. On Tuesday, Seacoast was trading around $18 per share, while the company's tangible book value per share at the end of the first quarter was $14.42. I'd much rather wait to see if Seacoast gets back closer to this level before buying shares; if the bank is bought at or slightly below tangible book value, there's no upside while the stock is trading almost $4 above that level.

The other route you could go would be to play a slightly longer game and try to pick a bank now that may get acquired once the pandemic subsides. Most bank stocks will likely trade higher after the pandemic than they are now, so if you pick an acquisition candidate and it gets acquired a year from now, that could result in a nice increase.

There has been a lot of talk about regional bank consolidation. PNC Financial Services (NYSE: PNC) has even said it's looking to make a significant purchase, so one idea is to try and figure out who they are targeting and purchase that stock.

Regardless of which strategy you take, before you choose any bank stock right now, conduct a thorough analysis of the bank's credit quality to get an idea of its asset quality. If it's trading way below tangible book value, there could be a very good reason for that, and you should factor that into your decision before you ultimately buy the stock.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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