The investment banker Emmett J. Daly pinpointed the reason there have not been more bank deals: renewed jitters about jobs and real estate have meddled with pricing.
"The weak economy has broadened the gap between what a buyer and seller perceive to be fair value of assets," Daly, a principal in the investment banking group of Sandler O'Neill & Partners LP, said in an interview. "When the economy finally gets back on its feet, that difference of opinion over fair value will narrow and you will see more deals done."
Randomly pick a banner bank merger of the last few years, and there is a good chance that Daly or Sandler O'Neill was involved. He helped orchestrate PNC Financial Services Group Inc.'s purchase of National City Corp. in 2008 and First Niagara Financial Group Inc.'s acquisition of NewAlliance Bancshares Inc. this year.
Sandler O'Neill is one of the two investment banks that dominate M&A involving large community banks or superregional banks. The other firm is KBW Inc.'s Keefe, Bruyette & Woods Inc., where Daly worked earlier in his career.
He joined Sandler O'Neill in 2003, after three years as the head of the midsize bank and thrift practice at Merrill Lynch & Co. He spent 13 years at KBW.
He shared his outlook on bank mergers in an interview in June with American Banker. The following is an edited transcript.
It had felt like deal activity was picking up last year. What happened?
EMMETT DALY: We all expected it to be much busier than it is today. We saw a lot of strategic discussions starting to occur late last year. Asset quality had stabilized. It wasn't perfect — but it felt better. CEOs had more confidence in at least thinking about strategic ideas. We've recently gone back into a kind of cautious mode with some concern about an economic double dip. We've seen things slow down in both the capital markets and the M&A business. So it's a long-winded way of saying we've lost momentum from [last year]. It is clearly the malaise of the economy combined with pervasive uncertainty about the regulatory environment.
Have accounting rule changes been a factor in the slowdown?
Everybody blames the accountants and purchase accounting for making deals tougher to do. I actually think that marking assets to market through purchase accounting has in fact made for a more transparent and credible M&A model. Investors have a much clearer view of the deal's true economics.
The weak economy has broadened the gap between what a buyer and seller perceive to be fair value of assets. When the economy finally gets back on its feet, that difference of opinion over fair value will narrow and you will see more deals done. So unfortunately, we're back to blaming the economy, not the accountants.
What needs to change for deal activity to accelerate?
I think it's the economy. When things are stable, you can at least value an asset. You may buy that asset a lot cheaper in a down economy. But as long as the economy is stable, you can get your arms around a seller's balance sheet, value it and acquire it. It's when you've got asset volatility caused by credit quality problems, economic problems — when things are really moving around, you can't accurately value that asset. So until things stabilize, it will be exceedingly difficult for buyer and seller to arrive at fair value.
Are there risks, for some companies, in waiting too long to seek a buyer?
Absolutely, I think there are bank managements and boards in denial, unwilling to truly assess their near-term problems. They will come to the capital markets either too late or with unrealistic expectations and will be denied capital. Oftentimes, this forces them to make strategic decisions that they wouldn't have had to consider had they addressed things in a more rational and balanced way.
First Niagara dealt with community resistance in its purchase of NewAlliance. Do you see that kind of pushback being an issue in other deals?
Clearly politicians in these tough economic times are going to be focused on job losses in the community, absolutely. You've got to address those issues and show how you're creating different but possibly better opportunities for the community. First Niagara did a great job of addressing community concerns and managing pushback from politicians in New Haven and Hartford. They did a number of town hall meetings and [First Niagara CEO] John Koelmel met with the mayor and the attorney general often and showed them that in each community that First Niagara had gone into, it had actually improved job prospects and enhanced the community.
There's a natural knee-jerk reaction to a merger. But if you proactively address concerns as First Niagara did, you can defuse some if not all of the pressure. You certainly have to put that on your checklist of things to do to get a deal done. And by the way, it's good business to do so.
Do we see buyers factoring potential community backlash into considerations about whether to pursue potential targets?
Yes, of course it should be factored into the overall mix. However, I don't think it would inhibit anyone from thinking about buying another company if the deal made financial sense. It simply has to be one of the issues a buyer keeps in mind and is sensitive to.