US banking and capital markets deals insights: Q4 2019
Deal value soared on efficiency-focused consolidation, including mergers by regional banks
The value of announced deals in 2019 surged 76% to $87.2 billion, with $37.4 billion in transactions reported in the fourth quarter—more than five times what we saw in 4Q 2018.
The year started with a bang with the announced merger of BB&T and SunTrust Banks Inc. It ended on a strong footing when Charles Schwab Corp. in the fourth quarter announced an agreement to buy TD Ameritrade Holding Corp.
We expect deal activity among industry firms to stay robust in 2020 thanks to high levels of available capital, innovation and consolidation in the payments industry, and a growing recognition among regional banks that they can gain a competitive edge by merging with well-positioned peers.
“Although the number of transactions where value was disclosed fell during 2019, the value of deals increased substantially. Scale matters in today’s market, and consolidation in the US banking system is required to maintain competitiveness.”
Significant transactions 2019
Key 4th quarter deals include a large bank/asset manager tie-up and merger activity in the US Southeast
Charles Schwab Corp. entered into a definitive agreement to acquire TD Ameritrade Holding Corp. from Toronto-Dominion Bank and other firms for $28.4 billion in an all-stock transaction. This was the largest announced industry deal in 2019.
First Horizon National Corp. signed a definitive agreement to acquire IBERIABANK Corp. for $3.9 billion in a “Merger of Equals.” First Horizon shareholders will own 56% and IBERIABANK shareholders will own 44% of the combined company.
Other transactions announced during the quarter include:
FirstBank Puerto Rico’s agreement to acquire Santander BanCorp. from Santander Holdings USA, Inc. for approximately $1.1 billion
United Bankshares, Inc.’s agreement to acquire Carolina Financial Corp. for approximately $1 billion.
Full year review: volume steady, value soared
In 2019, total announced deal value surged to $87.2 billion, up 76% over 2018. The Schwab/TD Ameritrade megadeal fueled the surge in deal value, along with the Q1 transaction that gave us Truist and a few deals ranging from $2 billion to $4 billion:
Entered into a definitive agreement to acquire SunTrust Banks, Inc. in a 100% stock consideration “MoE” transaction valued at $28.3 billion.
TCF Financial Corp. acquired Chemical Financial Corp. in a reverse merger stock transaction valued at $3.6 billion.
Prosperity Bancshares, Inc. signed a definitive merger agreement to acquire LegacyTexas Financial Group, Inc.for $2 billion in a deal comprising 85% stock and 15% cash.
Reverence Capital Partners LLC agreed to acquire a 75% stake in Advisor Group, Inc. from Lightyear Capital LLC and Public Sector Pension Investment Board in May for approximately $2 billion.
Transaction multiples
The average P/TBV multiple increased 7% compared with the third quarter of 2019 but fell 20% compared with the fourth quarter of 2018. The announced acquisition of Carolina Financial Corp. by United Bankshares, Inc yielded the highest P/TBV multiple at 1.9x.
We have excluded the TD Ameritrade transaction from our quarterly average. Given the resulting firm’s operations in both banking and asset management, the implied P/TBV multiple for this transaction would not provide a meaningful comparison to more ‘pure’ banking deals.)
Deals Outlook - 2020
Several trends fueled M&A in the banking and capital markets in 2019 and will probably drive transactions in the months ahead.
“Mergers of Equals” gain in popularity
High-priced deals usually require aggressive synergy and growth targets to generate attractive returns. Financial institutions often face challenges meeting the targets. A new trend in dealmaking is emerging in which firms gain clear advantages while setting benchmarks that are often more easily within their grasp. Such “Mergers of Equals” bring together banks eager to find greater efficiencies. During the first quarter of 2019, BB&T and SunTrust announced a $28 billion merger, while Chemical Financial Corp. and TCF Financial Corp. reported a $3.6 billion combination. Dealmakers structured the two transactions with book value multiples and targets that appeared to reward all stakeholders. TBV multiples stand at about 1.7x and synergy targets range from 20% to 30%--thresholds that usually are achievable. The “MoE” trend continued with the Q4 announcement of a tie-up by IBERIABANK and First Horizon. That combination includes a P/TBV multiple of 1.37. Expected cost synergies total $170 million, which is equivalent to 25% of IBERIABANK’s operating expenses and 9% of the combined expense base. We expect more transactions of this sort in 2020 as long as regional banks can continue to identify merger opportunities with relatively low TBV multiples and achievable synergies.
Consolidation in payments industry and the impact of “Big Tech”
The payments industry saw significant growth, with three megadeals announced in 2019:
Through consolidation, payments firms seek to gain scale, promote efficiency, and expand their customer base. Meanwhile, “Big Tech” companies are creating payment ecosystems across their large user base, with offerings such as Google Pay, Apple Pay, and Amazon Pay. As the overlap between financial and technology firms grows, we are likely to see additional deal activity as industry participants seek to acquire these specialized capabilities.
We will also closely track these considerations for 2020 M&A:
Availability of capital
The amount and diversity of capital available for business investment in 2020 may be unprecedented. US corporations have access to about $2.2 trillion in cash. Private equity firms hold $2.4 trillion and have moved beyond equity funding and into alternative assets classes such as hybrid funds and debt. Although we believe a market slowdown could inhibit M&A activity to a degree, the current high capital levels probably would not ebb to the same extent as during the 2007-2009 financial crisis. A slowing economy usually is accompanied by a decline in company valuations, making M&A targets more attractive. Potential buyers with ample available capital could steady such valuations.
Prospect of regulatory change
The potential impact from any regulatory or economic policy changes is always a concern during an election year. Companies could seek to complete transactions during the first half of 2020. M&A activity may slow in the months before the November election when the outlook for regulatory and policy changes will become clearer. Regardless of the outcome of the balloting, we believe major reform of US antitrust laws is less likely than an incremental tightening of regulations focused on data privacy. Cybersecurity and anti-money laundering may also gain more attention from lawmakers and regulators seeking to keep pace with rapid technological innovation. The prospect of more regulatory activity in any of these areas could hold back some acquirers as they try to assess the cost and implications of compliance.
About the data
We define M&A activity as mergers and acquisitions in which targets are US-based banking and capital markets companies acquired by US or foreign buyers. We have based our findings on data provided by industry-recognized sources. Specifically, values and volumes used throughout this report are based on announcement date for transactions with a disclosed deal value, as provided by Capital IQ, as of December 31, 2019, and supplemented by additional independent research.
Information related to previous periods is updated periodically based on new data collected by Capital IQ for deals closed during previous periods but not reflected in previous data sets. Deal information was sourced from Capital IQ and includes deals for which buyers or targets fall into one of the BCM industry sub-sectors: Commercial and Retail Banks, Consumer Finance, Diversified Financial Services, Non Bank Lenders, Investment Banking & Brokerage. Certain adjustments have been made to the information to adjust for transactions which our data sources classify as financial services but which we assign to technology and other sectors, or vice versa.
