Market Basics: Suntrust and BB&T merger to create the 6th bank in the US

The past week saw the announcement of the biggest bank merger in over a decade. Specifically, Suntrust  (STI) and BB&T (BBT) merged in what many anticipate to largely influence US financial markets. The new entity (still to be named) will be formed through an all-equity stock deal to form the 6th largest bank in the United States of America. Investors expect the deal to be finalised by Q4 2019. The board will be split by equal proportions from both current management teams, resulting in inevitable lay-offs along management positions on both sides.

There are two key reasons behind this acquisition. First of all, geographic overlaps in customer-base and assets in real-estate provide opportunities for positive synergy. Specifically, the new unit will benefit from the two parties’ strong presences in the south-east region of the United States. The second, more conventional motive behind such a bank merger is enhanced cost saving and achievement of economies of scale. Moreover, another goal of this acquisition will be to combine the technological facets of each bank, thus providing excellent opportunities to start leveraging technology as main resource. Quantitative investing, improved client analytics and online banking presences are but a few of the expected benefits. As this case represents a merger of equals, Suntrust investors are set to receive 1.295 shares of BB&T for every share currently held in their portfolio. While this increase in number of shares outstanding will cause share dilution for some, the expected cost savings and scale benefits can lead to profits for shareholders of either bank.

Numbers

Unfortunately, due to high levels of overlap in management positions, layoffs will be impossible to avoid and whole branches are expected to be shut down, leaving the staff at the mercy of executives. Nonetheless, many investors have welcomed the previously announced personnel reductions, as it lays further foundations for an incoming climb of share prices. At the day of the announcement, Suntrust’s shares rose by 8.7% on the New York Stock Exchange, representing the largest increase in intraday trading since 2011. For BB&T, stock prices climbed by 2.9%. This further indicates positive investor sentiment surrounding the deal.

Taxes

The combined entity’s goal is to reduce USD $1.6 billion worth of costs in the three years following the finalised deal. This will be achieved through back-office performance improvements, and a combination of systems resulting in enhanced efficiency.

Locations

With huge overlaps in branch-locations, the entity announced that they would look to reduce the distance between the offices, especially for businesses linked to regular cash-deposits. On the other hand, typical households are not set to reap the same benefits, with the development of mobile and online banking making physical presences largely redundant.

Who are the customers of the two banks?

Suntrust predominantly targets large businesses and high-income households. In contrast to this, BB&T attempts to capture the market share of small- and medium sized enterprises, and middle-class households. This prior discrepancy in target market indicates that the merger can be classified as a complementary acquisition. A typical trait of this type of deal is revenue enhancement as main benefit. Both institutions are seeking to achieve this by increasing technology-oriented spending, and thus attracting and retaining customers through mobile and online banking projects. The banks even announced the opening of an “Innovation and Technology Center” in the new headquarters.

About the CEOs

The new entity’s CEO, Kelly King, acts as BB&T’s current chief executive. The completion date of the deal has a personal aura to it, with Mr. King planning to close it on his birthday [September 12]. Moreover, Suntrust CEO Bill Rogers publicly promised that both parties will work very hard to achieve this set target, and that they do not anticipate any hardships to arise while working closely as a two-man team.

 

 

Ilya de StobbeleirComment