Will CIT-OneWest Merger Deliver More Bank for Your Buck?

Peter Bennett

By  Updated on Thu Aug 21, 2014

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As last week’s proposed acquisition of OneWest Bank by CIT Group illustrates, merger and acquisition (M&A) activity in the banking sector is on a tear, no matter how you parse the numbers.

Will CIT OneWest Merger Deliver More Bank for Your Buck?

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Through mid-May of 2014, there were 87 bank deals, a 32 percent leap over the same period a year earlier and more than double last year’s 14 percent jump, SNL Financial reported.

Expanding its focus, SNL Financial also noted that from the start of 1991 through mid-2013, there were more than 5,800 completed bank and thrift deals, valued at $1.3 trillion.

More bankers also are bidding on this avalanche of deals in the era of cheap money. Between 2011 and 2013, Keefe, Bruyette & Woods, a New York-based investment bank, reported that it saw multiple final bidders on 35 percent of the deals for which it was an advisor. Thus far in 2014, KBW has seen that number reach 60 percent.

Pre-Great Recession, there were more than 18,000 U.S. banks. Today there are fewer than 7,000.

So, given banking’s latest merger-mania infatuation, the questions are, what’s driving all the activity and what does it all mean for banks, shareholders and consumers? It’s a devilishly delicious question with almost as many answers and opinions as there are dollars locked away in the vault of J.P. Morgan Chase, the nation’s largest bank in terms of assets.

Deals never looked so good on paper

On paper anyway, the argument for financial institutions getting hitched couldn’t be much stronger. For example, when CIT emerged from Chapter 11 protection in 2010, it was borrowing money at a punishing 13 percent. If it completes its proposed acquisition of deposit-rich OneWest ($28 billion), its cost of funding will plummet to 2.4 percent.

This was sweet news to CIT shareholders, who roared their approval of the deal, driving CIT’s shares up 11 percent at the end of the trading day.

Whether it’s CIT’s deal, Capital One’s purchase of ING Direct USA (2012), J.P. Morgan Chase’s acquisition of Washington Mutual (2008) and Bank One (2004), or Wells Fargo’s buyout of Wachovia (2008), what’s not to like?

On a macroeconomic level, increased M&A activity signals an improving economy and climbing stock prices. For money to create affluence (which stems from the Latin root, to flow), it has to continue circulating, a point investment bankers no doubt have been making with greater resolve and success on Wall Street.

On a theoretical level, mergers should be complementary, creating an entity stronger than the sum of its parts. Again, in CIT’s classic case of vertical integration, the bank is vastly expanding both its deposit base and its geographic footprint.

Out of such a merger, the possibilities are endless. Conceptually, the CIT-OneWest merger should expand consumer access to a growing array of products and services. For example, customers of an acquired institution might gain access to online or smartphone applications that their previous bank didn’t have the budget or tech talent to deliver.

As for economies of scale, the purported strengths of the proposed merger are hard to deny. It’s hardly a stretch to believe the acquirer could reasonably consolidate its information systems, human resources, marketing, public and investors relations departments into one headquarters — savings millions of dollars in the process.

In the Dodd-Frank Wall Street Reform environment, mergers also helps banks lessen the impact of increasing regulatory and compliance obligations, which they blunt by spreading costs.

Given this new ability to drive down the cost of funding, general and administrative costs, takeover-minded banks have also gone on a public relations offensive, promising future cost-savings to consumers.

The prospect of a hot deal could dim over time

As in sports, some blockbuster trades or acquisitions don’t work out even if they might look good on paper. Despite the best efforts and economic projections of Wall Street analysts, there’s always that incalculable and unpredictable force called human nature.

A mishandled merger — no matter how well it pencils out — can torpedo a boatload of rosy numbers-driven projections. For example, a study by the Deloitte Center for Banking Solutions found that 17 percent of bank customers that had been acquired switched at least one of their accounts to another institution. The same survey revealed that two-thirds of the customers who had switched did so in the first month after learning of the deal. That kind of customer disintermediation could sabotage any projected cost savings by a newly merged entity.

Of course, customers aren’t always the first to run. Unable to cope with the culture clash and a new set of corporate values, employees of the acquired institution frequently look for greener and calmer pastures. Many other employees simply do not figure in the merged bank’s new math at all. The J.P Morgan Chase-Bank One merger in 2004 killed about 10,000 jobs.

In addition, some deals are pursued for all the wrong reasons, including feeding inflated corporate egos. For example, J.P. Morgan Chase paid a $7 billion premium to acquire Bank One in 2004. Because J.P. Morgan CEO William Harrison didn’t want to let Bank One CEO Jamie Dimon serve as co-CEO in the new bank, Dimon squeezed another $7 billion from J.P. Morgan before agreeing to consummate the merger.

Another factor helping to drive meters is aging management, as some CEOs look to cash out big before they retire. Data from investment banking firm Sandler ‘O’Neill show that the average age of a bank CEO in 2014 is 59.6, up from 58.6 a year ago and 55.2 in 2006. Right or wrong, graying bankers want to make one last splash before exiting the stage, not exactly the best justification for taking a company down the merger path.

Ultimately, determining the outcome of another bank merger is not unlike a watching a nine-inning baseball game or a 60-minute football game unfold. It all comes down to execution and a few courageous game calls by a fearless, but forward-looking management team, which no script can predict with 100 percent accuracy. The result hangs in the balance until the final out is recorded or the last second ticks off the clock.

That’s why they play the game!

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