M&A Trends and Outlook: A Q&A with Ted Rosinus, Managing Director at Stephens

In the latest Travillian Next episode, Travillian hosts Brian Love, Head of Banking & Fintech, and Indra Elangovan, Head of Strategic Advisory, sat down with Ted Rosinus, Managing Director at Stephens for a thought-provoking discussion. Ted shares M&A insights from the intersection of investment banking and his banking background. Explore the latest deal trends, outlooks, M&A process, and the strategic utilization of M&A for a competitive edge. Gain valuable perspectives on talent strategies, succession planning, and PE trends through the M&A lens.

Listen to the podcast or read the Q&A below!

Indra: For many financial institutions, their short-term attention has focused on navigating economic uncertainties and implementing strategies to preserve capital. What are you seeing and hearing from banks that are forward thinkers? What is at the top of their minds to remain ahead of their competitors from an M&A perspective?

Ted: For a lot of banks, the importance of core funding and core funding that you thought was core that turned out not to be core, since the fed started increasing rates… we have seen hundreds of billions of dollars leave the banking system. Strategic thinkers are certainly trying to figure out ways to combat or blunt the impact of the events of March from happening again. There’s a big focus right now on the need for technology. We saw in those days after the failures, just really how frictionless the banking industry and consumer deposit accounts has become. And they need to invest more in technology for sure. The challenge there is we’re never going to be able to, as an industry, outspend what the biggest institutions are spending in that area. And so, I think a lot of bank management teams and boards are really spending a ton of time trying to figure out the chessboard and viewing M&A as a way to enhance their standing and their ability to compete within the ecosystem.

Indra: What is the outlook and sentiment for Banking M&A in 2024 and beyond?

Ted: Well, it is interesting. I think what you’re going to see in the first half of this year is more transactions, conversations. There are many conversations going on. We’ll talk about the impact on balance sheet marks and rate environment and so on. That’s a big part here. The outlook for the first half of this year is you’ll certainly see some deals. They might have a more distressed flavor to them. One of the things that’s important to remember and acknowledge is that the upcoming regulatory exam for banks is going to look and feel a lot different than the one they had last year. And so, what happens on the back of those exams, depending on your bank’s position could lend itself to having to pursue a transaction or find a partner. When we look out into the second half of 2024, again, one of the big limiting factors on M&A right now is just the interest rate marks that these balance sheets have on them and it can make M&A difficult. Passage of time helps that. And so we get into the second half of this year, and when you look at kind of run rate M&A deals, it should be busier than the first half. We obviously have an election in November, which adds uncertainty and volatility. But the second half of this year is certainly setting up to be better than the first half. And 2025 has all the makings of a very busy year. I think you will see companies whose balance sheets are structured well coming into this, who are clean from a credit perspective and who, in your first question, have forced themselves to continue thinking strategically. You will see certain companies be really bold. I certainly think there will be transactions that will be eye-opening and classified as bold. The First Sun-Home Street deal last week is an example of that.

Indra: Ted, I have a follow up question to your points on M&A. From what I hear and read; acquisitive banks are likely to incorporate some creative capital market capabilities into the due diligence process. Are banks pairing acquisitions with balance sheet restructuring or changes as they look for M&A strategic opportunities?

Ted: Yes for sure. And I would tell you that most of the transactions that we’re evaluating incorporate some form of what I’ll call balance sheet optimization. The beauty of M&A, I mean, is the whole balance sheet obviously gets marked. and that’s what most of these companies do, right? I mean, they can’t absorb these marks today on their own. And so, whether it’s liquidating the securities portfolio and paying down looking at other avenues. So a well-structured, well-intentioned kind of strategic deal, there is institutional investor capital available to come in to that transaction. And you saw that last week on the First Sun/Home Street deal. But I would tell you that from our position, from our seat, that there is available capital to support a transaction and to help mitigate some of the balance sheet market issues.

Brian: Travillian’s wherewithal is executive search and succession planning. And I heard you mention technology and regulatory as being lightning rods for banks to deal with. Exams are going to be quite different. There’s talent at banks that needs to help mitigate these things. So, I wanted to relate talent to M&A. How does M&A change talent strategy? And then how is talent strategy, in essence, created through M&A? What have you seen?

Ted: Succession is clearly a challenge that our industry has faced for years. It’s, why folks like Travillian are incredibly important partners. Because we just know that new college grads, right, aren’t coming into the banking and finance industry. They’d rather go work at Google and I guess it’s called Meta now and other places that are in our industry. And look, I was talking to a CEO the other day and we were kind of lamenting that we’ve had three crises in 15 years and we’re all 15 years older. And we both joked that the best quote to sum that up is Sergeant Murtaugh’s quotes from “Lethal Weapon”. I’ll let your listeners go research what that is. But there’s a lot of that Brian. And so, when you’re having significant succession events it’s always instructive and important to step back and say: “Okay, is there succession achieved also through M&A?” And sometimes that’s underappreciated. As shareholder owned companies, if you’re looking at changing out your senior executive team because of retirement or otherwise, that’s also the moment where you need to be evaluating whether or not partnering for succession is a viable, alternative path to consider. So we, we do Brian, we get brought in a lot when these types of questions are being brought up. And look, invariably, that’s not the path that boards select. But it certainly does happen.

