Large U.S. banks are pumping the brakes on transformational M&A.
Only one megadeal — a transaction with a value of at least $500 million at announcement — was announced in the first quarter: Toronto-Dominion Bank's $13.64 billion bid for First Horizon Corp. The lone announcement marks a sharp shift from a record-breaking 2021 in which 23 such deals were announced and represents a lull in activity compared to three such announcements in the respective first quarters of 2019, 2020 and 2021.
According to industry experts, the slowdown in U.S. bank megadeals is a new normal as regulators and legislators seek to toughen bank merger rules. Larger banks are hitting the brakes on striking transformational deals as frustrations regarding longer closing timelines have now turned into fears that larger deals may not secure approval at all under a tougher regulatory regime, experts said.
"It's pretty tough to do a deal and not really know if and when you're going to be able to close," said Anton Schutz, president of Mendon Capital, a bank investment firm. "And the bigger the deal, the more potential for if."
Regulatory uncertainty rising
The regulatory environment began to shift following an executive order calling for increased scrutiny of M&A from U.S. President Joe Biden in July 2021 and a backlog of applications at the Federal Reserve, which prolonged deal closing timelines. But more recent developments, such as the Federal Deposit Insurance Corp.'s review of bank merger rules and a call by Senate Banking Committee Chairman Sherrod Brown, D-Ohio, for other regulators to join the FDIC, have sparked fear among larger banks that transformational mergers may not get approval at all, according to both Schutz and Gary Bronstein, a banking lawyer and partner at Kilpatrick Townsend & Stockton.
"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," Bronstein said. "Now there seems to be a view that the buyer needs to demonstrate 'We should get approval.'"
Those recent regulatory and political developments have given larger banks pause, and until there is clarity around how regulators will evaluate large bank M&A, the number of megadeal announcements will remain sparse, Bronstein said.
"The amount of time and effort and expense that goes into a $500 million-plus deal, you don't want to go through that process and not receive approval," he said. "There is a considerable amount of uncertainty on whether or not those deals will get approved today."
With the fear that regulators might not approve large mergers, "things are pretty much on hold with the bigger deals," Schutz said. Many large banks are waiting to see how TD's planned purchase of First Horizon will play out, he said.
Smaller bank transactions to continue
Aside from megadeals, U.S. bank deal announcements continued at a rapid pace in the first quarter. U.S. banks announced 47 deals in the first quarter, up from 35 in the first quarter of last year and 42 in the first quarter of 2020, but the majority of those deals were relatively small.
The second-largest deal behind TD's $13.67 billion acquisition of First Horizon held a deal value of just $313.5 million at announcement.
Bronstein said community and regional banks will continue to tie up in mergers that result in pro forma companies with less than $100 billion in assets, the suspected threshold for regulators' scorn.
"There's certainly a lot more larger deals that are potentially out there. But with the uncertainty that exists, they just may be pulling back," said Bronstein. "We're going to see less of the megadeals than we've been seeing over the last couple of years."
