Fleet Financial Group's deal to buy Natwest Bancorp for $3.26 billion drew mixed reviews on Tuesday.
Most observers agreed that Fleet paid an attractive price for the U.S. unit of National Westminster Bank PLC. Just a few months ago, the unit was said to be on the block for $4 billion to $6 billion.
But analysts and others questioned how Fleet could absorb Natwest right on the heels of acquiring Shawmut National Corp. That $3.7 billion deal closed earlier this month.
Indeed, the latest deal seemed to underscore the challenges that the banking industry faces as it moves to implement this year's spate of megamergers.
"Making these extremely large new companies work is a major task and one with which the industry has had only limited success to date," said consultant Edward Furash.
The stock market appeared to take the deal in stride, with Fleet's stock rising slightly after the morning announcement. The shares closed up $2.125, to $41.125, amid a general rise in bank stocks.
But concerns persisted as to whether Fleet has taken on too much integration work.
"In early November, you said your plate was full with the merger with Shawmut. What changed your mind?" Brown Brothers Harriman & Co. analyst Nancy Bush skeptically quizzed Fleet's chief executive Terrence Murray in a conference call.
And one large Fleet investor later said, "The open question is (how are) they going to go through one digestion period with Shawmut and now another?"
Mr. Murray replied that the Natwest integration would take place only after Shawmut was nearly fully assimilated next summer. The same team charged with the Shawmut integration would oversee the Natwest merger, he said.
The new Natwest will be named Fleet Bank of New York and will have current Natwest chief executive John Tugwell as CEO.
Jay Sarles, vice chairman of Fleet, will be chairman of the New York bank. The new bank will not be merged into Fleet's existing New York bank.
The deal, expected to be completed in the second quarter of 1996, would move Fleet into the New Jersey market for the first time, securing it Natwest's No. 4 position. And Fleet will rank third in New York State, including a significantly expanded market position on Long Island.
Fleet expects to close 30 of Natwest's 300 branches and lay off 900 Natwest employees. An additional 900 employees are expected to leave through attrition. Fleet predicted that the deal would generate $200 million of cost savings, or 23% of Natwest's 1995 operating expenses.
Fleet paid 1.05 times Natwest's book value, and 12 times next years earnings.
The deal hinged on Fleet's ability pay nearly the full price in cash without causing a goodwill burden that would depress earnings for years to come.
When Natwest put its U.S. commercial bank unit on the block last September, the bank insisted on an all-cash deal.
Mr. Murray said that at first glance a few months ago, Fleet was not very interested in the deal. Other banks thought to have been interested but likely dissuaded by the cash hurdle include Bank of New York Co., CoreStates Financial Corp., and First Union Corp.
Fleet will pay Natwest $2.7 billion in cash. It will issue $600 million of preferred stock - half of which Natwest Bank will take - and $400 million of debt securities.
The remaining $560 million will be paid through an "earnout," which will pay National Westminster 50% of the new Fleet Bank of New York's earnings for up to eight years, though Fleet said it expected the payouts to be completed within four years.
Fleet will also shed $31 billion in assets as part of the transaction, in an effort to replace low-yielding assets with higher-yielding ones.
The new company will have $90 billion in assets, after Fleet sheds $18 billion in assets and Natwest sheds $13 billion.
Fleet should earn 510 basis points more on the new assets, the company said. This should increase its net interest margin by nearly one-third, one investor said. The bank did not release an estimate for what its new net interest margin would be.
Though the bank insisted it could easily integrate Natwest while assimilating Shawmut, some observers questioned this assumption.
"It's almost as if banks are saying, I want to be sitting in the biggest armchair when the music stops," added Andre Cappon, president of the CBM Group Inc., a New York based consulting firm. "But what do they do afterwards?"
However, Thomas Thuerkauf of Keefe, Bruyette & Woods Inc. said he felt Fleet was up to the task, and raised his rating on the bank from "hold" to "accumulate."
For Natwest, the deal ends a two-and-a-half-decade struggle to establish its commercial bank in the United States.
In the end, the bank was unable to achieve the size necessary to achieve its objectives, said Mr. Tugwell. In a press release, Natwest said it would not use the proceeds from the sale to buy a U.S. investment bank. Observers widely expect the bank to buy an asset manager, however.
Because of accounting differences, Natwest calculates the sale price as $3.6 billion, which would represent a profit over the $3.3 billion it paid for the U.S. bank.
Natwest was advised by Goldman, Sachs & Co., and Fleet was advised by UBS Securities and Merrill Lynch & Co.
- James Kraus contributed to this report.
