Consolidation presents tremendous opportunities for banking companies, but achieving successful integration is often more challenging than initially expected. American Banker talked recently to Michael Mayo, a banking analyst at Credit Suisse First Boston, about what has been going on in the merger market and what it takes to succeed.

What's the tone out there for mergers?

MAYO: Our sense is that there are more willing buyers than sellers. The banks that want to make acquisitions have talked to the candidates, probably for a couple of years and from many angles. There certainly is a willingness for deals to take place.

Why aren't we seeing more deals?

MAYO: It takes two to tango and many of these participants want the lead role. That's what's holding things back in many cases. The challenge is who decides who runs the company, on what terms, and with which process.

Are there different styles of mergers?

MAYO: In simple terms, mergers can go fast or go slow. Bank of America and Fleet Financial Group were faster out of the block with their deals. The banks in this category believe it's more important to make decisions sooner rather than later to eliminate uncertainty surrounding the deal. This sometimes comes at the expense of ruffling feathers of the other bank's management.

The banks that move quickly believe it is very important to be decisive with merger-related decisions. These institutions have battle-hardened chief executives willing to take immediate steps even if it causes up-front pain.

These executives will streamline top management aggressively, even when it causes concern to the middle level of the company.

Those that go fast believe it is more important that the entire company reads from the same page early on. They want employees to quickly follow the company line.

In the slower-going camp, we would include Wells Fargo & Co. and SunTrust Banks. This group wants to maintain a cohesive culture. They also place a high premium on mistake avoidance even if it means a slower integration from what otherwise could be achieved. Generally, these banks place more relative emphasis on revenue synergies and customer retention.

What about pooling versus purchase accounting for mergers?

Pooling transactions inflate a bank's return on equity. Mergers appear much more favorable under pooling because they allow the acquirer to simply add together the book value of the two companies' assets and liabilities, without charging any premium to future earnings.

In purchase accounting, the alternative method, an acquirer must write off the premium, or goodwill, over a period that can last 40 years. The writedown of that goodwill creates a constant drag on earnings in each of those years.

What causes a merger to fail?

Mergers can fail because of misguided management's execution and vision. There is always a big risk in execution. Sometimes the mergers fail because of the way they are structured. We don't like to see a Noah's Ark structure with two of everybody brought along to the new banking company. We like the decision makers to be clearly identified.

Technological mishaps can cause a merger to fail. Management may act too quickly, putting the cart before the horse, and that can result in mishaps, such as in processing customers' accounts.

What about adoption of HR10, the Glass-Steagall reform?

The adoption of HR10 will facilitate a selective pace for acquisitions among banks, brokers, and insurance. Yet it won't be a watershed event like national banking was in 1995.

What goes into your consideration of a merger candidate?

Our bank franchise-value model looks at a bank based on the sum of its parts. The model shows which banks are vulnerable to takeover given that analysis.

As investors, we never pick stocks based solely on takeover appeal because you could be left with a lot of dogs.

We approach takeovers based on valuation relative to the attractiveness of the franchise.

We look for a banking company whose stock price is inexpensive in relation to the value of the given parts.

It's not as easy as it was to name merger candidates based on our analysis, which factors in the breakup value. This is due partly to valuation and partly because some of the more obvious candidates have been taken over.

Who are the merger candidates right now?

You can name almost any bank between $10 billion of assets and $80 billion of assets. Most of these banks have at least had informal discussions. You could almost say it's irresponsible for these banks not to consider a merger as one of several strategic options.

Examples of takeover candidates include Union Planters Corp., Colonial Bancshares, and Summit Bancorp.

Will we see the pairing of a couple of giants?

Chances are, we'll have some more large mergers. The possible acquirers include anyone who hasn't pursued a large transaction in awhile.

Chase Manhattan Corp., PNC!! Bank Corp., National City Corp., Mellon Bank Corp., and Wachovia Bank Corp. spring to mind.

You have a myriad of options. The real question is, does the merger pan out and increase shareholder value?

Who should just give it up and look for a buyer?

As a general rule, if a bank can't achieve the same value that a buyer can give, that bank should consider looking for buyers. We've been frustrated with the earnings of Union Planters, First Virginia Banks Inc., and Summit. You can ask, are these earnings shortfalls one-time blips or evidence of more-serious structural problems?

In your opinion, who could or should team up?

Chase Manhattan and J.P. Morgan & Co. would be do-able on paper given the synergies of their asset management, wholesale banking, and fixed- income units. That merger would also combine two formidable global corporate client lists and allow for cost savings.

But the deal would also bring substantial cultural and management issues.

A lot of the logical pairings have been considered and crossed off the list for various reasons.

What are your concerns about what takes place after the merger is closed?

These days, there's more attention paid to merger assumptions given merger mishaps such as First Union's acquisition of CoreStates Financial, old Wells Fargo's acquisition of First Interstate Corp., and First American's acquisition of Deposit Guaranty Corp.

In some cases, there's been a lack of a good track record for pulling off the merger. There have been deals in which the buyer lacked any experience in large mergers. As a result, investors have become more selective in deciding which acquisitive banks they should own.

Another concern is the delaying of merger synergies due to Y2K. That's when all banks and companies must make their computers able to read beyond 1999.

What about foreign banks?

The foreign banks are beginning to make more noise after retreating earlier in this decade. Deutsche Bank, HSBC Corp., and others have lately made purchases of U.S. banks and insurance companies. As more banks look to be global players, they realize the U.S. banking and capital markets are a necessity.

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