The likelihood of Bankwell Financial Group (BWFG 1.39%) getting acquired just got a whole lot better. Although this small financial institution probably isn't on your radar, acquisitions can result in a nice bump to the stock price, presenting a hidden opportunity.
The Connecticut bank, which has $1.9 billion in assets and 13 branches, recently agreed to add the activist investor Lawrence Seidman to its board of directors, according to a filing with the SEC.
Seidman will join the board at the bank's 2020 annual meeting, but will act as a non-voting observer until that meeting takes place. Seidman first took a 5% stake in the bank at the end of 2018, but has increased his position to almost 9%.
The importance of the board seat
Seidman is a well-known activist investor who likes banks with hidden value. Sometimes he'll make acquisitions when he finds promising stocks, or he'll look to urge the bank's management to change the direction of its business strategy. Seidman has acquired more than a 5% stake in banks 43 times, according to Barrons , and has an average return on those investments of almost 52%.
Seidman's board seat at Bankwell gives him more influence over the bank's overall strategy. It also suggests that senior management might already agree with his vision.
Activist investors do not always get board seats easily. For instance, S&P Global Market Intelligence reported in 2018 the continuation of a 14-year legal battle between Seidman and Spencer Savings Bank that involved Seidman trying to get his own candidates elected to the board of directors.
Why Bankwell could be a takeover target
Although activist investors don't always seek a full acquisition, many of Seidman's past targets have indeed been acquired. Although Seidman is the main indicator, the timing could be right for Bankwell to consider accepting a buyout bid if one comes its way.
Bankwell had very little growth in 2019, with total assets growing less than half a percent during the year. However, Bankwell still has solid profitability metrics. Return on assets, a measure of how well a bank uses its assets to generate earnings, is at 0.97% for the year. In the banking industry, a 1% ROA is generally considered strong.
Meanwhile, return on average equity, a measure of how much value a company is providing to its shareholders, weighs in at 10.2%, also good by banking industry standards. If the bank believes it is going to have a difficult time competing for deposits and loans in the current landscape, it may choose to sell now while it still thinks it has value.
Why People's United could be a buyer
Another factor potentially driving the sale of Bankwell is that an ideal buyer could be lurking right around the corner in People's United Financial (PBCT). Based in Bridgeport, Connecticut, People's United has $52 billion in assets and has made three acquisitions since 2018, and two of those acquisitions were not only in state but also closely resemble Bankwell Bank.
Specifically, People's United recently acquired Farmington Bank, with $3.1 billion in assets, as well as United Bank and its $7.3 billion in assets. What drove those deals is the fact that People's United could achieve significant cost savings -- 50% of pre-tax expenses in the case of Farmington, and 55% of non-interest expense with United. These savings came largely through branch closures in overlapping areas of each bank's geographic footprint. People's United closed 13 of the original Farmington Bank branches and shuttered 18 United Bank branches.
People's United could deploy this same strategy if it purchases Bankwell. All of Bankwell's branches are in areas where People's United already has a significant presence, and there'll definitely be some branch overlap with Bankwell in these highly attractive markets.
When could a deal happen?
The placing of activist investor Lawrence Seidman onto its board of directors is a good signal that Bankwell Bank might be willing to be an acquisition target. A deal may not happen overnight, but given the bank's sluggish growth lately, Bankwell likely won't resist an offer.
With everything that People's United has found attractive in past acquisitions, Bankwell looks like a good fit. Shares of Bankwell Financial Group are trading up since the announcement, but if a buyout actually happens, there could be more upside in the stock price ahead.