Strategy

KeyCorp Buys First Niagara for $4.1 Billion

The largest deal this year between two U.S. regional banks is another indication of a pickup in M&A activity in the banking industry.
Katie Kuehner-HebertOctober 30, 2015

KeyCorp on Friday said it would buy First Niagara Financial in Buffalo for $4.1 billion in cash and stock, another sign that merger activity in the banking industry is gaining steam.

The acquisition the biggest this year between two U.S. regional banks would make Cleveland-based KeyCorp the 13th-largest commercial bank in the country.

“This transformational opportunity will bring compelling and complementary capabilities to our shared three million clients, while driving meaningful synergies and enhancing shareholder value,” KeyCorp’s CEO Beth Mooney said in a press release.

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KeyCorp offered the equivalent of $11.40 per share for First Niagara — 0.68 of its own shares and $2.30 in cash, a premium of 9.8% to First Niagara’s closing price on Thursday.

First Niagara was trading almost unchanged at $10.39 on Friday, while KeyCorp was down more than 7% at $12.40.

After a slowdown in M&A deals following the financial crisis, regional bank takeovers are picking up, with BB&T and CIT recently buying smaller lenders to expand business lines and geographic markets as record low interest rates squeeze lending margins, Bloomberg said.

KeyCorp’s deal for First Niagara resolves some cost issues for the smaller regional bank, according to Bloomberg.

“The company has grappled with rising costs, including an increase in reserves to address a ‘process issue’ that affected some deposit accounts, and has said that expenses would climb as it spends money to improve technology systems,” Bloomberg said.

First Niagara, with $39 billion in assets and $29 billion in deposits, was the worst-performer in the KBW Bank Index last year before it was removed from the 24-company group.

“By some measures, things are looking up for the smaller banks,” Fortune noted. “Credit has improved, moderate loan growth has resumed and they have added to their capital cushions while taking less risk on their balance sheets.”

“Sustained low interest rates, however, have depressed earnings and banks have lost fee income for debit card transactions and overdraft protection due to new regulations,” Fortune added.