There has never been a more frenzied span in bank consolidation than this year's first half. Nearly $240 billion worth of mergers and acquisitions were unveiled-or more than the total value of deals during the past three years combined.
Dealmaking is running at a pace that could shrink the total number of U.S. banks by 5% this year, according to Thomas H. Hanley, the veteran industry analyst at Warburg Dillon Read, New York. That would be twice the shrinkage rate of last year.
Nevertheless, the nation still has 7,000 banks and Mr. Hanley thinks that none of the fundamental trends behind consolidation can really be said to have changed.
"Many banking markets remain highly fragmented, while financial institutions continue to seek critical mass," he pointed out. "Further, as ongoing revenue growth poses a challenge to banks, cost-saving opportunities present an alternative path to earnings growth, not to mention the potential funds that mergers can free for technology investment."
Of course, the headline-grabbing deals of the first half were the proposed $74.3 billion combination of Citicorp with Travelers Group, the $61.6 billion pact between NationsBank and BankAmerica, the $34.5 billion accord between Norwest Corp. and Wells Fargo & Co., and the $29.8 billion agreement by Banc One Corp. and First Chicago NBD.
This foursome of deals carries the prospect of a fundamentally reordered banking firmament.
Travelers-Citicorp, global in reach, could well stand as the largest cross-financial services merger ever as well as the biggest banking deal.
NationsBank-BankAmerica would be the first large-scale banking franchise linking the East and West coasts.
Banc One-First Chicago's combined territory would extend from the Great Lakes to the Gulf of Mexico and westward to Arizona, and it will be among the biggest credit card issuers.
Norwest-Wells Fargo would create a jumbo enterprise based in the Midwest and West, but doing significant financial services business in all 50 states.
Moreover, all were low-premium mergers-that is, the shareholders of the sellers harvested no enormous windfall over the market price of their stock. And, except for Norwest-Wells Fargo, they were mergers of equals.
That took the wind out of bank stocks' sales as investors began reducing their wagers on the prospect of big payouts. But Mr. Hanley and others do not think premiums in bank mergers are a thing of the past.
The more than $200 billion worth of low-premium deals among big institutions struck during the first half "likely will grace the record books for some time to come," Mr. Hanley said.
But what about the utterances by bank chief executives, notably First Union Corp.'s Edward E. Crutchfield, that low-premium deals are now the most likely type to be done.
"We suggest that this represents the triumph of hope over experience," said analyst Sean J. Ryan of Bear, Stearns & Co. "Nobody ever wants to pay a merger premium; the sad fact, though, is that few CEOs are lining up to sell their banks without one.
"Thus, the real choice for most acquirers is between deals requiring premiums, or no deals at all," he said. "For most acquirers, which generally adhere to the notion of scale as a competitive advantage, that choice is all too easy."
Most mergers, Mr. Hanley believes, will continue to involve midsize banks. And he anticipates "a healthy number of such acquisitions to occur at robust prices in the months to come."
In fact, buyout prices overall for banks and thrifts continue to rise by several measures. During the second quarter the average price paid in whole bank deals advanced to 2.65 times the book value of the seller and 22.4 times sellers' earnings. Among thrift institutions, as well, average prices stepped up to 2.3 times book and 28.6 times earnings
As for market premiums, the third quarter has already featured the announced agreement by Star Banc Corp. to buy Firstar Corp. at a sizable 44% premium over its market price. And last week, SunTrust Banks agreed to buy Crestar Financial at price amounting to a 30% market premium.
Mr. Hanley asserted that the acquisition of Firstar at 24 times its earnings was not out of line with other banking deals done recently. "Ultimately, we expect this transaction to be one of many of its size and price to materialize over the balance of the year," he said.
Mr. Ryan also dismissed the notion, often reflected in weaker stock prices, that midsize banks are significantly less likely to be acquired if they make acquisitions themselves.
A review of recent mid-cap acquisitions shows these (investor) fears to be ill-founded," he said. "Of the 15 mid-cap bank acquisitions since 1995 that we sampled, two-thirds had made acquisitions within one year of their ultimate sale."
He noted that many banks, including Merdian Bancorp., Shawmut National Corp. and U.S. Bancorp., had acquisitions pending when they decided to sell. Typically the sale occurred nine months after the acquisition, but time spans varied significantly.
For instance, CoreStates Financial Corp., Philadelphia, said in October 1995 it would acquire Meridian, just five months after Meridian announced its purchase of United Counties Bancorp. The announcement of CoreStates' own sale to First Union was announced 25 months later.
In the thrift sector, H.F. Ahmanson, after losing its bid to merge with Great Western Financial, said last October it would buy Coast Savings Financial. Five months later, in March, it agreed to sell to Washington Mutual, which had just acquired Great Western.
The interval can sometimes be quite short. Barnett Banks Inc. said on June 16, 1997 it would acquire First of America-Florida. Then, just over two months later on Aug. 29, Barnett said it would sell to NationsBank.
