1998

In Big '97 Deals, Signs the Rules Have Changed

Jan. 7 — The bank merger business has turned brutal.

The highest-priced deals in U.S. banking history took place in 1997.

In true history tradition, each was celebrated as a triumph of strategic logic and of the chief executive officer's collegiality and shared vision.

But beneath the happy surface, the game had changed forever.

Maybe it was Wells Fargo & Co.'s hostile bid for First Interstate Bancorp in 1996 that turned the tide. Maybe the lesson should have been learned as long ago as 1987, when Bank of New York Co. launched its successful attack on Irving Trust Corp.

The hostile takeover has become almost unexceptional in banking.

"In the coming year, you'll probably see more unsolicited bids that won't be made public at least for a while," said Michael T. Mayers, head of the financial institutions group at Advest Inc. "These bids usually come in the form of letters to the target's board, and they're getting more formal and more specific, sometimes even including price indications."

The most recent, high-profile example was Pittsburgh-based Mellon Bank Corp.'s approach to CoreStates Financial Corp. in October. Directors of Philadelphia-based CoreStates rebuffed Mellon twice, but that greatly increased the pressure on the company and its independent-minded chairman, Terrence Larsen, to sell.

In November, CoreStates sealed a deal with First Union Corp. of Charlotte, N.C.

But this was hardly the only example of an outside bank forcing a reluctant rival's hand.

In October, Carnegie Bancorp of Princeton, N.J., said it received an "unsolicited expression of interest" from an unidentified suitor.

Two months later, Carnegie agreed to sell to Sovereign Bancorp., a $14.6 billion-asset bank and thrift holding company in Wyomissing, Pa.

On Dec. 18, Success Bancshares of Lincolnshire, Ill., said it had made an unsolicited bid for North Bancshares of Chicago. On Dec. 29, North announced it had rejected Success' offer.

Deposit Guaranty Corp. of Jackson, Miss., is said to have invited bids in November after receiving an unsolicited offer from Union Planters Corp. of Memphis. Deposit Guaranty eventually agreed to sell to First American Corp. of Nashville.

These were not public brawls like Wells Fargo's fight with First Bank System (now U.S. Bancorp) for First Interstate Bancorp or Washington Mutual Inc.'s fending off H.F. Ahmanson & Co. to take over Great Western Financial Corp. But people who advise on mergers say such activity underscores bank executives' sense of urgency.

"Having your own expansion strategy is a good way to prevent being sold to someone else," said Barry P. Taff, partner at the Washington law firm Silver, Freedman & Taff.

By bulking up, a bank might also attract the bigger acquirers that are willing to pay the massive premiums that shareholders dream about.

Union Planters is an example of an acquirer that may be on the way to eventually selling out.

Having made several regional acquisitions in 1997, it is seen as a couple of deals away from warranting the attention of a bank elsewhere that wants to expand in the South.

While behind-the-scenes unfriendliness is expected to crop up at a lot of community banks — if only because there are more small banks than big ones — the CoreStates example suggests the dwindling number of potential big-bank targets will not be spared.

"Think about how many banks are out there that NationsBank would want," said John Duffy, director of corporate finance at Keefe, Bruyette & Woods Inc. "Not many."

Investment bankers expect the competition for a shrinking number of desirable targets to keep prices at their unusual heights.

Companies like NationsBank and First Union, which set successive records last year in their negotiated prices for Barnett Banks Inc. ($15.5 billion) and CoreStates ($16.6 billion), respectively, may find it necessary to sit out 1998 as they absorb these megadeals. But investment bankers expect other acquirers to seize the moment.

"Some past acquirers like Norwest haven't been active as they were when prices were lower," said Mr. Duffy. "The stock is trading at 19 times earnings, so they can afford to pay the 23 times it costs for a bank these days.

You have to ask at what point their competitive juices will change their view of things."

1864

From Thompson's Bank Note Reporter

Jan. 23 — Explanation of marks, &c.: A star (*) [means] that Thompson Bros. do not buy the notes.

…See the advertisement of the Receiver of the Washington County Bank, R. I. This concern was shaped for a great swindle, and but for our starring the Bank last summer, the rascals would have succeeded… Large amounts of these notes are in the hands of parties (accomplices) who will try to work them off. Don't touch them. There were $700,000 of the notes of this Bank printed for circulation last summer. This was enough for us.

1946

U.S. Debt Is 180% of National Income: Study

Dec. 20 — World War II has left the United States with a national debt, the amount of which, for the first time in its history, exceeds the amount of the annual national income and represents a per capita burden eight times greater than after the First World War. These are points stressed in a study made public yesterday by the Committee on Public Debt Policy. The study, a review of the United States debt after five great wars, was the final work of the late General Leonard P. Ayres, noted economist and vice-president of the Cleveland Trust Co. It was completed a few days before his sudden death in Cleveland last October, and is the first of a series of studies to be issued by the committee in its effort to arrive at sound policies for management of the public debt.

