The bottom line at American banks has been under a continual barrage of bad news of late.
First, lucrative interchange fees largely went by the wayside courtesy of Congress. Then litigation involving overdraft charges prompted lenders to restrain the predatory but profitable practice. And most recently, though also spurred on by litigation, Bank of America (NYSE: BAC) announced that it will stop selling credit protection to credit card customers.
While any one of these on its own is arguably inconsequential, taken together they resemble the ancient method of torture lingchi, or death by a thousand cuts. At long last, however, there's a glimmer of hope. But like a sparkling object off in the distance, the question remains: Is this the real thing or just another opportunity to celebrate prematurely?
The resurgence of mergers
Early this week, the market caught wind of something that's been noticeably absent of late: deals. All told, 18 deals worth approximately $8 billion were announced this past Monday, prompting many commentators to proclaim the return of "merger Monday."
According to Bloomberg reporter Cristina Alesci, "To a certain extent, this activity reflects pent-up deal volume … and the fact that it's a good time to be a seller." A prime example of the latter is Hertz Global Holdings' agreement to buy rival Dollar Thrifty Group for more than double the amount it bid two years ago.
But the most noteworthy news on the deal front is that consumer-electronics retailer Best Buy has granted its founder and former chairman Richard Schulze "access to certain due diligence information and permission to form an investment group with private equity sponsors in furtherance of making a fully financed proposal to acquire the company." At the midpoint of the $24 to $26 dollar range that Schulze has alluded to in the past, the deal would be valued at nearly $8.5 billion.
The second biggest deal to be announced, as I discussed earlier this week, is M&T Bank's (NYSE: MTB) $3.77 billion purchase of Hudson City Bancshares (Nasdaq: HCBK), a struggling lender with concentrated operations in the New York City metropolitan area. Although some have pitched the deal as a win-win for all involved, the reality is that it merely saves Hudson City from the otherwise possible disgrace of federal receivership.
And rounding out the biggest acquisitions is IBM, which announced its agreement to acquire Kenexa, a provider of cloud-based social business software and services. At $46 per share price, the net value of the deal is approximately $1.3 billion. According to IBM's press release announcing the deal: "Kenexa complements IBM's strategy of bringing relevant data and expertise into the hands of business leaders within every functional department, from sales and marketing to product development and human resources. As a result of this synergy, clients will be able to attract and develop the right skills to build the right teams, for the right projects, the first time."
Are mergers back to stay?
To say that this wave of mergers is a godsend to Wall Street is an understatement, as the dismal second-quarter earnings releases and conference call transcripts of investment bankers are littered with lamentations about the state of the merger and acquisition market. Take this quote from Blackstone President Hamilton James: "The stock market is weak, IPOs are hard, and there's no M&A market to speak of."
If this heralds in a more consistent stream, it will be particularly beneficial to the large banks which collect lucrative fees for acting as midwives. For instance, Bank of America, JPMorgan Chase (NYSE: JPM), and Goldman Sachs (NYSE: GS) all worked on the Hertz deal, JPMorgan advised Hudson City on its takeover, and Credit Suisse is advising Schulze on his potential Best Buy purchase.
At the end of the day, however, whether or not you should buy into these black-box behemoths should be based on much more than simply deal activity. To learn what other factors play into the decision for Bank of America, check out our recently released premium report on the company. Among other things, it articulates the three areas that every current and prospective B of A shareholder be aware of. Access this report now.
