Recently, Toronto-Dominion Bank (TD) revealed that it would not be able to obtain all necessary regulatory approvals in order to complete its planned acquisition of First Horizon (FHN 0.70%) before the two banks' merger agreement expires in May.

TD and First Horizon already had to extend their merger agreement from February until May and now will need to do so again, which suggests that it's been harder than expected to receive regulatory approval. Since the Biden administration took over, the Federal Reserve and other banking agencies have seemingly taken a much stricter approach to bank acquisitions and mergers.

Is TD Bank's acquisition of First Horizon potentially on the chopping block? Let's take a look.

Regulators continue to clamp down

In July 2021, President Joe Biden issued an executive order that essentially told banking regulatory agencies and the Department of Justice to apply increased scrutiny "to update guidelines on banking mergers to provide more robust scrutiny of mergers." The goal was to address falling competition in the U.S. banking industry and to make sure that businesses and consumers are not negatively impacted.

Since then, many planned acquisitions have been delayed, and at one point there was even a large backlog of pending deals waiting for approval from the Federal Reserve. Many banks have had to extend their merger agreements, like TD and First Horizon did.

"There's always been a view for decades on bank mergers that unless you could find a reason not to approve it, it's going to get approved," Gary Bronstein of the law firm Kilpatrick Townsend & Stockton told S&P Global Market Intelligence last April. "Now there seems to be a view that the buyer needs to demonstrate 'We should get approval'."

While most deals are still going through, they are taking much longer. Here's a list of large bank deals announced since 2020 and how long they've taken to close.

Acquirer Target Announcement Date Closing Date
First Citizens BancShares CIT Group Dec. 16, 2020 Jan. 4, 2022
PNC Financial BBVA USA Nov. 16, 2020 June 1, 2021
Huntington Bancshares TCF Financial Dec. 13, 2020 June 9, 2021
M&T Bank People's United Feb. 22, 2021 April 2, 2022
Webster Financial  Sterling Bancorp April 19, 2021 Feb. 1, 2022
New York Community Bancorp Flagstar Bancorp April 26, 2021 Dec. 1, 2022
State Street Brown Brothers Harriman Sept. 7, 2021 Terminated
US Bancorp Union Bank Sept. 21, 2021 Dec. 1, 2022
Bank of Montreal  Bank of the West Dec. 20, 2021 Feb. 1, 2023
Toronto-Dominion Bank First Horizon Corp. Feb. 28, 2022 ???

Data source: PCBB, bank press releases.

Some of the acquisitions announced in 2020, like those done by PNC and Huntington, closed in a pretty normal timeline of seven or eight months. But deals announced in 2021 have taken much longer. In fact, all but one in the chart have taken well over a year to complete. It took New York Community Bancorp more than a year and seven months to close its acquisition of Flagstar.

In November 2022, State Street, which had announced plans to acquire Brown Brothers Harriman and become the largest custodian bank in the world, chose to terminate the deal. State Street said that obtaining regulatory approval would have meant further deal delays and changing certain parts of the deal that would have made it less attractive.

Pursuing a large acquisition or merger is an enormous distraction, and the acquirers in large bank deals have not seen their stocks perform well in recent years. The longer a deal is delayed, the more of a distraction it will become, and it could also take away from the financial merits of a deal.

Furthermore, when merger agreements need to be extended, that can bring bank management teams back to the negotiating table. Market conditions change over a year or more and can lead one party to want a different price than they initially agreed to. 

Will TD be able to complete its acquisition of First Horizon?

With TD not being able to complete its acquisition of First Horizon by the end of May, the timeline is starting to get to the long end of when recent deals have closed, although not as long as New York Community Bancorp's acquisition of Flagstar.

Still, it does seem like these two are in it for the long haul, so I am cautiously optimistic. Both have reported beginning discussions to extend the merger agreement again. Meanwhile, in a regulatory filing, First Horizon said that getting ready for the acquisition has led to "significant expenses in 2022 unrelated to the ordinary course of business," so it does seem like it's in the company's best interest to see the deal through.

There could be a decent arbitrage opportunity here, with shares of First Horizon currently trading around $21.30 and the deal valuing the stock at $25 per share. However, the purchase price could change in the new merger agreement, and it's really anyone's guess about how regulators are thinking about the deal, so it's by no means a certainty.