Mergers and acquisitions have long been a big part of financial institutions’ (FIs) growth strategy. But that may be changing—at least in the short term. In a recent edition of the PrecisionLender Purposeful Banker podcast, Q2’s Dallas Wells, EVP of Strategy, shared his thoughts on a recent merger—between Texas Capital and Independent Bank—that didn’t quite happen.
"I think the deal fell apart," explained Wells, "because the whole world kind of fell apart."
Complexity and risk
In the throes of the COVID-19 pandemic, a merger of this size (which would’ve resulted in a roughly $50 billion entity) had many moving parts. It was complex, requiring a significant investment of resources, people, and time. Some of those resources—particularly people—are harder to manage right now.
The pandemic’s impact on numerous industries may also bear some blame.
"Texas Capital has a pretty good-sized oil and gas exposure," said Wells. "They actually reported a loss in the first quarter … they had a couple of big credits go sideways, and they started reserving for them. And with that exposure and just a lot of unknowns in that market, there was a lot of uncertainty on their side."
As for Texas Independent Bank, according to Wells, "They have a big exposure to commercial real estate, specifically for retail strip centers, which is another highly uncertain area right now. It's a gigantic undertaking anyway, then with all these circumstances, it was clear there was just enough extra risk that both sides decided to walk away."
Larger implications
In some ways, this deal-that-wasn’t was due to a perfect storm, but Wells believes that it is indicative of a larger trend in M&A.
"I would say every deal that's still pending out there is at risk," said Wells. "Everybody that was in the middle of negotiating is, in many ways, starting over and saying, 'we need to redo most of the due diligence and probably have a brand-new discussion about price."
But Wells didn't think M&A activity would go completely dormant, either. "I think if you were willing to make acquisitions six months ago, and that was your strategy, I think that's still the strategy. Nothing fundamentally has changed. Again, just the due diligence is always a malleable process … and the things we're looking at now in this particular environment are going to be maybe different than we expected. Every deal has a price, right? There is a price at which it's still enticing to you."
Tough choices ahead
The podcast went on to discuss the shifting perspectives of banks hoping to make acquisitions, those hoping to be acquired, and how the cyclical nature of the industry may lead to opportunistic acquisitions—and to some tough decisions by FIs who weren’t quite looking to be bought just yet, but think it’s probably on the horizon. Being unsure how to weather this downturn and also forced to weigh that uncertainty against lower pricing for their acquisition is a tough position to be in. These decisions hang on a lot of ambiguity that won’t likely resolve for some time.
Listen to the podcast
To get the complete conversation and additional insights about banking M&A strategy in the current crisis, you can read the transcript or listen to the Purposeful Banker podcast here.
