Summary
With so many small banks finding it hard to survive in this market, it would seem the governing agency would do all within its power to find potential buyers for those unable to make the grade. With the recent change in valuation methods to a multiple calculation, comparable data is imperative in providing confidence to the bidding firm.
Analysis
Valuation calculations for M&A strategies have changed over the past 10 years. The traditional model (and academic calculation) is to calculate a five year discounted cash flow (DCF) with a terminal valuation at the end of the period. This was true 5-10 years ago for strategic acquisitions as well as equity investments in the private section. With the private market in hibernation, valuation models have switched to multiples, as this shows what the market has been paying for comparable companies. For strategic acquisitions, this strategy can overlook valuable synergies between the two companies and can cause the negotiations to breakdown.
Under the multiple valuation scenario, comparable data is a requirement to benchmark pricing. With so many banks having a difficult time, it would seem the FDIC would be happy to share information on bid proposals for failed banks. With the gov’t agency bulking at providing this information, don’t expect acquisition activity to pick-up with equity firms or strategic expansions. If the FDIC continues to provide only winning bid information, other firms will not know where the watermark is and will be cautious at offering other bids as they may be paying too much for the failed bank.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
