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Holy grail – for now

27 Aug 2012 By Antony Currie

The latest U.S. bank merger may be too good to be true. M&T Bank, based in Buffalo, New York, is set to pay $3.7 billion for New Jersey rival Hudson City Bancorp. It’s just the kind of acquisition dealmakers have been waiting for. A local player still reeling from the financial crisis has found a safer home with a larger rival. It’s almost the ideal bank merger. But that introduces the big risk of a rival offer.

Hudson City’s shareholders are getting a 9 percent premium to Friday’s closing price, and up to 40 percent of the deal value in cash. That’s pretty good for a firm with almost all its loan book tied up in mortgages and its funding costs running at almost double the yield on its assets.

But M&T is hardly overpaying. It’s snapping up Hudson at just 82 percent of tangible book value. And Chief Executive Robert Wilmers expects to cut at least 24 percent of Hudson City’s costs. These should have a present value of some $540 million after tax, more than covering the premium his bank is paying. And rather than slashing jobs, ending outsourcing deals accounts for most of the anticipated synergies.

What’s more, by writing down problem loans and selling a third of Hudson City’s $44 billion of assets to reduce debt, M&T should get an immediate boost to net income. The tie-up should also add an extra 0.4 percentage point to M&T’s already solid-looking ratio of capital to assets.

The deal reflects Wilmers’ philosophy. He has no time for those who “seek dominance at the expense of leadership” and invest “in areas where they possess little knowledge,” he wrote in his letter to shareholders earlier this year. That’s probably why he relied on his own team to run the deal, hiring an outside investment bank, Evercore, only to provide a fairness opinion.

His only problem may be that having found a cracking deal for all concerned, others might now want a piece of it. With Hudson City trading as much as 5 percent above M&T’s offer price, some investors seem to think another bid might be in the offing. For Wilmers, that could be the price of striking a nearly perfect deal.


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