Sometimes companies get rewarded for making relatively large mergers. And sometimes they get slammed. In the case of Huntington Bancshares Inc. (NASDAQ: HBAN), this regional bank saw its shares slammed after announcing a planned acquisition of Ohio rival FirstMerit Corp. (NASDAQ: FMER) in a cash and stock merger that valued FirstMerit initially at $3.4 billion.

Some bank mergers are great for the acquirer. Huntington said that the pro forma company will have close to $100 billion in assets and that it will operate across an eight-state Midwestern footprint and become the largest bank in Ohio by the market share of deposits — and it gets Huntington to expand into Chicago and Wisconsin. So why was it that Huntington was slammed so hard on the news?

Huntington’s shares initially fell 8.5% to $8.05 on the news, but they went to as low as $7.83 for a new 52-week low. Will this interrupt some of the shareholder returns? Huntington said that the acquisition is projected to be accretive to earnings per share (EPS) in 2017 after merger expenses. It is also expected to be about 10% accretive to 2018 EPS.

The combined pro forma tangible capital equity to tangible assets (TCE ratio) is projected to be 7.1% at closing, and the regulatory common equity Tier 1 ratio is projected to be 8.7% at closing. Huntington did say that it will not re-submit its 2015 CCAR capital plan, and it intends to forgo the remaining $166 million of share repurchase capacity under its 2015 CCAR capital plan. Going one step further:

Huntington will include FirstMerit Corporation in its 2016 CCAR capital plan proposal and expects the plan will include share repurchases.

What may be an issue here is that some of the investing community might have hoped that Huntington Bancshares itself might be a takeover target ahead. That had been the case in the past, but that was before the Great Recession.

Some analysts think that this stock just became too cheap after the merger. It also turned out that Huntington Bancshares saw its own shares recover from the immediately lows.

Robert W. Baird thinks this is an opportunity, so it raised its rating to Outperform from Neutral. Baird also put a $12.00 price target out there. Baird thinks that Huntington is paying a full price, but thinks the sell-off was too much and this took it down to about eight times earnings or so when peers trade closer to 10 times earnings.
Bank of America Merrill Lynch likes this merger. The firm maintained its Buy rating and has a $12.00 price objective. It thinks that, despite an underwhelming reaction, the deal makes sense financially and strategically. It also pointed out that investors were likely disappointed with the length of the tangible book value earn-back period, but it raised its 2017 EPS estimate to $0.95 from $0.92 as a result of this transaction.

Macquarie issued an upgrade as well, but it simply raised its rating to Neutral from Underperform. That just removes a Sell-equivalent rating.

Jefferies pointed out significant savings and synergies, but that will not be fully realized until 2018. The firm already had a Buy rating and a $12.50 price target.

JPMorgan kept its Outperform rating, but lowered its target to $9.50 from $10, based on the price target for FirstMerit. Barclays also maintained its Equal Weight rating but lowered its target to $11.00 from $12.00. Sterne Agee CRT kept its Neutral rating in place and lowered its target price to $10.50 from $11.50.

FirstMerit’s shareholders will receive 1.72 shares of Huntington common stock, and $5.00 in cash for each share of FirstMerit common stock. That brought the initial deal to a price of $20.14 per share, based on the closing price of Huntington common stock before the announcement, but that would be a tad lower now (see below). The acquisition is expected to be completed in the third quarter of 2016.

It turns out that Huntington Bancshares traded back up at $8.58 by Friday’s closing bell. That is up by 9.6% from the post-deal low of $7.83. It is also still about 2.5% below the $8.80 pre-merger share price from Monday.

Another consideration here is that Huntington Bancshares were above $10.00 as recently as January 8, 2016, and they were at $11.06 as of the last closing price in 2015.

Again, sometimes banks or acquiring companies get pounded when they make acquisitions. Huntington’s market cap was last seen at $6.8 billion, versus a post-merger market cap of just over $3.2 billion for FirstMerit. This deal should not come with massive regulatory hurdles at all. Even if you lower the expected price targets from analysts, there is still more than 25% total return expected here when you consider the 3.2% dividend yield for Huntington.

FirstMerit shares were at $15.37 before the merger was announced, and then the shares rose each day to $18.19, then to $18.58, then to $18.95 and ultimately up to $19.38 by Friday’s close. If this was such a bad deal, there would be a larger concern about FirstMerit shares.

If the combined merger terms were to remain static with the share prices today, FirstMerit’s value at $5.00 per share in cash and $1.72 “HBAN” shares would be roughly $19.76. That leaves just under a 2% merger-arbitrage spread.

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