Suntrust Acquisition of National Commerce
10 Pages Posted: 14 Jun 2009 Last revised: 10 Nov 2021
Abstract
This case presents an interesting acquisition opportunity that SunTrust considered in 2004: National Commerce Financial, a large commercial bank, based in Memphis, Tennessee, with a strong footprint in North and South Carolina. The case shows how capital ratios are often a key component in the bank-merger process, and it allows for the evaluation of whether Phil Humann (SunTrust's CEO) could justify a multi-billion-dollar acquisition that had the potential to deplete capital, even if the deal were accretive to earnings.
Excerpt
UVA-F-1554
Sept. 20, 2008
SUNTRUST ACQUISITION OF NATIONAL COMMERCE
SunTrust's approach to mergers and acquisitions is very deliberate and highly selective. As a $ 100 billion-plus institution whose geographic footprint already covers some of the best markets in the United States, we don't need to grow for the sake of growth alone. As a rule, we only pursue acquisition opportunities that meet high standards for financial return while enhancing our geographic franchise or extending business line capabilities consistent with our strategic goals.
—2001 SunTrust Annual Report
Phillip Humann was stuck in traffic again on a balmy night in early 2004. The SunTrust chairman, president, and CEO normally dreaded his evening commute from downtown Atlanta, but today was different. The one-hour car ride would provide Humann some needed downtime to reflect on the direction of his company. Earlier that day, a group of investment bankers from New York had proposed an interesting idea that merited further investigation. The proposal was rather straightforward: SunTrust should acquire Memphis, Tennessee–based National Commerce Financial, a commercial bank with approximately $ 23 billion in total assets. Before approaching the board of directors for permission to engage in merger discussions, Humann needed to be certain that SunTrust could digest such a large financial institution and extract enough cost savings to make the deal financially attractive from an earnings perspective. Moreover, such a large transaction would probably adversely affect the combined companies' capital ratios, an important set of metrics that were monitored by both the regulatory and the investment communities. Could Humann justify a multi-billion-dollar acquisition that had the potential to deplete capital levels even if the deal were accretive to earnings? More important, what steps could SunTrust take to bolster its capital levels going forward?
Banking M&A: A Brief History
Up until the last quarter of the twentieth century, banking was largely a “mom-and-pop” operation in many communities. Although one could still find relatively large financial institutions in major U.S. cities, the rest of the country was dotted with thousands of minuscule banking entities, largely because of a series of laws that prohibited banks from expanding into neighboring states. When these interstate banking restrictions were lifted in the 1980s and early 1990s, banks began to consolidate at a furious pace; the total number of commercial institutions peaked in 1984 at 14,496 and fell to 7,769 as of June 30, 2003 (Figure 1).
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Keywords: bank capital ratios, mergers and acquisitions
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