Bank of America's (NYSE:BAC) purchase of FleetBoston Financial (NYSE:FBF) could mark the next wave of consolidation in the banking sector, and regional banking stocks are ablaze because of it.
Yesterday, we covered the details of the merger announcement. Today, I'd like to focus on what this deal could mean for our beloved regional banking all-stars.
My regular readers know that I'm fond of financial companies, particularly regional banking firms. I shared one of my favorites, Synovus Financial (NYSE:SNV), several months ago and the company has since climbed a respectable 26.3%.
Indeed, my first investment selection in the Fool's latest newsletter, Motley Fool Income Investor, was another quality regional. The bank's 10.7% total return has been a solid contributor to Income Investor's market-beating performance. (A free trial will reveal this company, as well as the newsletter's other diverse selections).
Just as I tend to favor the smaller regional banks to their larger brethren, I also prefer smaller acquisitions to yesterday's blockbuster. Many of the larger banks have taken years to recover from the indigestion related to such mega-deals. For instance, Wachovia (NYSE:WB) has only recently recovered from its aggressive string of acquisitions, which were actually made by its predecessor, First Union.
As one might expect, smaller, fold-in acquisitions generally produce the best results. Such deals tend to be accretive to earnings in a much shorter time frame as cost savings are rapidly squeezed from newfound synergies.
In fact, there's very little evidence that the large deals produce favorable results for shareholders. Often, there are just too many variances for large companies to comfortably absorb. It can take years to trim overlapping business segments in order to eliminate redundancy, and combining different corporate cultures often proves much more challenging than companies anticipate.
The good news for us, however, is that the acquisitions that tend to work the best are exactly the ones that our regional banking favorites would be involved in. If you add some exposure to these quality banks to your portfolio, you could reap the benefits associated with one of your companies being acquired at a favorable premium. However, just as importantly, you can own a quality investment while you wait.
Mathew Emmert owns shares of Synovus Financial.
