Columbia Banking System Inc. and Umpqua Holdings Corp. did not call their deal a merger of equals, but investors are acting like they did.
The stock prices of the companies tumbled in the immediate aftermath of the Oct. 12 announcement of their $5.15 billion tie-up, and in the weeks since, the share prices of Columbia and Umpqua have not completely caught up with peers. Part of the harsh reaction is likely due to the perception that the deal looks like an MOE, industry observers said.
"Whether they labeled it [an MOE] or not, I think most maybe have just thought, 'Well, that is one, whether you said it was or not,'" D.A. Davidson analyst Jeff Rulis said in an interview.
The biggest drawback to the MOE moniker is the negative connotation the Street tends to give those deals, Rulis and Brandon King, an analyst with Truist Securities, said. "The perception is that one plus one doesn't equal two. ... That's been an overhang on the MOE," Rulis said.
The deal between Columbia and Umpqua includes many of the hallmarks of an MOE: Columbia is the legal acquirer, while Umpqua is the accounting acquirer; the board and pro forma management teams are made up of individuals from both companies; and the pro forma company will retain Columbia's name for the holding company and Umpqua's name for the banking subsidiary. However, Columbia and Umpqua avoided the MOE label even though it's been more commonly placed on larger deals in the bank space.
Since 2015, the companies involved in 11 U.S. bank deals with values of at least $500 million at announcement dubbed their transactions MOEs, compared to just seven from 2000 through 2014, according to S&P Global Market Intelligence data. The benefits of calling a transaction an MOE are mostly internal, such as easing employees' angst around their future with the combined company, according to Rulis and King.
Rulis added that some companies could refrain from using the MOE label in an effort to avoid investor pushback. The Street's perception of MOEs could drive entities to make "a concerted effort not to apply that moniker," Rulis said.
Stock price pressure
Still, the marketing pitch on the Columbia and Umpqua transaction has not worked. On the Oct. 12 deal call, management touted the benefits of scale as the banks come together to create a bank with nearly $50 billion in assets spanning five states across the Northwest. "We can truly scale up, make deeper investments and more relevant customer solutions," Umpqua CEO and President Cort O'Haver said on the call.
But Columbia's stock faced a large sell-off immediately following the deal announcement — dropping 14.89% in the first day of trading. The bank's stock has recovered somewhat, but its movement largely matches a gain in the S&P U.S. BMI Banks Index. Umpqua, whose shareholders will own about 62% of the pro forma company, did not see as big of an initial sell-off, but its stock has also lagged the S&P U.S. BMI Banks Index since the deal announcement.
Analysts noted that the structure — with the smaller bank, Columbia, acting as the buyer — decreased the tangible book value dilution caused by the merger, a key metric for investors when evaluating deals. Analysts and investors often say the Street targets earnback periods of three years or less.
As structured, the deal is expected to be dilutive to tangible book value by 5.9% with an earnback period of 2.6 years. If Umpqua were the legal acquirer and issued its shares at about 1.6x TBV multiple with similar marks to Columbia's balance sheet, similar cost saves and day-one premium, the transaction would result in about 10% TBV dilution and about a nine-year earnback period, wrote Stephens analyst Andrew Terrell in an Oct. 13 note.
The "nuanced structure of the transaction makes sense" given Columbia and Umpqua's respective pre-deal trading multiples of about 1.8x TBV and 1.6x TBV, Terrell wrote. The companies estimate the all-stock transaction to be 23% accretive to Columbia's GAAP EPS and 8% accretive to Umpqua's GAAP EPS.
"Columbia had the higher price to tangible book value multiple, which made the pro forma numbers look better," Harvard Winters, an independent equity analyst and former investment banker, said in an interview.
The culture question
The Street's reaction may have also been influenced partly by Umpqua's last bank M&A transaction with Sterling Financial that was announced in 2013, Rulis said.
"That was a cultural mismatch and so I think there's a bit of an overhang from the last time Umpqua paired up with someone. Those two entities were very, very different," Rulis said. "That's a little scar tissue on Umpqua's side."
On Columbia's third-quarter earnings call, President and CEO Clint Stein tried to ease the concern that Columbia and Umpqua are not compatible.
"We stated this on the investor call at the announcement, and I don't know that it necessarily resonated, and that was the statement that we made that we were more similar than what the market perception has been," he said. "I do think that there's a bit of a perception issue there."
Even though they are not calling it an MOE, the leaders of the companies are touting how the banks will work together and have shared responsibilities after the deal closes.
The transaction is "a truly equal combination," Umpqua wrote in a statement to S&P Global Market Intelligence. "The structure we've announced reflects the carefully balanced approach we're taking to bring our companies together, which is evident in many ways, including the makeup of both the go forward Board of Directors and management team, which will include equal representation from both Columbia and Umpqua," the statement read.