Recent Acquisitions Highlight New Capital Considerations for Buyers

June 21, 2011 at 12:44 PM
As anticipated, acquisition activity is picking up as weakened institutions sell to healthy institutions. Two major transactions were announced within the last few days. Capital One Financial Corp reached an agreement to acquire ING Direct for $9.0 billion. PNC Financial Services Group, Inc. agreed to buy the retail banking franchise of Royal Bank of Canada for $3.45 billion.  In essence, both transactions are asset purchases from foreign banks. The main focus of attention in the financial press and among analysts has been on the strategic merits of the transactions, but one of the more intriguing aspects is the form of payment.
Both buyers qualify as systemically important financial institutions and therefore will likely be required to meet new, higher common equity ratios of at least 7.0 percent. Consequently, each will likely fund their purchase by issuing significant amounts of common stock to the seller. Capital One will issue approximately 55.9 million common shares to ING Group, which equates to an astonishing 9.9% pro forma ownership. ING Group will get one seat on the board of directors of Capital One. Furthermore, Capital One anticipates issuing an additional $2.0 billion of common stock to the market to fund a portion of the cash payment it will make to ING Group.
PNC may also pay a mix of cash and stock, although the specific percentages will not be known until next year. Under the terms of the agreement, PNC is prepared to issue up to $1.0 billion in common stock to RBC.
In the past, asset purchases could be largely funded through cash and debt. It now seems clear that buyers should be prepared to maintain or even increase their pro forma level of common equity when contemplating a transaction. Consequently, the ability to tap equity markets would appear to be even more crucial to affect acquisitions now than in the past.
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