Insight

Are bank acquisitions good for shareholder value?

Bank M&A continues…and with good result

New KPMG research reveals that mergers and acquisitions among United States-based banks have generally resulted in above-market returns for acquirers in the banking industry over the last five years. Our key findings include:

  • The market rewards banks for conducting acquisitions, as evidenced by higher market valuations post-announcement;
  • Acquiring banks’ outperformance, where observable, increased linearly throughout our measurement period, from 90 days post-announcement to two years post-announcement;
  • The positive effect was experienced throughout the date range examined;
  • Banks of all sizes experienced a positive market reaction, with one notable exception…
  • Amongst banks with more than $10 billion in assets, acquirers did not demonstrate statistically significant differences in market returns when compared to banks that did not conduct an acquisition.

KPMG’s Deal Advisory specialists who have monitored activity closely say they expect bank M&A deals in the United States to continue, as banks endeavor to strategically enhance their customer base and footprint, reduce costs, and improve fee income. 

Our research shows an increase in terms of deal value and deal volume since the financial crisis, and both continue to remain strong. 

Specifically, the number of bank deals increased from 241 in 2016 to 261 in 2017; however, total transaction value was relatively flat, at $26.8 billion in 2016 and $26.4 billion in 2017. Notably, 2016 was marked by a handful of large deals, which differs from 2017, where the higher total deal value was driven by improved bank valuations overall. Median deal value-to-tangible common equity climbed to 161 percent in 2017, from 131 percent in 2016.2 And price-to-tangible book values increased across all banking asset classes, as U.S. equity markets buoyed bank valuations.

We believe near-term market conditions in the U.S. banking sector will continue to drive bank M&A in 2018 as banks focus on interest rate management, fee income expansion, cost take-out efforts, and lingering compliance costs.

Conversations with a diverse set of our clients across the U.S. banking industry indicate that, in today’s environment, the following strategies are likely to continue driving bank acquisitions: 

— Customer base and/or footprint improvement

— Regulatory and operational cost rationalization 

— Deposit cost reduction 

— Product offering diversification (often to improve fee income). 

In conducting the analysis, we also focused on the question of whether deals actually improve shareholder value.

In analyzing 394 U.S.-domiciled bank transactions announced between January 2012 and October 2016,3 we concluded that bank deals have generally resulted in above-market returns for the acquiring banks. The analysis also yielded the following conclusions: 

— The market rewards banks for conducting acquisitions, as evidenced by higher market valuations post-announcement

— Acquiring banks’ outperformance, where observable, increased linearly throughout our measurement period, from 90 days post-announcement to two years  post-announcement

— The positive effect was experienced throughout the date range examined

— Banks of all sizes experienced a positive market reaction, with one notable exception…

— Amongst banks with more than $10 billion in assets acquirers did not demonstrate statistically significant differences in market returns when compared to banks that did not conduct an acquisition. 

Conclusion

Transaction volumes in the U.S. banking sector have remained strong and deal value has increased in recent years, and we believe the consolidation will continue. 

Bank executives should feel comfortable pursuing deals knowing that the current marketplace has rewarded M&A in this sector. 

However, our experience indicates that in order to be successful, acquirers should approach transactions with a thoughtful alignment of M&A strategy with business strategy, an organized and vigilant approach to due diligence and integration, and trusted advisers to complement internal teams and ensure seamless transaction execution.

Refer to the full article below for additional details about the study and its conclusions.