One more round.
Merger activity among U.S. banks, which trailed off in 1999 after a booming 1998, is expected to enjoy one more burst in 2000, and analysts are sizing up possible takeover candidates ranging from community banks to some of the largest banking companies.
In the spirit of the season, Keefe, Bruyette & Woods Inc. listed 10 banks as candidates for happy investment returns in 2000 because they are prime acquisition targets. For several reasons, including the expected elimination of pooling-of-interests accounting, next year "has the potential to be a big year for bank M&A activity," David Winton, an analyst at Keefe Bruyette, wrote in his report.
While the banks range in size and geography, there are some general trends that link them. Among the "usual suspects" on the list are Bank One Corp. in Chicago, KeyCorp in Cleveland, and Huntington Bancshares of Columbus, Ohio.
These banks are in the "needs-fixing or in-the-process-of-turning-around" camp, which makes them vulnerable to takeover, said Joseph Duwan, an analyst at Keefe Bruyette.
On the flip side are smaller firms, some of which are far from being household names. In this class tend to be strong performers that have high-growth business lines or are in fast-growing areas.
They include $7.7 billion-asset Mercantile Bankshares of Baltimore and Amcore Financial, a $4.3 billion banking company in Rockford, Ill. Both companies have attractive trust businesses, which have a "higher growth rate, do not require substantial amounts of capital, have little credit risk and higher profitability," said Mr. Duwan.
Associated Banc-Corp in Green Bay, Wis., with $12.3 billion of assets, is the largest independent banking company in the state, pointed out David E. Mudd, an analyst with Howe Barnes Investments in Chicago. People think that the company is a potential takeover target because "it is a good performer with above-average profitability in a stable to moderate growth market."
Bank merger and acquisition activity through Dec. 23 slowed to a total volume of $66.1 billion on 285 deals in 1999, according to Thomson Financial Securities Data Co. That was down sharply from $250.2 billion on 420 deals last year through that date.
Among the biggest catalysts for increased merger activity is the proposed end of pooling of interests accounting, which has fueled much of the bank merger activity in the past, many analysts contend. "While logic would indicate that accounting considerations alone should not drive M&A decisions, there is no question that many in the industry prefer pooling of interests, said Mr. Winton.
Other possible catalysts include the disappearance of year-2000 concerns, which have dampened bank stock prices - and hence merger activity - and a "tougher revenue outlook for the traditional spread banking business," added the analyst.
Bank One is one of the most trumpeted takeover targets in past days, because of its earnings disappointments and the recent departure of longtime chairman and chief executive officer John B. McCoy. Analysts expect the company to either sell to a larger suitor or to divest its credit card division, First USA.
KeyCorp and Huntington are both turning their companies around through cost-cutting initiatives and restructuring programs. These companies are still vulnerable to takeover because the banks are entering into a much more difficult environment in which to do business.
West Coast Bancorp, a $1.2 billion-asset banking company in Portland, Ore., also falls into this group, said analysts.
"People speculate that West Coast is a good takeover target because it is the largest independent publicly traded bank in Oregon," said Joseph Morford, an analyst at Dain Rauscher Wessels in San Francisco. "The company's revenue growth performance has been disappointing this year and its chief executive officer resigned earlier this year."
While Michael Mayo of Credit Suisse First Boston does not contest that merger activity is going to increase, he does think that consolidation may manifest itself in a way that few investors expect.
Wells Fargo & Co.'s recent agreement to buy National Bancorp of Alaska in Anchorage - described by many as a "takeunder" acquisition because the $30 share price offer was lower than the share price that National Bancorp was trading at - sends an "ominous sign" about future mergers, said Mr. Mayo.
"Forty percent takeover premiums may be a thing of the past," said Mr. Mayo. "Sellers could be dealing from a position of weakness in 2000."