Financial Institutions Developments: Merger of Equals

Edward D. HerlihyRichard K. Kim, and Matthew M. Guest are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Messrs. Herlihy, Kim, Guest, and Patricia A. Robinson.

The approval by the Federal Reserve and the FDIC of BB&T Corporation’s merger of equals with SunTrust Banks, Inc. is a landmark in the post-crisis regulatory environment. Notably, the transaction was unanimously approved by the boards of both agencies at a time when the Democratic appointees have been known to vote against pro-industry measures. Measured by deal value at announcement, the BB&T/SunTrust merger is the largest U.S. bank merger since that of JPMorgan Chase and Bank One in 2004. The approval paves the way for the companies to merge on December 6th and become Truist Financial Corporation.

In many respects, the transaction is closer to a true merger of equals than those before it and was made possible by the strategic vision and leadership of the CEOs and the remarkable compatibility of the two organizations’ cultures, business lines and management. Early in the negotiations, the companies agreed on an even board and executive management split, a new headquarters city and even a new name. On completion of the merger, Truist will be the sixth largest U.S. commercial bank with more than 2900 branches in 17 states.

The regulatory process featured public hearings on the merits of the transaction, a highly atypical Congressional hearing and a thorough antitrust review by both agencies and the Department of Justice. Although total required divestitures equal less than one percent of the combined company’s deposits, the review process took many months. Also, in an unusual step, the Federal Reserve issued an enforcement action on the same day to SunTrust Bank for alleged unfair and deceptive practices concerning the operation and billing for certain add-on products offered to businesses several years earlier. As noted in the action, SunTrust had already terminated these practices and paid restitution. Even then, the transaction was approved on a shorter timeframe than some other recent, smaller transactions, such as Fifth Third’s acquisition last year of MB Financial.

Thematically, the BB&T/SunTrust approval reveals much about the general state of the regulatory approval process for bank mergers. On the one hand, mergers of community and regional banks that do not raise significant regulatory issues, are being approved by the regulators more and more quickly. It is increasingly common for these transactions to be approved within 30 to 40 days of the filing of the application. On the other hand, transactions that do raise substantive regulatory issues, such as antitrust, are vetted by the regulators extremely thoroughly—far more so than pre-crisis. Below is a comparison of the Federal Reserve approvals for the BB&T/SunTrust and JPMorgan Chase/Bank One transactions:

Criteria BB&T/SunTrust JPMorgan Chase/Bank One
# of Days from Announcement to Federal Reserve Approval 285 152
# of Public Comments 1050 (90+% in favor) 440 (68% in favor)
# of Pages in the Federal Reserve Approval 80 63

Importantly, in analyzing the impact of the transaction on the financial stability of the U.S. banking and financial system, the Federal Reserve and the FDIC laid out a path for further consolidation among large banks. They noted favorably that:

  • BB&T and SunTrust are not major players in payments services, assets under custody activities, underwriting and bilateral repurchase activities, and numerous competitors in such activities would remain;
  • The companies’ use of wholesale funding and their share of U.S. intra-financial system assets and liabilities were small;
  • Their over-the-counter derivatives exposures, holdings of Level 3 assets and volume of trading book and available-for-sale securities represent only a small percentage of the total U.S. market;
  • BB&T and SunTrust do not engage in complex activities that might complicate the resolution process, such as acting as a core clearing and settlement organization for critical financial markets, and engage in only limited cross-border activities; and
  • The combined company would have a Globally Systemic Important Banks (“GSIB”) Surcharge score of only 29 points, well below the minimum threshold of 130 points that identifies a financial institution as a GSIB and subjects it to more burdensome regulatory requirements, and a score that is less than 10% of the average scores of the top five institutions.
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One Comment

  1. Terry Wise
    Posted Saturday, December 14, 2019 at 12:28 pm | Permalink

    Excellent review and summary of current state of bank mergers. The MOE merger can work, but only as Mr. Herlihy suggests, with the right boards and management teams. Saw this first hand in the 1995 MOE between First Chicago and NBD which received Fed Approval approximately 117 days following announcement (full disclosure Wachtell Lipton served as legal advisors). Also, we also chose a new name – First Chicago NBD Corporation, but without the guidance of an outside brand advisor!