Higher valuations, improving multiples, more capital, and the potential for regulatory relief are all contributing to increased consolidation in the financial institutions market in 2017. A number of factors are motivating potential sellers, including the continued burden of regulation, competition, unclear succession plans and the expectation of higher multiples. The time appears ripe for making deals—or at least for potential buyers to try raising capital in preparation for future deals (which we will address as Issue #8 on our Top 10 list).
In general, 2015 and 2016 were two of the three busiest years on record for M&A activity. The current economic climate shows strong M&A fundamentals which, if sustained, can be expected to drive high levels of M&A activity in 2017. Despite the political unpredictability following November’s elections, equity markets continue to rise, and even after a modest increase to the federal funds rate in December 2016, interest rates remain near historic lows (although the Federal Reserve suggests that further rate increases are likely in the coming months).
Deregulation expectations have caused analysts to be even more bullish on the financial institutions industry as a whole, with many publicly traded institutions seeing share price increases upwards of 30 percent over the past four months. We expect to see acquirers continue to try to use their increased share value as acquisition currency for future acquisitions or mergers. As a rising tide lifts all boats, many private company sellers view their own worth through the lens of multipliers and valuations of publicly traded institutions. With industry valuations near record highs, those looking to exit are setting a high sale price.
There remains a variety of valid reasons for financial institutions to seek a sale. Although deregulation seems imminent, the timeline and the form (a delay, roll back, or whole sale elimination) are anything but clear. In the interim, financial institutions still face the same significant cost of regulatory compliance which has historically been a key reason for seeking a sale. Other frequently cited justifications – lack of economies of scale, shareholder demand for a liquidity event, unproven succession plans – continue to warrant sale considerations.
With interest rates low and spreads tight, strategic buyers will continue to target acquisitions as a key growth strategy. However, public reports of extended regulatory scrutiny relating to noncompliance issues continue, placing many of those would-be buyers in the regulatory penalty box. As we have seen over the last year, these noncompliance issues not only cause major delays in getting transactions through the approval process, but in some cases have caused deals to fall apart entirely. Financial institutions thinking of growth are well-advised to confirm that their own house is in order before seeking expansion that would require regulatory approval.
Schiff Hardin has a dedicated team of financial institution transactional, regulatory, and litigation attorneys with significant experience handling various aspects of bank and non-bank financial institution matters. Our attorneys regularly advise financial institutions on corporate matters, mergers and acquisitions, regulatory compliance and enforcement matters and litigation throughout the U.S.
Visit Schiff Hardin’s Financial Institutions Practice website or contact the authors with questions or for assistance.