Why M&T Bank Is Primed For Its Biggest Acquisition Deal Ever

Feb. 25—M&T Bank Corp. has been out of the acquisition game for more than six years, but executives say they are more than capable of successfully completing and integrating their largest deal ever.

And Wall Street analysts say they have good reason to be confident.

"This company has been an accomplished acquirer during the last 30 years," said bank analyst Gerard Cassidy, of RBC Capital Markets in Portland, Maine. "It's an incredible culture they have."

It has been nine years since M&T announced a new acquisition, and six years since it completed one. But that changed earlier this week, when the Buffalo-based bank announced its purchase of People's United Financial of Bridgeport, Conn. — its first under CEO Rene Jones.

The $7.6 billion deal will create the 11th-largest U.S.-based commercial bank, with more branches in the Northeast region than JPMorgan Chase & Co. and Wells Fargo & Co.

It will operate more than 1,135 offices and more than 2,000 ATMs across 12 states and the District of Columbia, extending from Maine to Virginia. And it will have more than $206 billion in assets and $8 billion in combined revenues.

The deal is expected to close later this year — executives are targeting October — with the systems conversion slated for early 2022.

But there is a long way to go first.

"Acquisitions and conversions are always hard work," the bank told employees in an internal Q&A.

Until the close, the bank told employees, "it remains business as usual."

Preparation

Both M&T and People's are old hands at the bank merger-and-acquisition game, with M&T having completed 24 acquisitions in the past 35 years, while People's counts 17 since 2007.

M&T's top 140 executives have participated in an average of 10 acquisitions each. And while M&T hasn't done any deals since 2015, the same veteran executives are largely still at the bank — some in higher roles, such as Jones and President Richard Gold.

That means they've learned from experience, and they know what they're doing.

"They're a very sophisticated institution, and have a lot of sophisticated people who have gone through this process many times," said Frank Schiraldi, managing director and bank analyst at Piper Sandler in New York.

Already, prior to Monday's announcement, more than 200 M&T employees and 15 consultants reviewed more than 3,000 People's United documents and 2,000 loans as part of due diligence for the merger, according to a presentation M&T executives gave to Wall Street analysts and investors. That review included the 100 largest loans, all "criticized" and "watch" loans over $5 million and a sampling of credits from key industries affected by the pandemic.

Top leadership from M&T's business lines were involved in the deep dive, along with support from attorneys at Sullivan & Cromwell — one of the nation's leading corporate and banking law firms — and Lazard, M&T's investment banker.

They not only looked at the consumer, mortgage, commercial and wealth management businesses, but also zeroed in on People's risk management, credit risk, treasury, audit, accounting policies, compliance issues, enterprise security, corporate services, technology and operations and human resources.

"We're good at this," Jones said in an email to M&T employees. "I look forward to working together to make this another big success."

Now, the banks will form a joint merger integration team with representatives from both banks working side by side to plan the next steps . They'll engage thousands of back-office and customer service employees, answering customer questions and concerns while ensuring the transition is smooth.

The group will be led by Michele D. Trolli, executive vice president and chief technology and operations officer, with support from Tom Hayes, senior vice president and director of enterprise transformation, and Michael Keegan, newly named head of community markets.

"People's United is a great partner for M&T," Jones said in the email. "Simply put, they're a lot like us. Our footprints are complementary, our cultures are purpose-driven, and we share an equally long history of putting customers and communities first."

Regulators

The merger is subject to the approval of federal banking regulators, notably the Office of the Comptroller of the Currency and the Federal Reserve. That review process, which could begin within weeks once a formal application is submitted, can take months, but most bank mergers are approved in due course, and often within a predictable time period.

But M&T — which has normally had few problems in most of its past mergers — stumbled badly in its last go-around nine years ago, with Hudson City Bancorp in New Jersey.

The Federal Reserve in 2013 found that M&T was lagging in its regulatory compliance, especially when it came to anti-money-laundering and the Bank Secrecy Act. Regulators didn't cite actual illegal activity, but asserted that M&T's risk management processes and procedures were weak and insufficient for a bank of its size.

Rather than risk rejection, M&T delayed the merger for more than three years while it hired hundreds of new employees to deal with the issues and spent hundreds of millions of dollars bringing its systems up to snuff. At more than 1,129 days, it ended up being the industry's longest-ever delay for a large bank deal.

The Fed finally cleared the merger in 2015, and lifted its regulatory order and restrictions on M&T two years later.

But analysts note that banks of M&T's size are in close and constant communication with regulators all year, so a repeat of the prior problem is unlikely.

"The Hudson City situation was quite unique," Schiraldi said. "I think the regulators really put you through the wringer in that process. Once you come out the other side, you've got a stamp of approval. I wouldn't foresee any additional regulatory hurdles this time around."

M&T officials won't discuss any conversations they've had with regulators, or predict the outcome.

"We look forward to working closely with regulators and policy makers throughout this process," the bank said in its employee Q&A.

Conversion

The conversion of computer systems and other operations is always the riskiest part, where technical and service problems can crop up and damage or even destroy the goodwill and hard work of the prior months. That makes it critical for M&T to get this part right.

"The road is littered with failed mergers, of all stripes, and the banking industry specifically has its share of bad transactions," said bank analyst Michael Mayo of Wells Fargo Securities. "And even when there's a good transaction on paper, there's still strategic, cultural, execution and financial risk. So nothing should be taken for granted."

In this case, fortune smiled on M&T. People's not only uses a single provider for its core banking system, but M&T has had prior experience with that vendor from an earlier merger conversion.

Additionally, since the Hudson City debacle, M&T has invested even more in its technology and systems, not only for risk management and compliance, but also for the benefit of its customers. That includes its ongoing plan for a new technology hub with 1,500 employees at Seneca One tower, as well as another tech base in Wilmington, Del.

That is now going to help M&T as it absorbs People's United.

"This transaction does not necessarily require an enormous amount of new technology spending," Cassidy said.

Mayo noted that M&T plans the systems conversion of People's just three months after the deal closes — far faster than for other major deals.

"That reflects confidence," he said. "M&T is not going to make a statement like that unless they're very confident about their internal technology."

Execution

Mayo said that the "jury is going to remain out" on how well M&T will do in its new markets. But, if successful, M&T sees significant potential for new opportunities that translate into sizable but undetermined gains in revenue.

First, it is betting that it can capitalize on an entirely new market with millions of potential new customers by cross-selling its own products and expertise to People's extensive base of retail, small business and commercial customers. It also hopes to foster new relationships with New England clients .

At the same time, it plans to bring People's specialty business lines, particularly small-ticket equipment financing, to its own markets .

On the other side of the ledger, M&T says it expects to cut $330 million in costs, or 30% of People's expenses — 27% when excluding the costs from People's prior decision to close its supermarket branches in Stop & Shop stores.

"M&T is like the Bruce Smith of banking," Mayo said, referring to the legendary former Bills defensive end. "M&T has played defense about as good as any bank for the last three decades ... M&T really picks its spots when it allocates its capital."

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