M&A outlook: will a catalyst emerge in '07?

Going into 2006 there was a feeling among many industry watchers that deal activity in the bank and thrift space would heat up and outpace a relatively anemic 2005 M&A season. Looking back at the first three quarters of the year it looks like they were right and wrong.

With no real

Regionally only the Mid-Atlantic and New England have met last years pace of 25 and 7 deals respectively (Table 1). The Midwest, which led all regions in 2005, is on pace to repeat this year. The Southeast also had legs, with the number of deals on pace with 2005.

Deal value was up significantly compared to 2005, with $78.2 billion in deals announced as of Oct. 31, 2006, second only to the full-year aggregate deal value of $130.8 billion in 2004.

Regionally the Mid-Atlantic, Southeast, and the West drove the bulk of the deal value increase. But these increases can be attributed to nine deals with values of $1 billion or more (Table 2). Of these deals, three represent about $50 billion in deal value: Capital One's acquisition of North Fork; Wachovia's acquisition of Golden West; and the Regions Financial acquisition of AmSouth Bancorp.

The hot markets of Texas and Florida had a third of the top nine deals, with an aggregate deal value of more than $4 billion.

Looking out into 2007, if the next big wave of M&A arrives, it will have to be driven by a powerful catalyst, the most likely candidate being demand for deposits and deposit growth. If the competition for low-cost deposits drives up costs it will make more sense for banks to start acquiring others to fuel expansion. Acquisitions of deposit heavy companies, with little branch overhead, will likely start the run.

If the yield curve stays inverted into 2007 then poor earnings and margin compression may result in more deals at lower-than-average deal values. This didn't act as a catalyst in 2006, as many thought it would, but it still cannot be ignored when looking into 2007.

The general outlook for 2007, then, would be for a small increase in the number of deals and for deal values to pull back on an average basis. Hot regional markets will stay hot from a pricing perspective, though there will be less deals since the supply has been reduced.

--John McCune, SNL Financial jmccune@snl.com

Table 1
Bank and thrift whole deal activity by aggregate deal value
(in $ millions) and number of deals

Target region                    2001     2002     2003      2004

Mid-Atlantic    Aggr. deal      9,433    4,203    8,135    10,628
                Val. ($M)
                No. of deals       25       25       34        28

Midwest         Aggr. deal      3,793    1,563    1,788    76,820
                Val. ($M)
                No. of deals       92       68       67        97

New England     Aggr. deal      1,124    1,755   51,933     5,501
                Val. ($M)
                No. of deals       13        8       17        11

Southeast       Aggr. deal     19,298    2,083    6,529    31,741
                Val. ($M)
                No. of deals       56       51       60        55

Southwest       Aggr. deal        824      516    1,387     2,828
                Val. ($M)
                No. of deals       39       36       49        42

West            Aggr. deal      5,918    7,068    2,586     3,238
                Val. ($M)
                No. of deals       24       24       32        36

Nation          Aggr. deal     40,389   17,189   72,359   130,755
                Val. ($M)
                No. of deals      249      212      259       269

Target region                    2005   2006 YTD   2006 Ann.

Mid-Atlantic    Aggr. deal      7,277     25,308      30,370
                Val. ($M)
                No. of deals       25         25          30

Midwest         Aggr. deal      4,366      3,966       4,759
                Val. ($M)
                No. of deals       93         65          78

New England     Aggr. deal        135        544         652
                Val. ($M)
                No. of deals        7          7           8

Southeast       Aggr. deal      3,622     14,813      17,776
                Val. ($M)
                No. of deals       63         51          61

Southwest       Aggr. deal      8,233      4,667       5,600
                Val. ($M)
                No. of deals       50         39          47

West            Aggr. deal      5,449     28,891      34,669
                Val. ($M)
                No. of deals       31         26          31

Nation          Aggr. deal     29,082     78,187      93,825
                Val. ($M)
                No. of deals      269        213         256

2006 YTD as of 10/31/2006

Ann. = Annualized, Annualization factor of 1.2

Source: SNL Financial

Table 2
Largest bank and thrift deals YTD in 2006
All transactions with deal value greater than $1 billion

Quarter   Buyer/target                                     Region

2006Q1    Capital One Financial Core./                     Mid-Atlantic
            North Fork Bancorp.
2006Q2    JPMorgan Chase & Co./ BONY Retail                Mid-Atlantic
            Banking Business
2006Q2    Wachovia Corp./Golden West Financial             West
2006Q2    Regions Financial Corp./ AmSouth Bancorp.        Southeast
2006Q2    Banco Bilbao Vizcaya Argent SA/ Texas            Southwest
            Regional Bancshares
2006Q2    Citizens Banking Corp./ Republic Bancorp.        Midwest
2006Q3    National City Corp./ Harbor Florida Bancshares   Southeast
2006Q3    National City Corp./ Fidelity Bankshares         Southeast
2006Q4    PNC Financial Services Group/ Mercantile         Mid-Atlantic
            Bankshares Corp.

                                                           Announce
Quarter   Buyer/target                                     date

2006Q1    Capital One Financial Core./                     3/12/06
            North Fork Bancorp.
2006Q2    JPMorgan Chase & Co./ BONY Retail                4/7/06
            Banking Business
2006Q2    Wachovia Corp./Golden West Financial             5/7/06
2006Q2    Regions Financial Corp./ AmSouth Bancorp.        5/24/06
2006Q2    Banco Bilbao Vizcaya Argent SA/ Texas            6/12/06
            Regional Bancshares
2006Q2    Citizens Banking Corp./ Republic Bancorp.        6/26/06
2006Q3    National City Corp./ Harbor Florida Bancshares   7/10/06
2006Q3    National City Corp./ Fidelity Bankshares         7/26/06
2006Q4    PNC Financial Services Group/ Mercantile         10/8/06
            Bankshares Corp.

                                                           Deal value
Quarter   Buyer/target                                     ($mill.)

2006Q1    Capital One Financial Core./                     14,568
            North Fork Bancorp.
2006Q2    JPMorgan Chase & Co./ BONY Retail                 3,100
            Banking Business
2006Q2    Wachovia Corp./Golden West Financial             25,474
2006Q2    Regions Financial Corp./ AmSouth Bancorp.        10,060
2006Q2    Banco Bilbao Vizcaya Argent SA/ Texas             2,165
            Regional Bancshares
2006Q2    Citizens Banking Corp./ Republic Bancorp.         1,034
2006Q3    National City Corp./ Harbor Florida Bancshares    1,104
2006Q3    National City Corp./ Fidelity Bankshares          1,038
2006Q4    PNC Financial Services Group/ Mercantile          6,028
            Bankshares Corp.

As of 10/31/2006

Source: SNL Financial