Why Bigger Is Better in Banking

It's been a decade since the banking industry has seen merger and acquisition news like this: BB&T (NYSE: BBT) is buying SunTrust (NYSE: STI) , in what the two institutions call a merger of equals. When joined, they will create the sixth largest bank in the country. But why is it happening, and why now?

In this Market Foolery podcast, host Chris Hill and Motley Fool Director of Small-Cap Research Bill Mann unpack the reasons. They also offer some color on the earnings reports of Twitter (NYSE: TWTR ) , which is seeing some key metrics going in the wrong direction, and Chipotle Mexican Grill (NYSE: CMG) , which was accelerating back to excellence through all of 2018.

A full transcript follows the video.

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This video was recorded on Aug. 9, 2017.

Chris Hill: It's Thursday, Feb. 7. Welcome to Market Foolery ! I'm Chris Hill. Joining me in studio, Bill Mann in the house!

Bill Mann: Hello, Chris! How are you?

Hill: I'm good! Good to see you! I'm better for the sight of you, that's how I am! We've got Chipotle earnings. We've got Twitter earnings. We've got to start with the deal of the day, though. We got a bank merger.

Mann: For the first time in more than a decade, we've got a big bank merger.

Hill: We do. SunTrust and BB&T are teaming up in a $66 billion, what's being called "a merger of equals." They're not quite equals. It's an all-stock deal. This creates the sixth largest bank in America. Shares of both SunTrust and BB&T are up, so I'm assuming this is a no-brainer. If all you're doing is looking at the stocks, you go, "Wow!"

Mann: You are what the scoreboard says you are. A couple of things have happened. One is that the Trump administration has lowered some of the inhibitions for bank mergers that have been in place since the global financial crisis. The other thing that has happened is that banking, particularly deposit-taking, has changed a little bit. The regional banks, of which SunTrust and BB&T are, are having a little bit of a difficult time competing with Citibank . Even Goldman Sachs now has checking accounts and branch access and things of that nature. So it's a good merger for both of them. They are not community banks anymore. They risked being in that spot where they weren't the hugest, so they didn't have access to certain types of capital. But they're not tiny anymore.

Hill: I get that there are a lot of good things about this, a lot of synergies that can be wrung out. This does seem like the resulting entity should put them in a better position to compete against the even bigger banks. That being said, there are a couple of things behind this deal that have not just you and me, but I think a lot of people, scratching their heads. Let's start with the fact that we've got Kelly King, the CEO of BB&T, he's going to be the CEO of the combined company until early September of 2021, when William Rogers, the CEO of SunTrust --

Mann: I want to call him Will Rogers. Desperate to.

Hill: William Rogers is going to take over as CEO. Why? Why are they having this revolving door in the corner office?

Mann: It's a little bit of actuarial arbitrage, as we might call it. Kelly King had said earlier that he was planning on retiring in 2021. So it's a pretty clean process. BB&T is the acquiring bank, even though it's a merger of equals.

Something funny about BB&T. BB&T is from eastern North Carolina. The company is called Branch Banking and Trust. Everyone thinks that has to do with their strategy. No. The co-founder from 1872 was named Branch.

Hill: Oh!

Mann: Yeah! Alpheus Branch and Thomas Jefferson Hadley founded this bank. It's a bank that has retained the name of its founder for 150 years.

The other interesting thing about this merger is that BB&T is based in Winston-Salem, North Carolina, and SunTrust is based in Atlanta, but after the merger, they're relocating headquarters to Charlotte. Charlotte will once again have the headquarters of two of the six largest banks in the country.

Hill: That's right, because Bank of America is down there.

Mann: Bank of America's there. Also, Charlotte is basically the No. 2 headquarters for Wells Fargo . So, once again, Charlotte, Bank City USA may be the biggest winner in the whole deal.

Hill: They have not decided on a name for the resulting entity --

Mann: It has to be Branch, now that we've determined the history. How can you walk away from that?

Hill: [laughs] It'll be interesting to see what they come up with. Certainly, we've seen rebranding efforts go awry. Hopefully, they do no harm.

By the way, before we move on, can you share with the dozens of listeners what you shared with me? The little fun tidbit about SunTrust Bank, which I was not aware of?

Mann: Oh, yeah! This is actually a pretty big loss for Atlanta, because SunTrust is an Atlanta institution. One of the things that SunTrust has in a vault is the formula for Coca-Cola . The Coca-Cola Company keeps their original formula hidden, locked in a vault at SunTrust.

Hill: Do you think that's now going to be moving to Charlotte?

Mann: Well, maybe! Once again, we have an opportunity to rename a stadium since the brand-spanking-new Atlanta Braves stadium is SunTrust Field. Who knows? I don't know if they'll move the formula or not. I doubt it's hard to move a recipe. [laughs] But it's probably fine where it is.

Hill: Let's move on to Twitter. Fourth-quarter revenue and adjusted profits came in higher than expected, and nobody cares. Shares down 10% on, among other things, pretty light guidance for the new fiscal year. We like it when CEOs are very transparent in their communication style. In this case, Jack Dorsey being upfront about the fact that their operating expenses are going up in 2019.

Mann: Yeah. They've added some employees, although it's still pretty light. They have less than 4,000 employees at Twitter, which surprised me. Twitter also has had an issue over the last several quarters where the number of monthly active users has dropped. One of the strategies that they have for solving this is that they're no longer going to report monthly active users. That should help! [laughs] And it's something that investors look very closely at, in terms of the health of this company.

Hill: See, maybe this says something about me, but I always opt for, maybe not outright cynicism, but --

Mann: Oh, you're a cynic!

