F.N.B.’s Prototypically Bad Acquisition

Numerous studies have shown over the years that most acquisitions, both inside and outside the banking industry, destroy shareholder value for the buyers.   In my experience, some companies are simply poor acquirers, with the old First Union being the all-time champ on that score. But others buck the average and consistently create shareholder value with their deals. (Wells Fargo and M&T come to mind.)

I mention this because $21 billion F.N.B. Corp. just announced the acquisition of $7.5 billion Yadkin Financial, in a deal that’s destined to be seen as a classic value-destroying bank acquisition. Here’s what’s wrong with it.

N.B. is vastly overpaying. F.N.B. will pay 2.2 times tangible book value and 14.2 times 2017 estimated earnings for Yadkin, a company with an ROE that came to all of 6.3% last year. How is that adding value for F.N.B.’s shareholders? It’s not. Actually, it’s destroying it. It was an auction. What else would you expect? More on this in a minute.

N.B. is making unrealistic assumptions about the integration. There’s essentially no overlap between the F.N.B. (which operates mainly in Pennsylvania) and Yadkin (mainly North Carolina) franchises. Which is to say, the typical cost-saving opportunities acquirers like to crow about, like closing redundant branches, aren’t especially obvious. Yet F.N.B. says it expects to achieve cost cuts at Yadkin of 25%. This is delusional. F.N.B. will keep Yadkin CEO Scott Custer (an old friend, by the way) to run the franchise. But if Custer has run such a loose ship that 25% of Yadkin’s expenses can be cut without affecting performance, he’s the last guy F.N.B. should want running the place. Actually, Custer is a smart and effective manager. As I say, F.N.B.’s goal of cost cuts that deep is crazy.

Management is sticking it to its own shareholders.N.B. says that the deal will be 5.5% accretive to earnings per share in 2017. We’ll see. What we don’t have to wonder about, though, is what will happen to F.N.B.’s tangible book value per share when the deal closes. It will be diluted—by 8.5%. For a company whose earnings per share grew by 8.8% last year, that’s effectively giving up an entire year’s work. Ridiculous.

Wall Street analysts as doormats. As just about everyone who covers banks knows, an acquirer willing to do one dilutive, for-stock acquisition can be expected to do more, often many, many more, ravaging shareholder value in the process. Yet from what I can see, the reaction of the sell side to this deal was for analysts to nod dutifully and reiterate their buy ratings. Why they don’t object, I can’t understand, except to cite the usual pressure analysts get from their investment bankers.

F.N.B.’s acquisition of Yadkin is a near-perfect example of how the shareholders of bad acquirers suffer.  In contrast, the management of the buyer benefits (via higher compensation), the investment bank benefits (fees!), and the management of the seller benefits (via change-of-control payouts).

Throughout my career, I have applauded the occasionally good deal by a historically bad acquirer (NCNB’s acquisition of First Republic back in 1988, for instance) and I have stood up for the shareholders of the acquirer after a bad acquisition.  This is a bad deal for F.N.B. shareholders, with all the hallmarks of a bad deal.

What do you think? Let me know!