What happened

Shares of MB Financial, Inc. (NASDAQ:MBFI) are up by roughly 13% as of 11:45 a.m. EDT after the company announced it would be acquired by Fifth Third Bancorp (NASDAQ:FITB). Fifth Third shares were down by nearly 8% in active trading today, suggesting that its shareholders aren't as enthusiastic about the acquisition.

So what

MB Financial shareholders are slated to receive $5.54 in cash plus 1.45 shares of Fifth Third for every MB Financial share they own. At recent market prices, that values MB Financial at about $50.26 per share.

Acquiring MB Financial is a way for Fifth Third to grow its retail banking presence in the Chicago market. After the acquisition, the combined company will have total Chicago deposit market share of 6.5% and become the second-largest bank in the area by middle market business relationships.

Federal Reserve building

Image source: Getty Images.

Fifth Third Bancorp said in a presentation that it sees the opportunity to cut $255 million in annual expenses, or 45% of MB Financial's non-interest expenses. Approximately 70% of MB Financial's branches are within two miles of a Fifth Third branch, which gives the combined company the ability to consolidate and close branches to save on costs.

Now what

The market clearly views this deal as being better for MB Financial shareholders than owners of Fifth Third. The acquisition places a high price on MB Financial, valuing it at more than 16 times consensus earnings estimates in 2019, and at nearly 2.8 times tangible book value. In contrast, Fifth Third Bancorp shares traded for about 2 times tangible book value at market close on Friday. 

For its part, Fifth Third said that it valued MB Financial at less than 10 times earnings estimates for 2019 based on fully phased-in cost savings. But investors are right to be skeptical, as history suggests that synergies are easy to forecast, but difficult to realize.

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