KBW CEO: 'It's very hard to finalize the plans for a merger at a time like this'

Yahoo Finance's Alexis Christoforous and Brian Sozzi speak to Tom Michaud, KBW CEO about the current merger and acquisition market, future outlook for the banking industry with interest rates near zero and more.

Video Transcript

ALEXIS CHRISTOFOROUS: We've now eclipsed another grim milestone in the coronavirus pandemic. We have surpassed 6.4 million total cases of COVID-19 worldwide, which has resulted in almost 381,000 deaths. Many of those figures coming from the US. There are now over 1.83 million confirmed cases in America, which has resulted in more than 106,250 deaths.

This pandemic has certainly taken a toll on merger activity and acquisition activity throughout Wall Street. In the month of April alone, deals were down about 72% compared to the prior month. That's according to data from Refinitiv.

And joining us now to talk about this is Tom Michaud. He is CEO of KBW. That's a Stifel company. Tom, good to have you with us.

I'm curious what deal-- what deals look like right now. Any indication that things are starting to pick up here in the month of June?

TOM MICHAUD: Well, Alexis, first of all, good morning, and it's a pleasure to be with you. Very hard to finalize the plans for a merger at a time like this for a couple of reasons. One is there still is a lot of uncertainty in the economic outlook. So a lot of the financial modeling is very hard to do right now. That's number one.

And then number two is share prices have been so volatile that it's hard to really understand where the relative valuation will play out. So in our opinion, those are two primary drivers for why M&A, not only in the banking industry but I think across the whole market, has slowed down.

That being said, as we get further along and we get better monthly data, that the worst-case scenario of this recession seems to be taken off the table-- and it still is severe, but the worst case gets taken off the table-- confidence is starting to build, and in my opinion, planning is likely starting across the economy for what things may look like as we get maybe 9 or 12 months out. And so that happens for strategic purposes as well in M&A.

BRIAN SOZZI: Tom, very curious on how deals are getting done. For decades, the whole concept of you get a deal done-- you go out there for the $90 ribeye steak, a couple bottles of wine, a handshake, and the deal gets done, wink and a nod. But how are you doing it now since so many people are still under lockdown?

TOM MICHAUD: Yeah, so the point is they're not happening now, but mergers, especially healthy ones-- if it's a healthy one and not a rescue acquisition, which if it's a healthy one-- I mean, if you read these proxy statements where the companies are required to give the deal history, it's months and months. If you're working on something now, it may-- if it's successful, it may happen in six months.

So you're not seeing deal announcements, and it's for the reasons you just said, Brian, which is there's just too much uncertainty-- uncertainty in the share-price movements and uncertainty for the economic outlook. So it's been quiet. It's been very quiet for new announcements.

ALEXIS CHRISTOFOROUS: Tom, I know that you helped to expand KBW into Europe. Europe's a little ahead of us when it comes to reopening economies. Are you seeing signs of life there-- more signs of life there than perhaps in the US when it comes to M&A activity?

TOM MICHAUD: Well, first of all, we focus, as you know, on the financial-services sector. There's been very little bank merger activity in Europe because that market is already very highly concentrated. So merger activity has been more focused in the US.

But I'll tell you, the best-performing sector of the market in Europe as of this morning when I last looked was the insurance sector, and that's because Axa this morning announced that they only cut their dividend. They didn't eliminate it. And there's-- and I think that investors are taking that as a good sign that the regulators are feeling better to allow a company like Axa to pay a dividend because previous to this the viewpoint had been is that there was going to be an across-the-board ban for financial-services companies paying dividends.

BRIAN SOZZI: Tom, is it inevitable that banks will start merging this year? And to me, I don't think the banking sector has been built for a prolonged period of 0% interest rates, if not negative rates.

TOM MICHAUD: So, Brian, that's a great observation because the big story here is is that the banking industry has been consolidating since the major law changes in the mid '80s. Remember, there used to be 18,000 banks in America. There are now 5,000 banks in America. And not only that, but the bigger banks have a bigger concentration of the industry.

So the industry is always in consolidation mode, or at least since the mid '80s. The question is what's the pace? So we're in a timeout right now because of the recession and the uncertainty, like I just mentioned. But when it starts, I think this shutdown and this virus and what's been happening is going to accelerate it because the recent consolidation has been all about scale and the ability to make investment in technology.

And I think all the digital connectivity of the last three months has proven that that trend is solid. It's here to stay, and it's likely to accelerate, which I think will lead to more consolidation in the banking industry.

ALEXIS CHRISTOFOROUS: Tom, how do you see what's happening now compared to what was happening in 2008? You were doing this back then as well, so you're intimate with the situation. The banks were part of a systemic problem back in '08. They're obviously not now. This is a health crisis. But are there any similarities maybe that you can draw between M&A then and now?

TOM MICHAUD: Well, I'll tell you the first thing I'd like to do because you really need to have orderly stock prices for consolidation, so I'd really like to pivot and talk about that. The banking industry is in-- was in much better shape going into this, like you said, than it was in the '08 period, and that's because of capital. That's because of liquidity. And there were parts of Dodd-Frank that were really good that made the industry safer and sounder.

What was surprising to me is the first reaction from investors was they didn't really care. So on February 21, the average regional bank in America was trading at 1.6 times tangible book, and then by March 23 it was trading at 0.9 of tangible book. The underperformance relative to the stock market-- the investor community got much more bearish about banks than they did the overall stock market.

And so now what I see happening is the unwinding of that. As the worst-case scenario has come off the table, I think investors are realizing that the banks are in better shape. And so they've been closing that gap even though I think there's room to go.

BRIAN SOZZI: Tom, real quick before I let you go, you helped rebuild KBW after the September 11 terrorist attacks. What advice would you give business owners trying to rebuild their small businesses given what we've seen in the streets the past few days or even after being closed from the COVID-19 pandemic?

TOM MICHAUD: I'll tell you the first thing is how resilient our country is. And the fact of the matter is America was built, frankly, by taking one step at a time, I believe, and remaining optimistic, I think, in the resiliency of our economy, in our country. We will eventually figure all this out, in my opinion.

And then also too I think it always comes down to as well treating your customers right, your community right, and in some ways focusing on the goodwill that comes from those relationships with your clients because usually what I feel goes around comes around. And I think that when we needed that period of goodwill following 9/11 as we were rebuilding, our clients were there for us. And that would be my advice to the community that you just mentioned.

BRIAN SOZZI: All right, Tom Michaud, CEO of KBW, thanks for spending some time with us this

TOM MICHAUD: Thank you. Good morning.