Evaluating the Buyer’s Shares

Bank M&A has accelerated in 2025 with 144 announced transactions as of October 29 and looks to be set for ~175 deals this year compared to 133 last year. Other than the smallest deals, usually consideration paid to selling shareholders consists of the buyer’s common shares or a mix of shares and cash.

Accepting the buyer’s stock raises a number of questions, most of which fall into the genre of: what are the investment merits of the buyer’s shares? The answer may not be obvious even when the buyer’s shares are actively traded.

Our experience is that some, if not most, members of a board weighing an acquisition proposal do not have the background to thoroughly evaluate the buyer’s shares. Even when financial advisors are involved, there still may not be a thorough vetting of the buyer’s shares because there is too much focus on “price” instead of, or in addition to, “value.”

Key questions to ask about the buyer’s shares include:

• Liquidity of the Shares. What is the capacity to sell the shares issued in the merger? SEC registration and NASDAQ and NYSE listings do not guarantee that large blocks can be liquidated efficiently.
• Institutional Ownership and Index Membership. Is there much institutional ownership and what is the weighting of the buyer’s shares in various indices? Liquidity tends to improve with greater institutional ownership and index weighting.
• Profitability and Compounding. The banking model is predicated upon leveraging capital to produce shareholder returns (i.e., ROE and ROTE). Is ROE/ROTE competitive vs. peers through time? How is it generated (e.g., efficiency or parent company leverage)? Can the acquirer be described as a “compounder” of capital?
• Capital Management. How is capital allocated among reinvestment, dividends, share repurchases and M&A?
• Reported vs. Core Earnings. What is the quality of earnings as discerned by a comparison of reported vs. core earnings over a multi-year period (e.g., the last five years and five quarters)?
• TBVPS Dilution. What is the projected dilution to tangible BVPS at closing and how long to recoup it from less certain EPS accretion once expense saves are realized?
• Seller Pro Forma Perspective. What is the pro forma impact to tangible BVPS, EPS and DPS from the perspective of selling shareholders?
• Analyst Estimates. If the buyer is publicly traded and has analyst coverage, how do the budget and management’s formal or informal projections for the next couple of years compare with the Street’s consensus?
• Valuation. How does the current valuation (P/E and P/TBV) compare to current peers and what has the valuation range been in absolute terms and compared to peers over the past decade?
• Share Performance. How have the shares performed compared to peers and relevant indices over multi-year holding periods and how have changes in valuation impacted the performance?
• Pro Forma Capital. Will the buyer have ample regulatory capital, and is the parent company capital structure overly-levered and/or complex?

The list does not encompass every question, but it illustrates that a liquid market for a buyer’s shares does not necessarily answer questions about value, growth potential and risk profile. We at Mercer Capital have extensive experience in valuing and evaluating the shares (and debt) of financial service companies garnered from over four decades of business.

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