The US bank M&A market is likely to freeze for the third time in just over five years if tariff-related stock plunges continue.
Industrywide stocks fell faster than the broader markets April 3 and 4 after President Donald Trump's implementation of tariffs, following an already volatile period for the market throughout the first quarter. Bank deals in negotiation stages and banks preparing to issue initial public offerings will likely pause until there is more certainty, investment bankers said. Announced deals are unlikely to fall apart as a result of the down market but could face a rockier path to shareholder approval because of lower nominal valuations, they said.
The state of bank stocks as a result of Trump's tariffs will have a chilling effect on dealmaking similar to that of the onset of COVID-19 in March 2020 and the failure of Silicon Valley Bank in 2023, Christopher Olsen, Olsen Palmer LLC managing partner, and Frank Sorrentino, Stephens Inc. managing director, said in interviews.
"It's weird that we've seen, now, three black swan events in five years," Olsen said.
Most bank deals using stock that have yet to announce will likely pause, but some could break off entirely if the down market lasts, while a small portion of deals in negotiation could continue to move forward if the structure is close to a merger-of-equals, he added.
Bank initial public offerings will also likely be shelved until valuations return to normal, said Bill Burgess, Piper Sandler Cos. co-head of financial services investment banking.
The current moment feels like a hybrid between March of 2020 and March of 2023, Sorrentino said. A throughline between the three events is uncertainty, because each event was an unprecedented change in the environment, and anything that causes volatility and a down market at a large scale will dull M&A activity, he added.
"In each of those cases, it took about a full year for the markets to climb out of the hole and for activity to kind of get back to more normal levels," he said. "History doesn't repeat itself, but it does rhyme."
Announced deals
Bank deals that have made it past announcement will likely continue on the same track because the transactions have been agreed to contractually, but the market environment does not help the optics, Olsen said. Most bank deals involve fixed exchange ratios, in which case the nominal price will have declined with the buyer's stock price, making the likelihood of shareholder approval less of a "slam dunk," Olsen said.
The seller's shareholders may question the transaction when it comes time for the shareholder approval vote, but banks engaging in stock deals have more than 50% institutional shareholders that usually approve deals rather than reject them, Sorrentino said.
Advisers are telling their clients that it is impossible to time the bank M&A market, as the volatility of the past five years has demonstrated, and that banks need to be ready to transact and move quickly when a window opens, Olsen said. That volatility could push small public banks that do not have the balance sheets to withstand such dramatic gyrations to go private or sell to larger institutions, Burgess said.
In a sea of unknowns, another question is whether the tariffs will remain in place despite the market's initial reaction. If there is a dramatic turnaround over the weekend — a "just kidding" scenario, as Olsen put it — the M&A market could dodge a long-term slowdown. Bank stock valuations are real-time, so if the market recovers, bank M&A can continue on a more positive track, Olsen said.
But for many, the stock movement following the tariff announcements could instill a lasting sense of skepticism in the market's future, Sorrentino said.
"I have to believe that this is a temporary setback in valuations and that the market will recover," Burgess said. "I don't think that the administration has the desire to put us into a recession. But right now, we're acting as if it's going to transpire."
Chill for deals in progress
All-stock M&A transactions or cash-and-stock deals are likely to be shelved because the exchange ratios produce less value to the seller if the buyer's stock has decreased, Olsen said. Valuation spreads between buyers and sellers are slow to close, causing long-term cooling effects on transaction negotiations.
Banks considering selling are also likely to hit the brakes until the environment improves, the advisers said.
If buyers and sellers are tied to a certain price per share, they will have to hit pause. But some advisers are telling their clients to stay the course through the rocky period, counseling that both buyers' and sellers' valuations are declining with the rest of the market and the exchange ratio remains the same, Burgess said.
"Again, the purchase price is the exchange ratio, I've literally said that today 15 times," Burgess said. "I've said this 10 times today, too, that the implied valuation that you thought was $10 a share last week, it was going to change every hour that the markets open for the next few months. ... That takes a sophisticated buyer and a sophisticated seller to look beyond the price movements."
