Banking Competition Likely to Heighten With This Merger

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In late August of 2012, Buffalo, New York-based M&T Bancorp (NYSE: MTB) announced its intention to purchase Jersey City, New Jersey-based Hudson City Bancorp (NASDAQ: HCBK) in a cash-and-stock deal valued at approximately $3.7 billion. The deal now appears likely to go through during the second quarter of 2013. Although it is subject to a customary regulatory investigation as well as approval votes by shareholders from both companies, it appears unlikely that these obstacles will scuttle or delay the deal.

About M&T Bancorp and Hudson City Bancorp

M&T Bancorp is a major commercial, thrift, and savings bank that operates hundreds of branches in the northeastern United States and Southeastern Canada. The company provides commercial and consumer lending services, including development loans, mortgages, and various refinancing products. It also operates deposit accounts, savings vehicles, wealth management services, and ATMs for its retail customers. Although M&T may resell its mortgages on the open market, it was not materially affected by the U.S. housing crisis. In addition to its lending and deposit services, M&T Bancorp also issues credit cards and insurance products to its retail and business customers. In 2012, the company earned $953.4 million on $4.1 billion in gross revenues.

Hudson City Bancorp is a smaller thrift bank that operates primarily in the Greater New York City region. The company focuses its deposit-account and lending infrastructure on retail and small-business customers. Like M&T, it issues mortgages, auto loans, business loans, personal credit lines and other straightforward credit facilities. The company also maintains a wealth management division that caters to retirement investors and independently-wealthy clients. It has nearly 140 branches in New York, New Jersey, and Connecticut. With about 1,500 full-time employees on its payroll, Hudson City Bancorp reported 2012 earnings of $249.1 million on gross revenues of $770.4 million.

How the Deal Is Structured

Under the terms of the proposed merger, Hudson City Bancorp shareholders have two distinct choices. First, they can elect to receive per-share cash payments equivalent to the value of .08403 share of M&T stock over a 30-day averaging period. Alternatively, shareholders can elect to receive M&T shares in accordance with the same ratio. M&T has stated that the deal's cash component cannot exceed 40 percent of its total value. In other words, some Hudson City shareholders may have to accept stock transfers against their will. In addition, this arrangement ties the final value of the deal to M&T's stock price.

At M&T's current levels, this merger values Hudson City Bancorp at approximately $8.58 per share. Relative to the company's current share price of $8.55, this represents a fractional premium. Relative to Hudson City's pre-announcement closing price of $6.44, this represents a premium of 32.7 percent. Since Hudson City's exact value may fluctuate in relation to M&T's share price, investors are advised to watch M&T's price action for signs of temporary weakness. Such movements may represent transient buying opportunities.

Legal Issues and Potential Complications

The success of this deal is contingent upon votes of approval from the shareholders of both companies as well as formal regulatory approval from U.S. authorities. As it currently stands, these approvals appear to be all but assured. With no legal action on the horizon, the merger should close by the end of the second quarter.

Long-Term Prospects and Likely Outcomes

It is important to note that this deal requires M&T to shoulder a significant amount of Hudson City's outstanding debt. In the wake of the financial crisis, the company accumulated nearly $13 billion in unpaid obligations. This has been a major cause of the long-term weakness in its shares. It appears that M&T is willing to assume this outstanding debt in exchange for the new market exposure that the deal provides.

However, the market in which Hudson City Bancorp operates is already highly competitive. Rival thrift banks like Peoples United Bancorp (NASDAQ: PBCT) have achieved significant penetration in the suburban counties that ring New York City. Given the relative affluence of clientele at Peoples United Bancorp, these banks tend to focus heavily on wealth management, trusts and retirement accounts. Peoples United Bancorp has grown its earnings by 42% in the last year.  Although M&T has proven that it can compete in crowded, high-margin markets, this deal's long-term value remains unclear.

Investors who wish to capitalize on a pre-merger surge in M&T's share price would do well to purchase Hudson City Bancorp shares at these levels. On the other hand, those who believe in the deal's long-term prospects may wish to buy into M&T directly. In either case, this deal appears to offer the promise of solid returns for opportunistic investors.

 


mthiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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