DealZone

Will UnTARPed Banks Boost M&A?

May 19, 2009

News that top investment banks want to pay back their TARP funds is welcome news for the M&A market. Though the tens of billions of dollars in capital that will slosh out of the banks and into government coffers may sap the banks of the funds to make big buys, the fact that most post-stress-test capital-raisings have gone smoothly must be encouraging for dealmakers.

Plus, banks that are unable to pull themselves from the government teat will have a whole lot less pricing power. It was interesting to see HSBC commenting on Tuesday that it expects industry consolidation in the second half of this year and in 2010. Though they may be looking more closely at non-U.S. assets, given the burns on their fingers from their foray into the U.S. mortgage market, that big global may sit out the next round of mergers. Will they be missing the boat, particularly given the conviction of many analysts that the U.S. economy will be the earliest to recover?

A key question that could rain on any M&A party is asset quality, and the radiation emitting from the toxic assets still poisoning the financial system. While most of it has been moved to the bomb shelter balance sheet of the U.S. taxpayer, there is little conviction that valuations will have the golden glow of yesteryear, and plenty of lingering fear that the glow is the toxicity of the lost decade.

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