The committee was formed to fulfill the purposes of a grant of $100,000 by the Laura Falk Foundation of Pittsburgh for study of the U.S. debt. The committee was formed by men prominent in industry, banking, insurance and education and is headed by W. Randolph Burgess, vice-chairman of the National City Bank of New York. Cooperating with it as consultants and research workers is a group of economists recruited from universities and various business fields.

The Ayres study finds that when we entered World War I the national debt represented about 8% of the national income total, within two years had grown to 41% and by 1930 had been pared down to about 22%. Deficit spending during the following decade and subsequently the great burst of war expenditures brought such a perpendicular rise that by February, 1946, the debt was 180% as great as the annual rate of national income reported by the Department of Commerce.

The burden of the national debt resting upon each man, woman and child in the United States after each of the country's great wars is given as follows in the Ayres study:

Revolutionary War ………. $19
War of 1812 ……………… $15
Civil War ………………… $78
World War I ……………... $240
World War II …………….. $1,981

Lower Interest Rates Factor in Inflation

Government controls applied to interest rates, according to the study, "have circumvented the normal tendency in wartime for the laws of supply and demand to operate towards higher rates. This does result in large interest savings to the Government; but it has had other results as well, for in the process of keeping interest rates low, the Reserve System has had to pump out money into the spending stream, and this has itself built the substance of inflation at the source. There is also the question whether at less lower rates the Treasury has been able to sell as many bonds to investors as it could have sold at higher rates and hence whether the amounts taken by the banks and Federal Reserve System have not been larger than necessary."

"Throughout our history," the Ayres study finds, "the greatest obstacles to national financial strength and the most acute dangers of fiscal collapse have never been the results of inadequate or failing resources, but always consequences of weak financial policies." Our past record with respect to the national debt, according to the study, "is good enough to encourage us and poor enough to put us on guard. During 154 years from 1792 through 1945, we have had 93 years of net surplus in our national budget and 61 years of net deficit."

The study also finds that while inflationary forces resulting from World War II were greater than ever before, with war spending and the increase in the Government debt on an unprecedented scale, both in dollars and in relation to our population and its income, actual price inflation, while still under way, has been less thus far than after World War I.

In a statement announcing its plans, the committee pointed out that among the agreed aims in plotting a sound course of public debt policy are the fostering of high employment and a high total income for the country, with continuity of prosperity rather than eras of "boom" and "bust," and the avoidance of inflation as well as deflation, while making reasonable provision for reduction of debt. The committee warned that "a wise debt policy will at times call for difficult, drastic and unwelcome action by the Government" and that "such action requires not only wisdom and courage by Government, but also understanding and support by the people."

Vice-chairman of the committee is John S. Sinclair, executive vice-president, New York Life Insurance Co. The other members are: Daniel W. Bell, president, American Security & Trust Co.; E. E. Brown, president, First National Bank of Chicago; Lewis W. Douglas, president, Mutual Life Insurance Co. of New York; Marion B. Folsom, treasurer, Eastman Kodak Co.; Robert L. Garner, financial vice-president, General Foods Corp.; Harold M. Groves, professor of economics, University of Wisconsin; Benjamin U. Ratchford, professor of economics, Duke University; Wesley C. Mitchell, professor emeritus of economics, Columbia University; Earl B. Schwulst, executive vice-president, Bowery Savings Bank; George Willard Smith, president, New England Mutual Life Insurance Co.; Levi P. Smith, president, the Burlington Savings Bank; H. B. Wells, president, Indiana University; A. L. M. Wiggins, president, Bank of Hartsville. The late General Ayres was also a committee member.

Donald B. Woodward, second vice-president of Mutual Life Insurance Co. of New York, is secretary to the committee, and James J. O'Leary, associate professor of economics, Duke University, is the director of research.

Other studies by the committee will be pressed through to publication and finally be issued in book form, Mr. Burgess said. Next to be published will be an examination of the topic, "The Public Debt and the Banks," which will be prepared for the committee by J. H. Riddle, vice-president of Bankers Trust Co. This will be followed by a study on "Interest Rates," by Professor James J. O'Leary, of the economics department of Duke University, who is director of research for the committee. "Fiscal Policy," including such angles as the compensatory budget and debt maturities, to be prepared by Professor Ratchford, and "Life Insurance and the Debt," by Sherwin C. Badger, financial secretary of the New England Life Co. Following the series of studies, the committee will sum up in a series of recommendations.