CHICAGO - After a year of shopping for a Midwest banking company, Bank of Montreal has temporarily shelved plans to do a major deal because prices are too high.
"Until I get more comfortable with the price-reward ratio, we won't be doing anything aggressive," Matthew W. Barrett, chairman and chief executive, said in an interview.
Mr. Barrett's disclosure could affect the prices of some Midwest bank stocks.
Bank of Montreal, which already owns Chicago-based Harris Bankcorp, announced with great fanfare a year ago that it wanted to expand its U.S. presence. Since then, mere sightings of Mr. Barrett speaking with bankers in various U.S. cities have touched off major stock-price runups in companies presumed to be acquisition targets.
In late May, for example, the stock of Milwaukee-based Marshall & Ilsley Corp. hit a 52-week high on rumors that Bank of Montreal was poised to make an offer. And early last fall, talk was in the air that Mr. Barrett was considering a run at Chicago-based Continental Bank Corp.
Mr. Barrett said that, when he set out to make an acquisition a year ago, he didn't perceive how expensive U.S. banks had become.
Back in 1984, Bank of Montreal paid roughly $600 million in cash, or 1.3 times book value, for Harris; Mr. Barrett, 47, now says he would have to shell out two to three times book value for a bank of comparable size and quality.
The Goodwill Obstacle
Bank of Montreal, with $80 billion in assets, also would have to pay cash to do the deal because Canadian banks are prohibited from making acquisitions by swapping stock. But a cash purchase would create an enormous amount of goodwill.
Goodwill is the difference between the acquisition price and an acquired company's book value. It would have to be written off over several years, depressing Bank of Montreal's earnings.
For example, the purchase of a $16.7 billion-asset U.S. bank with common equity equaling 6% of assets at two times book value would pile $1 billion of goodwill on Bank of Montreal's books. "When you run the numbers it is a sobering analysis," Mr. Barrett said.
Still on the Lookout
Mr. Barrett said he would continue to scout for a major acquisition, albeit at a leisurely pace. The executive said he remains intent on the building profits of Bank of Montreal's U.S. operations to account for 50% of the company's total profits by the end of the decade, up from 30% now.
But Mr. Barrett acknowledged that he can't reach his goal if he pays the prices U.S. banks now are fetching. "I shake my head," he said.
Bank of Montreal has not had an easy time of it in the United States during the past year.
Harris' CRA Woes
Just as it was gearing up for a major expansion, Harris Bankcorp flunked federal examination of its compliance with the Community Reinvestment Act.
Barred from expanding until its regulatory problems were solved, Harris for the last year has expended management resources on community lending. rather than local acquisitions.
What's more, Harris has lagged many of its Midwest peers in financial performance of late.
Harris posted first-quarter profits of $23.2 million, an annualized return of 0.7% on assets and 10.83% on equity. By contrast, big Midwest banks together averaged a 1.07% ROA and a 14.26% ROE in the first quarter, according to Keefe, Bruyette & Woods Inc.
Though acknowledging that he has been approached about selling Harris, Mr. Barrett said the two institutions have a "very happy marriage."
Mr. Barrett also acknowledged he is pressuring Harris to boost its performance but said that's just part of his job as a manager.
"We have a corporate standard of a 15% return on equity," he said, "and we want every business unit to give us a plan that demonstrates how they are going to achieve it."
Harris soon will have its 1992 CRA compliance examination, and Mr. Barrett expressed confidence that the unit will pass muster. Once it does, he said, Harris will resume making local acquisitions that flesh out its $13.8 billion-asset franchise.