Hill: I'm always instantly curious whenever any company that has been reporting a certain metric comes out and says, "We're not doing this anymore." Cynicism, not the right word. Skepticism.

Mann: You can be cynical! It's OK!

Hill: But if there was an advantage in them to continue reporting it, they would.

Mann: That's right.

Hill: My default setting is, "Well, clearly there's no longer an advantage in it for you to keep reporting that number."

Mann: That's right. This is actually one of the greatest tips that I can give people in terms of trying to analyze companies. If you look back over a few years and they report or focus on different key performance indicators each time, it means that they're really just trying to show you at all times what looks best for them. Twitter's argument in this case is that it's a slightly misleading statistic since all of their monthly users are not worth anywhere near the same value. So, they feel like they've got a better measure than this. But this is something that people pay very close attention to. And the cynic or skeptic in you would definitely go to the fact that, yes, they are taking this away at a point in time in which it's been declining.

Hill: The stock is still up over the last 12 months, even with the drop today. Jack Dorsey has been doing a bunch of interviews lately, long-form sit-down interviews, both on podcasts and sitting down with magazines. He did that recently with Rolling Stone. Considering the fact that Twitter is a $23 billion company, Jack Dorsey still talks like someone who isn't sure what he wants this business to be.

Mann: Yeah. Twitter is such a mystery to me. One of the things that's always concerned me was the quality and the depth of the management. For a time, there was a revolving door. Jack Dorsey has been focused on a lot of different things. You hear more about him fasting or his weird diets or going to Burma or whatever it is that he's up to.

One of the things I look at for companies is, if a company disappeared tomorrow, would it be painful for its users? In this case, you'd definitely say yes.

Hill: For anyone who's on Twitter and uses it on a regular basis, I would absolutely say yes.

Mann: Yeah! I mean, it might make ESPN broadcasts a little easier. "LeBron James is tweeting about fencing," or whatever it is. But it really is a utility in that way. But at the same time, maybe it's just me, but I don't know what this company does to expand or to make its members and its users more valuable. I just don't see what Twitter can do, what lever they can pull. For a company worth more than $20 billion, it's not very profitable.

Hill: Unlike Twitter's fourth quarter, Chipotle's fourth quarter, boom!

Mann: I feel like we need to have LL Cool J playing in the background for this particular segment.

Hill: "Don't call it a comeback"?

Mann: "Don't call it a comeback."

Hill: Shares up 14%. It was a strong quarter. Traffic up. Same-store sales up just over 6%. In this environment, coming off of --

Mann: It's unreal.

Hill: -- coming off the year that we just had for restaurants, 6% is tremendous.

Mann: Chipotle's stock was up 14% the last I checked, and it was not as if Chipotle's stock has not already had a torrid 2018. They are not bouncing off of the bottom. I went back and looked, because I wanted to see what kind of momentum there was for Chipotle. You just said, for the fourth quarter, it was 6.1% same-store-sales growth. For the third quarter, it was 4.4%. For the second quarter, it was 3.3%. The first quarter was 2.2%. They've had a lot of momentum. Brian Niccol caused a huge amount of optimism behind the brand, behind the company. He's gone in and fixed a lot of things. I think it's very safe to say that Chipotle has gotten past the really horrible queso issue. I can't remember, what else happened with them? I don't quite...

Hill: They had a couple of health issues.

Mann: They had some health issues, that's right. Which were real, and they really did a lot of damage to the brand.

Hill: Absolutely.

Mann: To me, that's what's most important.

Hill: Another thing you look at that's rising within Chipotle is online orders. They highlighted that in the report. That's something that we've been watching with this company. I think, the fact that they laid out this blueprint for "We want to have dedicated space in the kitchen just for the online orders," that's a smart move. Also, from an execution standpoint, that can be tough to pull off. Right now, they look like they're pulling it off.

Mann: Yeah, and you remember -- not that anecdotes should take the place of data -- how hard it was to actually go in when we'd ordered online from Chipotle several years ago, when they first rolled out their app.

The other thing that's becoming meaningful for them is what they call the Chipotlane, which is the drive-throughs at Chipotle. They keep people moving through different channels at the same stores. The numbers are astounding for what they've done over the last year.

Hill: From a business standpoint, it's great! Just from a word standpoint, Chipotlane, that's in the same camp as Zestimate for Zillow . OK, that's cute. That's cute that your drive-through window is called the Chipotlane. [groans]

Mann: [laughs] To be fair, I'm not sure if they're calling it that or that's what's been socialized. Let's not blame them too much. The Zestimate, that's rough.

Hill: Yeah. We have to put that all on them. And, hey, as you indicated, in all seriousness, just imagine if they get queso right. [laughs] Just imagine. Anytime we look at restaurants, anytime we look at retail, one of the things we like to look at is the average ticket price. Not just how many people are coming through the front door, but how much are they paying when they're getting ready to walk out? And if they can get queso right, then all of a sudden, the ticket price goes up.

Mann: Right. I've been on a little bit of a health kick, trying to get myself back in order, so queso has not been on my list of things to go and eat very much of, but it was pretty easy to not eat Chipotle's queso over 2017 going into this last year. If they fix that, and they've still been testing chorizo, which is delicious... they've got a number of levers that they can pull to bring some additional excitement into the restaurant.

Hill: Because I want you to succeed in your health kick, I'm just going to tell you, stay away from District Taco. Those people know how to do queso.

Mann: Those people, their queso and their guacamole are outstanding. Someday, I will be able to have it again.

Hill: Bill Mann, thanks for being here!

Mann: Great to be here, Chris!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery . The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!

Bill Mann has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Twitter, Zillow Group (A shares), and Zillow Group (C shares). 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.

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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