With acquisition prices soaring across the banking industry, two Massachusetts institutions are pursuing slightly different routes to enhance revenues-a joint venture and a lower-cost merger of equals.
Bank of Boston Corp. has revved up its mortgage servicing business through an alliance struck last year with Florida's Barnett Banks Inc. and Thomas H. Lee Co.
Meanwhile, Waltham-based Affiliated Community Bancorp has been thriving as the offspring of an unusually happy marriage between two like-minded thrifts.
Because takeover prices are steep and desirable candidates are becoming harder to find, investment bankers and lawyers say banks of all sizes will increasingly have to explore such alternatives to the more typical acquisition.
"They'll have to consider it or the market will force them to," said Barry P. Taff, a partner in the Washington law firm of Silver, Freedman & Taff.
But such arrangements are more easily considered than done. And for every investment banker or lawyer who touts them as the way for banks to expand, another is ready with the reminder that this road has been traveled before-usually unsuccessfully.
"History shows us that banks have been terrible at making joint ventures work for both parties," said Robert A. Baer, senior managing director at Bear, Stearns & Co., New York.
Banks have too often viewed themselves as above their partners, Mr. Baer said. Such arrogance can destroy the relationship needed to make a joint venture work and ultimately leave both sides weaker.
But Bank of Boston's experience with Barnett Banks Inc. and the investment firm Thomas H. Lee shows bankers may be learning from past mistakes.
Peter Manning, executive vice president responsible for mergers and acquisitions at Bank of Boston, said that although the bank had cultivated its mortgage banking business, it lacked the capital to compete with regional rival Fleet Financial Group.
Still, the bank didn't want to abandon the revived Massachusetts real estate market.
So it signed a five-year agreement with Barnett, Florida's largest mortgage banker under which the mortgages originated by both banks are serviced by a joint venture, HomeSide Mortgage.
Each bank owns a third of HomeSide, while the remaining third is held by Thomas Lee and another venture capital firm, Madison Dearborn Partners.
The key to making any such arrangement work, Mr. Manning said, is ensuring that both partners have similar mindsets from the outset
"You have to be real honest on your strengths and weaknesses, really candid," he said. "And your partner has to be the same."
Knowing the players involved intimately is crucial, as Bank of Boston's near catastrophic deal with Mercury Finance Co. vividly demonstrated.
The bank in January agreed to sell its subprime auto lending arm in exchange for 16% of Mercury's stock and two seats on its board. That deal fell through after Mercury admitted its profits had been misstated for four years due to alleged fraud, and Bank of Boston is looking for another partner.
Still, the experience hasn't soured Bank of Boston from pursuing other joint ventures. The bank regularly meets with officials from other industries and investment bankers to discuss potential future joint ventures.
Another way banks can expand their business without paying a hefty puchase price is by entering into a merger of equals with a low purchase premium.
Mergers of equals-sister-kissing exercises in the minds of many-have a poor track record and have not been looked on kindly by Wall Street. There are important reasons why.
Putting together such a merger involves getting both banks' managements to agree on a business strategy and all other major corporate goals. Most of all, they have to agree how-and by whom-the big decisions will be made.
"You have two of everything," observed J. Michael Shepherd, a partner at Brobeck, Phleger & Harrison, a San Francisco law firm. "It's like Noah's ark."
The history of these deals-as investors are keenly aware-is disappointing earnings after the merger. "They're vulnerable to the lack of premium, which means shareholders attack these deals," said Mr. Taff.
When the deals are consummated, they most often fail to achieve objectives because the partners may in fact be very different animals.
The combination of KeyCorp and Society Corp. provides the biggest example of this. KeyCorp stock has lagged other large regional banks since the 1994 merger of equals. Though the banks were similar in size, "their cultures weren't at all compatible," said James Ackor, an analyst at Tucker Anthony.
Affiliated Bancorp is the progeny of the March 1995 merger between Lexington (Mass.) Savings Bank and Main Street Community Bancorp, Waltham.
In sharp contrast to most mergers of equals, an outsider was brought in to run things. Timothy J. "Ted" Hansberry came from Shawmut National Corp.- now part of Fleet-to serve as president and chief executive officer.
Mr. Hansberry acknowledged recently that "a large part of managing an MOE is managing the egos."
The $1 billion-asset thrift has performed well. Mr. Hansberry noted at a recent conference on bank mergers that its 1996 efficiency ratio was a quite respectable 50.8%.
Analysts said the merger has gone well because both predecessor thrifts had specialized in lending to small commercial real estate projects.
"They've really benefited from all the consolidation in New England," Mr. Ackor said. "Small-businessmen don't like their loan officer to change, and the bank has really stressed its continuity."
The two thrifts continue to operate a separate units under the new holding company, which is involved mainly in risk management and investment strategy.
