Mich. bank returns to start-up strategy in NW
It is rare that Wall Street greets the failure of a merger with something other than disappointment.
But when the $2.7 billion-asset Capitol Bancorp of Lansing, Mich., announced that it had pulled the plug on a $17 million offer for a struggling Seattle community bank, it showed that management teams can get just as much credit for the deals they walk away from as the ones they complete.
Capitol may know that better than most - last week's termination of the purchase of the $136 million-asset AEA Bancshares Inc. was the second deal it has killed in a little over a year.
"I give a company credit when they have enough sense to walk away," said Joseph A. Stieven of Stifel, Nicolaus & Co. in St. Louis. "Most don't. Sometimes the most important word in banking is 'no.' "
Eric E. Rothmann, an analyst with Howe Barnes Investments Inc. in Chicago, agreed. "I would rather see" a deal collapse "in the 11th hour than have it go through and be in a royal mess," Mr. Rothman said.
The pullout was announced Friday. Capitol had unveiled the cash-and-stock deal in January and said it expected to complete it by mid-2004. In May, however, the Federal Deposit Insurance Corp. and the Washington Department of Financial Institutions hit AEA with a cease-and-desist order for problems including weak management, lax oversight by the board of directors, and poor asset quality.
Capitol's previous walk-away decision came in April 2003 when after due diligence it withdrew an offer announced for First International Bank of Chula Vista, Calif.
Terry McEvoy, an Oppenheimer & Co. analyst in Portland, Maine, said the pullouts do not indicate that Capitol is a bad acquirer. Rather, he said strict price discipline forces the company to look "further down in the quality spectrum" of available banks.
Buying such banks is inherently riskier than buying more sought-after - and more expensive - ones, Mr. McEvoy said. "They're looking at banks with more hair around the edges, and those are the deals at risk of falling through."
In an interview Friday, Michael M. Moran, Capitol's chief of capital markets, said the company is still interested in growing by acquisition - and has reviewed more than 200 possible targets over the past two years.
But in the wake of the AEA pullout it is returning to basics in the Pacific Northwest, he said. Instead of entering the region by acquisition it intends to use its core competency by starting up banks there.
The company owns 32 banks, each of which it helped to charter and found.
Friday's press release said Thomas S. Giovanelli, a veteran Seattle banker, had been hired to direct Capitol's Pacific Northwest expansion drive.
Though Capitol is "always open to discussions about acquisition and affiliation opportunities," chairman and chief executive Joseph D. Reid noted in the press release, it has "traditionally focused on de novo bank development."
Mr. McEvoy of Oppenheimer said Friday's developments were heartening. He said the company avoided a bad deal, reaffirmed its commitment to the Pacific Northwest by hiring Mr. Giovanelli, and - most important - went back to its core strategy.
"They are returning to what they know best, and that is de novo expansion," the analyst said.
