Skip to Search
Skip to Main Content
Main Content

 

News & Publications

 

Godfrey & Kahn Updates

 

Press Room

Announcement

Bank Strategy Briefing: M&A book value multiples

October 29, 2018

One common question we get from community bankers is: What are banks selling for these days? Most of the time the person asking the question is looking for some multiple of tangible book value. This “Price/TBV” multiple is a seemingly simple metric that many in the industry use to identify pricing trends on a macro-level. Here are the current trends on this data:

Graph of US Bank Deal

There is a tendency in the industry for some institutions to casually use Price/TBV multiples as a benchmark to gauge whether a particular seller received an attractive premium or whether a particular buyer struck a good deal on an acquisition. The problem is that Price/TBV data can be a misleading metric. This is because reported Price/TBV multiples are often applied in a non-uniform manner based on deal structure and the amount of tangible equity on a particular seller’s balance sheet. Those relying on Price/TBV as an apples-to-apples comparison of deal valuations run the risk of being misled by these nuances. This can lead to unrealistic expectations when exploring M&A opportunities on both the buy-and sell-side. 

To illustrate this point, consider the following (overly simplistic) illustrations of three identical banks that each sell for a 1.50x Price/TBV multiple, yet deliver significantly different purchase prices to their shareholders:

Transaction #1 Transaction #2 Transaction #3
Total Capital Example Core Capital Example Accrued Expense Example
Buyer pays 1.50x multiple on total tangible equity. Buyer pays 1.50x multiple on 8% “core” tangible equity. Excess capital paid out on dollar-for-dollar basis. Buyer pays 1.50x total tangible equity after seller accrues for core processor early termination and deconversion charges.
Total Assets: 
$100 million
Total Assets: 
$100 million
Total Assets: 
$100 million
Tangible Equity: 
$11 million
Tangible Equity: 
$11 million
Tangible Equity:
$11 million
    Accrual for $1.5 million core processor charges immediately prior to closing.
  “Core” Equity: $8 million Adjusted Tangible Equity: $9.5 million
Multiple: 1.50x Multiple: 1.50x Multiple: 1.50x
  Core Equity Price: $12 million  
  Add Excess Capital: 
$3 million
 
Purchase Price: 
$16.5 million
Purchase Price: 
$15 million
Purchase Price: 
$14.25 million

 

Here are a few takeaways that we think are helpful:

  1. Deal valuations are nuanced and institution specific. Be skeptical of conclusions drawn based largely on reported or rumored Price/TBV multiples.
  2. There are many factors beyond Price/TBV that inform proper bank valuations including Price/earnings, comparable transactions, expected cost savings and earn-back period. 
  3. Do not pursue or abandon an M&A strategy based on what you believe to be “market pricing”, unless you have done your homework.  
  4. Speak with a good investment banker, attorney, accountant or other trusted advisor who can educate you on market-specific valuation information or connect you with the right expert.  

Of course, our Financial Institutions team at Godfrey & Kahn, S.C. is always here to assist either directly or by connecting your bank with other helpful resources.

Related Attorneys

Media Contact 

If you have a media request or need an attorney with particular knowledge for comment, please contact Susan Steberl, Director of Marketing, at 414.287.9556 or ssteberl@gklaw.com.

Subscribe.

Subscribe today to receive firm newsletters and blogs, client updates, seminar announcements, and more according to your preferences and areas of interest.

Recent News

Please wait while we gather your results.

Recent Updates

Please wait while we gather your results.

Recent News

Please wait while we gather your results.

Recent Editions

Please wait while we gather your results.

Disclaimer and Legal Notices

Copyright © 2018 Godfrey & Kahn, S.C.

Attorneys at Law - All rights reserved.

 

Client Login

 

top