by Edward D. Herlihy, David S. Neil, Richard K. Kim, Lawrence S. Makow, Jeannemarie O’Brien, Nicholas G. Demmo, David E. Shapiro, Joshua M. Holmes, Matthew M. Guest, Mark F. Veblen, Brandon C. Price, Jacob A. Kling, Raaj S. Narayan, Rosemary Spaziani, David M. Adlerstein, Amanda K. Allexon, Lori S. Sherman, Eric M. Feinstein, Steven R. Green, Meng Lu, Amanda K. Toy, Matthew T. Carpenter, Kwon-Yong Jin, and Emily J. Hantverk.
Bank M&A surged in 2021 with total deal value reaching approximately $78 billion, its highest level since 2006, including 13 deals announced with values above $1 billion. Deal activity was driven by consolidation among large regional banks, continuing a trend that was kickstarted by the BB&T/SunTrust merger in 2019 and picked up steam in late 2020 with significant acquisitions by PNC and Huntington. Ironically, the pandemic in some ways provided a stimulus for bank mergers by prolonging low interest rates and slowing loan growth while massive government relief programs bolstered credit quality and increased deposits. At the same time, stay-at-home measures spurred a customer migration from branches to mobile platforms and accelerated increased competition from financial technology companies, necessitating increased investment in technology, often facilitated by greater scale. These combinations illustrated the increasing importance of scale and accelerating digital and technological investment and the significant synergies and value creation that a well-planned and executed strategic merger can create for shareholders and other constituencies on both sides of a transaction.
In July, President Biden issued an Executive Order and accompanying Fact Sheet on “Promoting Competition in the American Economy” calling for actions aimed at a broad swath of industries, including the banking industry. The Fact Sheet, among other things, encouraged the DOJ, the Federal Reserve, FDIC and the OCC to update guidelines on banking mergers to provide more robust scrutiny of mergers. The Fact Sheet also encouraged the CFPB to issue rules allowing customers to download their banking data and take it with them. Because the banking agencies, unlike the DOJ, are independent agencies, the Administration can only encourage and not compel them to take specific actions. Interagency collaborations tend to span many months and occasionally years, so it was too early to tell the impact that the Executive Order would have on bank M&A.
In December, Congresswoman Maxine Waters, Chair of the House Financial Services Committee, urged the Federal Reserve, FDIC and OCC to impose a moratorium on approving any large bank mergers over $100 billion in assets while the agencies conducted their reviews to update the bank M&A approval processes as requested by the Biden Executive Order. The DOJ also issued a press release seeking additional public comments on whether and how to revise the bank merger review guidelines (after an initial request for comment issued in September following the Executive Order) with a focus on whether the current bank merger review is sufficient to prevent harmful mergers and whether it accounts for the full range of competitive factors appropriate under the law. The partisan battle over bank regulation then fully spilled into the public domain when the three Democratic FDIC Board members posted an announcement on the CFPB’s website reporting that the FDIC had approved a request for public information regarding the process the FDIC uses to review bank mergers. FDIC Chair Jelena McWilliams said the request for public information was put up for a vote without her consent, making the action invalid. McWilliams then penned an op-ed in the Wall Street Journal in which she described the action of the FDIC board members as an attempt at a “hostile takeover of the FDIC internal processes, staff and board agenda.”
Despite these gathering clouds on the regulatory horizon, the Federal Reserve approved three large mergers late in 2021. Additionally, there was a trend of foreign banks divesting significant U.S. franchises. For the buyers of these franchises, the transactions create an opportunity for accelerating geographic expansion and increasing scale, distribution and reach without diluting existing shareholders or grappling with the difficult social issues present in larger strategic or merger of equal type transactions. Another distinction is the perception that U.S. bank regulators may prefer that the franchise be owned by the new buyer as compared to a seller who is looking to exit and may no longer be making substantial investment in U.S. operations such as technology and risk management systems.
Among the bank mergers that were announced in 2021, other than the divestiture transactions by foreign sellers, most transactions were structured as all-stock mergers, with some describing themselves as merger of equal transactions. These transactions require a strategic vision that identifies two institutions with complementary and compatible cultures, management teams and business lines. This strategic vision must be shared by the two CEOs and boards of directors and be closely followed by early agreement on difficult social issues, including board and management composition, succession of key executives, executive compensation and retention issues, the identity of the legal and accounting acquirer, headquarters location, name and community commitments. These transactions impact all of a bank’s key constituencies, including shareholders, employees, communities and regulators, and each must be appropriately considered and addressed. Strategic mergers among banks of a similar size, whether a “merger of equals” transaction or a significant strategic merger, offer an attractive opportunity to accelerate growth and create a stronger and more competitive institution with increased scale, efficiency and enhanced resources against the backdrop of rapid technology innovation and disruption and increased competition from existing players and new entrants. Because these transactions create a combined institution that is roughly double in size and may be premised in part on expense reduction and consolidation of existing branch networks, these transactions would likely become more challenging to complete in a less favorable regulatory environment. Accordingly, uncertainty regarding the standard for evaluating bank mergers by the regulatory agencies and DOJ and the regulatory environment more generally may have a chilling effect on the willingness of boards and executive teams to pursue these types of transactions.
Banks face significant competition from fintechs who are continuing to disrupt all aspects of the legacy financial services model and who have benefitted from the accelerated adoption of digital platforms for delivery of financial products and the increased use of digital payments. Fintechs have also benefited historically, as compared to legacy banks, from a lack of regulatory oversight and seemingly unlimited investor appetite for risk. If the regulatory environment for banks becomes more challenging, it may further enhance a competitive advantage for fintechs. However, there is also an increasing regulatory focus on large technology companies by antitrust and other governmental regulators. In October 2021, the CFPB issued lengthy information requests to some of the largest tech companies regarding their products, plans and use of information related to payments. The CFPB also commenced rulemaking regarding consumers’ access to their financial data, which could significantly impact how consumer-focused fintechs operate. Customer data drives the value of many fintechs as it can be used to market additional products and to improve underwriting and risk management. There is also a growing chorus from advocacy groups pressuring the bank regulators to crack down on partnerships between banks and fintechs that allow fintechs to effectively use the bank’s charter to avoid state law interest rate caps and the bank regulatory agencies issued a request for comment on proposed guidance on managing risks associated with third-party relationships, including these types of partnerships. Click here for more details.
Edward D. Herlihy, Richard K. Kim, Lawrence S. Makow, Jeannemarie O’Brien, Nicholas G. Demmo, David E. Shapiro, Joshua M. Holmes, Matthew M. Guest, Mark F. Veblen, Brandon C. Price, Jacob A. Kling, and Raaj S. Narayan are Partners; Rosemary Spaziani, David S. Neil, David M. Adlerstein, and Amanda K. Allexon are of Counsel; and Lori S. Sherman, Eric M. Feinstein, Steven R. Green, Meng Lu, Amanda K. Toy, Matthew T. Carpenter, Kwon-Yong Jin, and Emily J. Hantverk are Associates at Wachtell, Lipton, Rosen & Katz LLP.
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