Dirty Money
A young economist sees a $20 bill on the ground and says "Hey, look a twenty-dollar bill!"
His older colleague replies "Nonsense. If there had been a twenty-dollar bill lying on the street, someone would have already picked it up by now."
This is an old joke told to students in econ 101 (where I first heard it) meant to highlight some of the gaps between how markets work in theory and how they work in the wild. They work IRL because someone, anyone, picked up the $20 bill.
Sidewalk Money
I was on a walk around my neighborhood and passed a bill on the ground. This one, though, was a $1,000,000 bill. I remembered the joke, which made me laugh. I also remembered that the largest bill ever issued by the US Treasury was $10,000. My found money was also a joke, but very convincing looking. Like the economists, I left it for someone else to find.
The idea behind the joke is that many markets, like financial ones, are very efficient and it’s uncommon to "find money." But, sometimes, every now and then, it does happen. And, as an investor — not an economist — it’s exactly your job to pick it up.
Come Together
Way back in February 2022, a smallish Austrian Bank, BAWAG, agreed to buy a small-potatoes Idaho bank, Peak Bancorp, for $12.50 in cash per share. Predictably, shares traded up towards the merger price, this is what's supposed to happen. Investors aren’t supposed to leave money on the ground. The deal received shareholder approval, but still needed regulatory blessing.
In the meantime, there was a run on some other small banks. Even though the deal remained intact, shares tanked. In the ensuing months, shares have not recovered. There's now a 30% gap between share price in the markets and the how much the shares will get when the deal closes. Underlying performance at the target bank has been… fine. So have things at the Austrian bank.
The deal is still going through regulatory approval. Regulators infrequently intervene in transactions this small, but maybe that’s a reason to stay away? From 2006 to 2021 more than 3,000 banks merged in the US. The Fed approved every single one without a single rejection. It rejected exactly one deal in 2022. So, intervention seems unlikely. Any action certainly wouldn't be anti-trust.
The market price gives just about a 30% chance that the deal will close. There’s no glaringly obvious regulatory objection. Both businesses have performed reasonably well and both managements have confirmed that the deal is proceeding.
Given those circumstances, investors providing for just a one-in-three chance that the deal will close is very generous, making the shares attractive.
Pick Up the Bill
Its not, exactly, "found money," but it's certainly ignored. Since the company is going to wind up as part of a giant foreign owner, management isn't exactly incentivized to rouse investors to close the gap. Its too small to attract any institutional investors and too boring to attract much of a retail crowd.
Instead, the existing shareholders are biding their time until the deal closes. This has provided a nice window to pick-up shares at a relatively nice spread to the deal value that is well supported by the underlying business if something does go wrong.