A Bank Merger Sure to Leave a Little Extra Money in Everyone's Pocket

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Since the crash, it's not often that bank investors get to count themselves among the day's market gainers. But thanks to a generous buyout offer from M&T Bank (NYSE: MTB  ) , investors in Hudson City Bancorp (Nasdaq: HCBK  ) have found themselves in the unusual position of being able to sit back, count their significant winnings, and stop beating themselves up over why they ever thought financial stocks were a good idea in the first place.

An offer they couldn't refuse
M&T announced yesterday that it's buying Hudson City for $3.7 billion, to be paid in cash or M&T stock, whichever Hudson City shareholders prefer. The buyout price is at a healthy 16% premium over Hudson City's Aug. 24 closing price of $6.43 per share.

For its money, M&T will get Hudson City's 135 branch offices. The new, combined network of 870 locations will stretch from Connecticut to Virginia -- a healthy swath of wealth-laden territory.

Unfortunately, also as part of the deal, M&T will be expected to pay off about $13 billion of Hudson City's debt. This will be balanced out by the $25 billion in deposits and $28 billion M&T expects to receive, which will give the newly bigger M&T Bank the fourth-largest deposit base in New Jersey.

Encouraging signs of actual thinking
According to the statement announcing the merger, there's very little overlap between M&T's existing branch network and Hudson City's. That's obviously good news and an encouraging sign that the parties behind the merger have thought things through.

And while the two banks have distinct styles, they're complementary, at least as M&T sees it. Being a thrift, Hudson City is focused mainly on deposits and mortgages. M&T says it will take that loyal base and offer it a wider range of banking services, including the premium wealth management and corporate trust solutions that it offers to its current customers. "To the customers and communities now served by Hudson City," M&T CEO Robert G. Wilmers said, "M&T brings a wider array of banking products and services."

This mixing and matching of thrift banking and commercial banking may or may not be an ideal match, but having extra services at your customers' disposal never hurts, so long as the thrift customers aren't forgotten about in the rush to expand.

When you have lemons ...
While Hudson actually did quite well through the darkest days of the financial crisis, of late it's been struggling, just as other banks are starting to pull themselves back together. Goldman Sachs (NYSE: GS  ) , for instance, which was forced to give up its pure investment-banking status during the crisis, has recently decided to make the most of its bank-holding company status by opening a private bank-within-a-bank to serve its wealthy clients around the world.

And in the face of new regulation -- i.e., the Dodd-Frank financial reforms of 2010 -- other big banks such as JPMorgan Chase (NYSE: JPM  ) and Morgan Stanley (NYSE: MS  ) are finding their own ways to make lemonade out of lemons. Essentially, they're winding down the big proprietary trading operations that had become the banks' raison d'etre and refocusing on client services -- banks' real raison d'etre as it existed for centuries before the explosive rise of trading and investment banking beginning in the 1980s.

Hudson City investors got an instant 16% gain from this M&T buyout offer. M&T Investors picked up 4.5% on news of the deal. Reiterating what was suggested already, so long as M&T doesn't get delusions of grandeur from the merger and begin treating its new and existing clients like mere stepping stones just for the sake of getting bigger and bigger, this looks to be a satisfying move -- one beneficial to all parties, even consumers. How often does that happen?

Here's to big banks that keep their noses clean and act as financial stewards and guardians of the economy. They're the kind of banks that can still be good investments. Learn all about just such a bank in this Motley Fool special free report: "The Only Big Bank Built to Last." It's one of the few big banks today that can be recommended as a good investment for just about any investor. Download it while it's still available.

Fool contributor John Grgurich wonders whether Goldman Sachs will be giving away toasters to its new passbook savings account holders. Otherwise, John holds no positions in any of the companies mentioned in this column. Follow John's dispatches from the front lines of capitalism on Twitter, @TMFGrgurich.

Motley Fool newsletter services have recommended buying shares of Goldman Sachs. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a gripping disclosure policy.

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2012, at 9:54 PM, wrg2608 wrote:

    I honestly believe that HCBK shareholders are getting robbed. This valuation is way too low.

    "But thanks to a generous buyout offer from M&T Bank (NYSE: MTB ) , investors in Hudson City Bancorp (Nasdaq: HCBK ) have found themselves in the unusual position of being able to sit back, count their significant winnings, and stop beating themselves up over why they ever thought financial stocks were a good idea in the first place."

    1) This is not a generous buyout offer. This is an offer below current book value. Let alone that, as you point out, banking is turning around. The biggest problem for all banks is the Fed. But HCBK would have done fine. A sub-book value merger is then certainly not "generous."

    2) What makes you think that HCBK shareholders were beating themselves up? They had exposure to banking which as an industry is largly undervalued. And they were collecting a LARGER DIVIDEND then they will now with MTB.

    In sum, endorsement of this deal and saying that HCBK shareholders should be happy because we got a significant premium to where the stock was trading is short sighted commentary. Long term investors who were perfectly fine taking the yield and the banking exposure likely got screwed.

  • Report this Comment On August 29, 2012, at 10:04 AM, XMFGrgurich wrote:

    Hmmm ... you have a point in that, with banking slowly turning around, investors could possibly have been better off in the long term with HCBK.

    But HCBK was also having problems, and may not have been around long enough for the long-term investors to get a decent profit out of it.

    Thanks for the thoughtful commentary. Cheers.


  • Report this Comment On August 29, 2012, at 12:22 PM, wrg2608 wrote:

    Agreed John. I think that your point is exactly what HCBK and MTB will have to convince shareholders of. My only problem is if HCBK was really facing such a questionable future, then why was management paying such a large dividend? Why get 0% return on cash that could have gone towards paying debt and securing a future for our bank independent of a sub-book value deal.

    Thank you for your response and for your original coverage of the deal. I just hope that there is some sort of public questioning of the deal as opposed to what is generally being said.

  • Report this Comment On August 29, 2012, at 1:08 PM, Keepitsimple19 wrote:

    wrq2608 is spot on. As an HCBK shareholder, the only thing I can be happy about is that my long term capital losses in this deal will lower my taxes. HCBK was still showing a profit and paying a generous dividend after near zero interest rates over the last several years. I now see that mortgage interest rates have ticked up slightly from their all time lows. IMO, the worst was over,HCBK had weathered the storm, and things would slowly improve while I collected 5% or 6% on my money. Instead, a vulture swoops in and grabs the company at a price not far from its 10 year low. Joy. I'll just sit back now, count my significant winnings, and stop beating myself up now!

  • Report this Comment On August 30, 2012, at 5:14 PM, robyrob wrote:

    Yeah for us idiots that bought HCBK at 12 or 13, a 15% premium on 6.50 doesnt look so good. Question, do I keep the MTB shares or get the hell out of this crap entirely? It won't help my taxes to sell.

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