$26 Billion Canadian Megamerger Escalates Race for Global Leadership

Bank of Montreal's efforts to establish itself as a dominant retail and commercial bank in the Midwest could get a much-needed boost from its planned merger with Royal Bank of Canada.

Since Bank of Montreal bought Harris Trust and Savings Bank in 1984, it has risen no higher than No. 3 in the attractive Chicago market, trailing First Chicago NBD Corp. and ABN Amro Holdings. Though it has pursued more acquisitions in the region, the Canadian company has often been outbid by more aggressive competitors.

Now, observers say, $22 billion-asset Harris could emerge as a beachhead for a bold expansion in the United States by the merged Canadian banks.

"I would think that it might enable that organization to do much larger acquisitions here," said Michael E. Sammon, senior vice president of Howe Barnes Investments Inc. in Chicago. "This clearly puts them in a size category in which they could make offers to pretty big companies."

Observers speculated that Harris might well expand outside its home base of Chicago, following the lead of ABN Amro. The Dutch banking giant entered Michigan last year with the acquisition of Standard Federal Bancorp.

Firstar Corp. of Milwaukee, for instance, would be an attractive acquisition for the combined Canadian banks, Mr. Sammon said. With $19.8 billion in assets, Firstar would double Harris' size and give it a presence in Wisconsin and Minnesota.

The $26 billion market capitalization of the merged Canadian banks would make a U.S. acquisition easier than it had been in the past for Bank of Montreal. The market capitalization would be the 10th largest of any North American banking company.

Alan G. McNally, chairman and chief executive of Harris, could have a larger role in the combined bank. In December, all of Bank of Montreal's U.S. operations were placed under Mr. McNally. That includes those of the investment bank Nesbitt Burns Securities Inc. Mr. McNally was unavailable for comment.

Although Harris' earnings rose 12% last year, to $181 million, some sources say Bank of Montreal has been unhappy with a lack of growth in market share. Indeed, rumors have sometimes popped up that Harris would be sold.

If the merged Canadian bank were to put Harris on the block, it could draw a lot of attention from potential buyers. "It would be an interesting spinoff," said John J. Harris, an investment banker with ABN Amro Chicago Corp.

But one adviser in the merger negotiations said Royal Bank indicated no intention of selling the U.S. bank. "I would not put (Harris) in the category of assets for divestiture. In fact, I would think they'd want to grow it."

For its part, Harris executives said the merger would mean "business as usual." Bank of Montreal has had a presence in Chicago since the last century and intends to stay, said Harris spokeswoman Pam Kassner.

Certainly, the merged Canadian banks would be an active syndicated lender in the U.S. In 1997, Royal Bank was No. 14 and Bank of Montreal No. 15 in the U.S. loan syndications market, according to figures compiled by Securities Data Co.

Bank of Montreal has also been building its equity underwriting business in the U.S. through Nesbitt Burns. The subsidiary employs about 300 people in Chicago, New York, and Houston, with Chicago representing the largest concentration.

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