Investor Enthusiasm for Deals May Depend on Dilution

By Monks, Matthew | American Banker, June 1, 2012 | Go to article overview

Investor Enthusiasm for Deals May Depend on Dilution


Monks, Matthew, American Banker


Byline: Matthew Monks

A $91 million merger in New England underscores top risk facing acquisitive banks: annoying investors by paying with stock.

Shares of United Financial Bancorp (UBNK) of West Springfield, Mass., fell more than 7% on Thursday after announcing that it would acquire New England Bancshares (NEBS) of Enfield, Conn.

Single-day selloffs greeted four other public banks that have unveiled deals worth more than $50 million this year. Only one other acquirer saw its shares plunge more than United. Shares of Park Sterling (PSTB) in Charlotte, N.C. fell more than 8% on May 14 after it announced its $77 million purchase of Citizens South Banking (CSBC) in Gastonia, N.C.

Industry observers call such selloffs a buyers curse. Taken together, all five transactions indicate that dilution outweighs the strategic benefits of a deal. United Financial estimates that its deal will dilute its tangible book value by 9%. Park Sterling's deal will dilute its tangible book by 12%.

Post-merger tangible book values will decline at two other banks whose shares fell when they unveiled deals: Old National Bancorp (ONB) and Tompkins Financial (TMP).

United's plunging share price was striking because its deal appears to be a safer bet than those other deals by several measures. It is also the type of deal that a lot of bankers a not to mention regulators a favor: a reasonably priced, exclusively negotiated pairing of two fairly small but healthy players in a well-to-do market. …

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