Is the M&A Tide Finally Turning in Favor of the Acquirers?

We’ve written several articles this year on the topic of M&A; more specifically, the generally poor reaction to announced deal activity in the market. Prior to the pick-up in M&A activity earlier this year, we cautioned that this might occur, for a variety of reasons. Most notably, we observed that the anticipated rapid recovery from the economic downturn and the bank sector’s emergence from the recession relatively unscathed would likely result in an M&A wave that was marked by higher-than-normal deal pricing than what is typically seen in the early stages of economic recovery.

…in stark contrast to the trends witnessed in prior M&A cycles.

Following every deep recession over the past two decades prior to the COVID-19 pandemic, the early stage of bank M&A merger waves tended to be very fruitful for the stocks of acquirers. Targets wounded by credit stumbles and capital shortfalls during the preceding downturn were priced accordingly, leading to very favorable “deal math” for stronger institutions that maintained their premium stock currency. But more importantly, the risk profile of these transactions was attractive due to low absolute pricing on TBV. Deal metrics tended to be based on the target’s depressed earnings capacity during the downturn, rather than the earnings stream it was likely to generate during the subsequent recovery.