Big bank mergers again being contemplated after a long break
One scoop to start: A trio of top shareholders in Ireland’s Smurfit Kappa have demanded that Europe’s largest cardboard box maker end its refusal to engage with International Paper and enter into negotiations with the US group that has offered nearly €9bn to buy it. More here.
In the decade since the financial crisis, big banking takeovers have been like hen’s teeth. But now the animal spirits seem to be stirring again, writes the FT's Martin Arnold.
The latest to rediscover the thrill of the chase is Barclays, which has been tossing around the idea of a merger with Standard Chartered while doing some “blue-sky thinking” on how to respond to the arrival of an activist investor.
The trigger for senior Barclays directors to start “scanning the horizon” for M&A options as well as looking at ways to return more capital to shareholders and to expand in its home UK market, is the 5.4 per cent interest acquired in the bank by Edward Bramson’s activist fund Sherborne (he's profiled here).
Quite how far Barclays has gone in scoping out these contingency plans is unclear. But it seems that the idea of a merger with StanChart – which has echoes of an approach it made several decades ago – is at an extremely early stage.
The merits of such a combination, which Lex weighs here, were discussed in theoretical terms between a director at each of the banks, according to people familiar with recent events. But there hasn’t been a formal book drawn up on StanChart and the idea has not been discussed by the full Barclays board.
Shares in Barclays were down 1.09 per cent on Wednesday after the FT first reported the news about its consideration of a deal with StanChart. Its rival’s shares closed up 0.4 per cent, having given up much of their earlier gains.
So what conclusions can we draw from this? First, it is clear that Barclays is taking Bramson very seriously. Second, the bank does not appear to have full confidence that its current strategy of slightly upping the resources in its investment bank while moderately increasing its dividend will be enough to keep the activist and his many supporters at bay.
Could it also mean that big bank M&A is back on the cards? Given the highly sceptical reaction of many shareholders and analysts to the idea of a “BarChart” deal on Wednesday, that still seems a bit of a stretch.
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The great M&A wave in US banking
The UK isn't the only country primed for banking consolidation. FIG bankers in America are scanning the horizon with a new sense of urgency. After Tuesday’s rollback of certain Dodd-Frank provisions, which amounts to the biggest changes to financial regulation in eight years, a great M&A wave could be coming.
Consolidation among US banks is a secular trend. The number of banks halved in the past 20 years and will probably halve again in the next 20, says Jason Goldberg, analyst at Barclays, as more and more small lenders look to cut costs by combining.
Data released on Tuesday showed there were 5,607 federally insured commercial banks and savings institutions at the end of the first quarter, a fall from 5,670 the year before.
But now things could really start to pick up at the bigger end. Monday’s $4.7bn deal between Fifth Third Bancorp of Cincinnati and Chicago’s MB Financial could be a taste of things to come, say bankers, as management teams take advantage of high share prices, lower taxes and — crucially — lighter regulation to plot moves they have long dreamed of.
The market didn’t like the deal much. Fifth Third’s shares fell about 8 per cent on the day, as investors saw that the bank was paying $2.70 for every dollar of book value, and that even with aggressive assumptions on cost cuts it expected to take seven years — about double the average in deals like this — to earn back that premium.
“It’s higher risk with lower reward,” sniffed one M&A banker unconnected to the deal.
But on Tuesday Fifth Third recovered about 3 per cent, while some of MB’s regional rivals (Wintrust and First Midwest) held on to gains they’d made on Monday.