Western Independent Banker - May/June 2008 - (Page 13) By Jeffrey J. Wishner What Potential Sellers Should Focus On In Today’s Challenging M&A Environment selling for more than 3X book a year ago. For the first six months of 2007, the average price to tangible book value of a bank that sold in the West was 2.6X. In fact, from June 30, 2007 through February 20, 2008, buyer bank stock prices, as measured by the Western Keefe Bank Index, have declined on average by 28 percent and trade at a price to last 12 months earnings of 12X. Buyers focus on earnings accretion and an ability to pay higher prices is dependent upon a high price to earnings ratio. There is obviously a disconnect between current publicly traded bank valuation levels and seller expectations. Another detriment to M&A activity is credit concerns. Due diligence has become important again and it’s not unusual for buyers to review a greater proportion of the loan portfolio and take a week to do it, as opposed to a cursory review in less than a day’s time. Also, sellers who are taking stock in the transaction need to do cross due diligence. Potential buyers have become resistant to taking on someone else’s potential loan problems, especially when they are concerned about their own. Likewise, potential sellers feel comfortable with what they’ve originated even if their loans are in workout mode compared to the unknown in a potential buyer’s loan portfolio. Last, declining stock prices have really put a damper on M&A activity. First-hand experience has provided a good example of what sellers should be focused on in this challenging M&A environment. A deal and its key terms had been agreed to in late 2007 between a buyer and a potential seller. A month later, the deal had fallen apart just days before its scheduled announcement. The buyer had offered the potential seller a AS OF FEBRUARY 2008, Western independent bank merger and acquisition activity has been nearly nonexistent. In fact, since September 30, 2007, only two Western community bank transactions have been announced, Stockmans Financial Group’s sale to PremierWest Bancorp and United Bancorp of Wyoming’s sale to Wells Fargo. That compares to 26 transactions in the first six months of 2007, when it wasn’t uncommon for banks to sell for over 3X book. As an M&A investment banker, the past six months have been frustrating as market volatility has “killed” several deals that had gotten past due diligence and close to signing a fully negotiated definitive agreement. The lull in M&A activity has been caused by: (I) high seller expectations, (II) weak buyer currency, (III) credit concerns on both sides of potential transactions, and (IV) market volatility. Like real estate markets, bank seller expectations are set by what their neighbors were able to sell for. Every bank director believes that their bank is worth more than the bank down the street. Sellers focus on price to book and many of the better performers were In today’s environment, sellers may take solace in the certainty of cash, but I would opt for stock in the right buyer’s currency because a potential seller will share in the upside of recovering stock prices. Sell for cash when stock prices are high. Western Independent Banker May/June 2008 13
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