As the merger wave continues to wash across the banking industry, bankers and analysts are squaring off with increasing frequency over whether cost cutting or revenue growth is more important in measuring an acquisition's value.
While some analysts and investors say future revenue generation is too intangible to measure, bankers argue that deals should be judged not just on the number of branches cut and employees laid off, but on the potential for increased sales to a broader customer base.
To the frustration of bankers who tout their mergers' revenue-generating potential, however, it is the job layoffs and branch closures that always grab the headlines.
"Cost cutting is tangible, you can get your hands around it," said James Schmidt, manager of the John Hancock regional bank fund.
Gerard Cassidy, a bank analyst with Hancock Institutional Equities Services, added that the focus on cost cutting is appropriate, given the performance of past deals.
"The lesson one gains from past bank mergers is the potential revenue gains have not come in line with earlier predictions," he said. "So deals sold on revenue enhancements are panned."
First Union Corp.'s pending merger with First Fidelity Bancorp. is a case in point. First Union's stock fell 7% in the days following the merger news, despite claims by First Union chief executive Edward Crutchfield that the deal would enable his bank to boost sales of its offerings - such as capital markets services - by marketing them through First Fidelity's branch system.
Analysts noted that similar claims were made two years ago when Keycorp agreed to merge with Society Corp. Earnings for Keycorp have been far off original expectations - a point the company's chief executive, Robert Gillespie, is now conceding in speeches.
Mr. Gillespie and other bankers argue that the potential for revenue enhancements is something that analysts cannot ignore, especially given the extreme revenue crunch banks face.
However, Thomas Brown, a Donaldson, Lufkin & Jenrette analyst who is a frequent foe of bank mergers, argues that most revenue predictions are unrealistic.
"A deal like NationsBank's buy of BankSouth where they are looking for such large consolidation benefits, there will also be a meaningful revenue loss," he said. "All they did in their estimates was take the two banks' revenues and put them together, and take out expenses. That is incredible."
First Bank System chief financial officer Rick Zona joins the equity analysts in criticizing the type of modeling NationsBank used to show accretion in the year after its merger.
His Minneapolis-based bank assumes revenue runoff in the year after a merger, he said.
Banc One's head of mergers and acquisitions, William Boardman, proposes measuring a deal on price per customer paid.
"We are going to be seeing some alternative ways of pricing," he said. If it is cheaper to add customers without a merger, then maybe a merger should be avoided, he said.
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National Westminster Bank PLC Thursday morning in London confirmed a report in American Banker that is has hired Goldman, Sachs & Co. to help it sell its $31 billion-asset U.S. bank. Shares have risen to $61.25, from $58.75 before the report appeared on Wednesday.
Barnett Banks Inc. shares fell $1.50 to $56.75 after PaineWebber cut its rating to "attractive" from "buy," citing slower than expected cost cuts and the recent rise in the Florida bank's stock price.
Volume in PNC Bank Corp. and Midlantic Corp. soared, with PNC trading 6.3 million shares and Midlantic 4.8 million. Analaysts said an unidentified arbritageur pulled his stake in both banks, possibly in reaction to reports that shareholders may vote down their proposed merger.
Shares of Chemical Banking Corp. fell $1.75 to $58.75 after it was announced that 85 branches in low-income and moderate-income neighborhoods would remain open after the merger with Chase Manhattan Corp. is completed.
