Target: Bank of America
Price: $4 billion
Sponsor: Berkshire Hathaway
Target: Amalgamated Bank
Price: $100 million
Sponsors: The Yucaipa Companies LLC, WL Ross & Co. LLC
Don’t expect a couple of recent big investments of private money into the banking industry to signal a resurgence of dealmaking in the sector, market watchers say.
A pair of buyout funds,
Together with Warren Buffett’s recent $4 billion investment in Bank of America, the moves could be seen as a renewal of a binge of deals that occurred in 2010 when a series of buyout firms took stakes in commercial banks as the financial crisis eased. Not too likely, according to a pair of sources.
For one thing, many of the banks that needed to raise capital have already done so, said Ralph F. “Chip” MacDonald III, a partner in the financial services practice of law firm Jones Day in Atlanta, an attorney who follows the financial industry. “People are digesting what they bought last year,” he said.
In addition, bank regulators continue to view buyout firms warily, limiting them to holdings of less than 25 percent. Regulators likewise are keeping a lid on M&A, which prevents the banks from growing through acquisition. And the Dodd-Frank financial reform law, with its “living will” provision, could increase the likelihood that a troubled institution would be shut down, wiping out investors’ stakes.
Finally, record low interest rates are crushing banks’ interest margins, making the industry overall less profitable than others might be.
The recent examples had unique characteristics that make them unrepresentative of the broader banking market. Buffett rather famously dreamed up the B of A investment in the bathtub, then called CEO Brian Moynahan to inform him of his decision.
That was simply a case of the stock being too cheap to pass up, noted Lee Kimmell, a managing director in the financial institutions group of the investment bank Houlihan Lokey. “It’s the best franchise in America,” with an extensive network of branches and Merrill Lynch storefronts. The stock has been trading recently around $6, compared to $50-plus in October 2007.
Amalgamated Bank was somewhat closer to the profile of a troubled institution looking for a cash infusion. The bank, with a debt-to-equity ratio of 6.21 percent, was ordered by the state of New York on Aug. 31 to raise that ratio to 7 percent within a year and to 8 percent in two years, according to the Associated Press.
Wilbur Ross, the head of the eponymous firm, has made a career of buying into industries that are out of favor, and he has invested in banks before. The firm, alongside The
Still, the recent deals are best viewed in isolation, rather than as part of a larger trend, Kimmell said. “Is it over? No, it’s not over, because I don’t think it ever really got started.”