It’s hard though. I mean, you tell me. I would almost throw the question back to you.

Brian: I’ve been doing this for eight years and from day one I made it my duty to try and find a really nice stable of folks in [a younger] age group that can grab the torch. A lot of folks just believe that succession candidates aren’t there. They are, but a lot of them are not where you think they’ll be. If you’re looking for someone who really understands strategy, couldn’t they come from a CFO rank, or  dare I say a COO or CTO? Today’s succession planning is understanding that the next 25 years might have nothing to do with the previous 25 years, in terms of true leadership competencies. But the ones that – like you said – are bold in their thinking are the ones that stand out to me.

Ted: You know Howard Marks, the great investor, he does an annual letter that is a must-read. Last year it was called “Sea Change”. And the core thesis was exactly what you just said: what worked in the last 30 years is not going to work in the next 30 years. And I think you’re right. You can be bold in your M&A and succession strategy.

Brian: You mentioned the FirstSun deal with Home Street and how institutional PE got involved in that deal. I just wanted you to elaborate a little bit more around how you interact with private equity, especially in 2024, and how do you see private equity investments playing out this year.

Ted: Well, I’ll let the private equity guys speak to that. I mean, we clearly have what I view as very dynamic and strong kind of two-way relationship with private equity funds that traffic in our space. But I think what you’re seeing kind of more broadly, it’s going to be  transaction specific.

Not every M&A deal is going to be structured or viewed in a manner that is either sometimes that doesn’t need capital or it may not be done in such a way that investors or institutional investors want to get behind it. And there can be any number of reasons for that. What’s kind of the broader point here is that inside a well-structured M&A deal, there is institutional money available to help offset some of the challenges that are going to come from marking the balance sheet. And if you go back you think about investor sentiment, we come out or well, not us, but our research group comes out with an investor survey a couple of times a year. And you go back, and you look at how the sentiment was going in last year was tough. And then March happens and it got really tough, a lot of volatility. Most forecasters were dead wrong on the directionality and level of interest rates. Credit fears were seeping in. It was really hard. You couldn’t model net interest margins, no one knew what deposit betas were going to be. I mean, generally speaking, the buy side was underweight, the banking industry. I think what’s changed now is there’s a general consensus around that the Fed is done hiking and that the Fed will be cutting. There’s an interesting dynamic inside of that though, because the Fed dot plot has three cuts for this year. Anyone can go look it up. You look at the forward and the futures market and it’s anywhere, the market says that the Fed’s going to settle out between four and four and a quarter. Well, that’s five or six cuts. There’s a big chasm between those two forecasts. And so rates are coming in. But to what level is a big question but, generally speaking, by sides more comfortable modeling kind of a rate scenario. And understanding what names are going to look like the credit piece is still to be determined. We’re in the middle of earning season. I would tell you that for the most part credit is still pristine. I mean, NPAs compared to last quarter, for all those who have reported, is up two basis points.

There’s a general conviction that M&A is going to increase. And that for the right type of transaction, that is a good place to invest some dollars.  It’s been years now, but I throw my old investor hat on. Half of the balance sheet that you own is fully marked. And can be liquidated to, again, we talked about earlier, to implement some balance sheet optimization strategies. So again, deal specific, but I think there’s certainly more interest from institutional investors than there was six months ago because the outlook’s gotten a little clearer.

Indra: Just staying on the M&A topic, there is a growing gap between merger announcement and closing. What are the factors in play for that extension of this process?

Ted:  It’s all regulatory. There used to be a period where you could have a couple M&A applications pending at the same time. I even had a couple clients announce two deals simultaneously on the same day. And so that world no longer exists. I hate to keep going back to March, but it’s really kind of was a significant event for our industry, but also for the regulators, I have to imagine considering when you add up those four bank failures.

I saw a stat that those four equaled all the failures from the great financial crisis. Brian, you may have to check that, but it’s close enough. And so heightened scrutiny. Most applications, Indra, are being sent to Washington, D.C. for review. There was a period of time where you could get review and approval within your region. That’s the exception, no longer the rule. And, and then the last thing I would tell you is as long as your merger application is open, the regulators are looking at everything. If you don’t have your BSA and compliance in order, there’s things that can come up inside of an approval process  that certainly can extend and elongate the approval time. And the last thing I’ll leave you with is if the target has any issues, particularly in the compliance area, again, BSA, AML, so on, that deal is very unlikely to get approved until that issue is resolved.

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