BB&T Solves Jamie Dimon’s ‘Too Many Banks’ Problem
(Bloomberg Opinion) -- The much-anticipated next wave of banking consolidation has begun.
BB&T Corp. announced on Thursday that it had agreed to buy SunTrust Banks Inc. in an all-stock deal that values the latter company at about $28 billion, not including debt. The merger fulfills predictions by everyone from Bank of America Corp. CEO Brian Moynihan to analysts at Ernst & Young that loosening regulations may set the stage for consolidation. While there’s been a smattering of smaller deals, such as Fifth Third Bancorp’s $4.7 billion takeover of MB Financial Inc. announced last year, the SunTrust and BB&T combination is the biggest banking merger since the financial crisis.
“There are too many banks,” JPMorgan Chase & Co. CEO Jamie Dimon said almost exactly two years ago. And now there will be one fewer. The combined company will be the sixth-biggest bank in the U.S. by assets, falling in between U.S. Bancorp and PNC Financial Services Group Inc. The added scale is meant to help BB&T and SunTrust accelerate investments in digital technology and specialized businesses. To that end, the companies are targeting $1.6 billion in net cost savings by 2022, a number that likely reflects a plethora of expected branch closures as more business moves online and away from the local outposts. JPMorgan had been spending about 8 percent to 10 percent of its revenue on communications and technology over the previous eight years, a 2017 analysis by Bloomberg’s Gillian Tan found, putting pressure on rivals big and small to catch up.
It’s interesting that BB&T and SunTrust chose to structure their merger as a stock swap. Some of the speculation about M&A had been fueled by expectations that banks would look to put the extra cash in their coffers from the U.S. tax overhaul to work on deals. BB&T shares have given up some of the gains they made during the bank rally following President Donald Trump’s election, but had rebounded off of a two-year low set on Christmas Eve, giving the company a decent enough equity currency to work with. BB&T is offering 1.295 shares for each SunTrust share, which implies a 7 percent premium based on Wednesday’s closing prices. The low premium helps to mitigate the integration risk of a major combination like this, says Robert W. Baird & Co. analyst David George.
Stock swaps and “mergers of equals” are always tricky, and that’s doubly so when you are working with companies of storied heritages. BB&T was founded in the aftermath of the Civil War and SunTrust was chartered in 1891. But BB&T and SunTrust seem to have worked out a more equitable deal than most combinations of this type. While the companies’ total assets are within the same ballpark – $226 billion at BB&T versus $216 billion at SunTrust – BB&T’s higher market value helps justify its planned 57 percent ownership stake in the combined company. BB&T CEO and Chairman Kelly King will continue in those roles through 2021, at which point his counterpart at SunTrust, William Rogers, will take over as CEO. The board of directors will be equally split between legacy SunTrust and BB&T directors.
Rather than duke it out over whose headquarters and brand gets to live on, the two companies have decided to start fresh. The merged entity will operate under a new name (yet to be announced) and will have its headquarters in Charlotte, North Carolina, while still maintaining offices in BB&T’s home base of Winston-Salem, North Carolina, and SunTrust’s Atlanta.
This is likely just the start of tie-ups among mid-tier banks. But it’s fair to ask what the end game for these mergers is. The combined BB&T and SunTrust will still have just a fraction of the assets of JPMorgan, Bank of America and Wells Fargo & Co. Once they play this M&A card, they may be more limited in their ability to pursue further deals to get even larger, especially if the political winds start to move against consolidation. By merging, BB&T and SunTrust are in a way doing the biggest banks a favor by taking some capacity out of the system. The rationale for the combination is clear, but the gap to the biggest finance giants remains wide.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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