Payment too kind
The bosses at U.S. lender BB&T have gotten greedy. The Federal Reserve last week approved the North Carolina-based bank’s $2.5 billion purchase of Susquehanna Bancshares, one of the industry’s biggest transactions in years. Other lenders may be relieved to see the deal pipeline flowing again. The buyer’s top brass, though, will share an undeserved $2.5 mln bonus, a blot on otherwise good news.
It’s a chief executive’s job to consider deals that might increase shareholder value, and he or she shouldn’t get anything extra for doing it. If an acquisition turns out well, then return on assets and on equity should both improve, along with the share price, and the boss’ pay should rise accordingly.
Granted, consummating bank mergers is harder now than before the financial crisis. JPMorgan and Bank One needed less than six months for regulators to sign off on their 2004 tie-up. M&T Bank’s takeover of Hudson City Bancorp, on the other hand, is still under review almost three years after watchdogs started scrutinizing M&T’s anti-money-laundering safeguards and other issues.
That deal could be an aberration, if BB&T’s experiences are any indication. The lender run by Kelly King also recently snapped up the Bank of Kentucky and 41 of Citigroup’s Texas branches, receiving approval within eight months for each transaction, the same amount of time it took to get the thumbs-up on Susquehanna.
Directors and executives of small and mid-size banks should take that as an invitation to jump back into the M&A game. The Fed has even provided some encouragement, especially for deals that result in a combined entity with less than $25 billion in assets. Larger deals should be possible, too, as long as they don’t get too close to exceeding $250 billion in assets.
Suggesting executives can reap windfalls from mergers may encourage bad marriages, though. BB&T’s board avoided that problem, deciding to grant the bonuses only a couple of weeks before the Fed’s approval. And if the deal turns sour, the directors can void the payments. By that time, though, the damage to the bank and its shareholders will have already been done.
(This item has been corrected to refer in the fourth paragraph to BB&T buying Citigroup branches in Texas. An earlier reference to the purchase of Royal Bank of Canada’s U.S. branches was incorrect.)