As featured on the website Travilliannext.com on June 16, 2021
M&A waves typically reflect a “follow-the-herd” mentality.
More often than not, periods of heightened bank sector M&A activity seem to be driven by a few common themes in each cycle. But no matter the reason for the pick-up in M&A for a particular period, it usually tends to play out the same way. Early movers are rewarded for their foresight in capitalizing on what eventually becomes the “trend du jour” for that cycle, leading others to attempt to emulate their actions, but with very mixed results as the cycle matures. Competition for deals intensifies, prices rise, and bank stock valuations reach parity over the course of the cycle, leaving very little room for error in the integration phase and thereafter as acquirers look to realize the promised financial and strategic benefits of the merger.
While there are several illustrative examples we could point to over the past few decades, one that stands out is the period after The Great Recession. Banks such as Home BancShares (HOMB) and Bank OZK (OZK), among a few others, weathered the crisis period relatively better than peers, quickly recognized the value inherent in distressed bank acquisitions, and embarked on an acquisition spree that resulted in premium stock valuations for these acquisitive banks. Some copycats of this strategy were still successful later in the cycle, but the benefits seemed to lessen with each successive transaction. This inflected around the midpoint of the decade, with active acquirers as a group underperforming the bank index for several years thereafter, particularly after M&A pricing crested in mid-2018.
While there are several illustrative examples we could point to over the past few decades, one that stands out is the period after The Great Recession. Banks such as Home BancShares (HOMB) and Bank OZK (OZK), among a few others, weathered the crisis period relatively better than peers, quickly recognized the value inherent in distressed bank acquisitions, and embarked on an acquisition spree that resulted in premium stock valuations for these acquisitive banks. Some copycats of this strategy were still successful later in the cycle, but the benefits seemed to lessen with each successive transaction. This inflected around the midpoint of the decade, with active acquirers as a group underperforming the bank index for several years thereafter, particularly after M&A pricing crested in mid-2018.
