Consolidation in the banking industry reached a near-record pace in the third quarter, with acquirers paying unprecedented prices to build their empires.
Banking and thrift companies committed an estimated $23.2 billion to acquisitions announced from July through September, according to Sheshunoff Information Services, after a comparatively sluggish $7.8 billion worth of activity in the spring quarter.
The banking activity reflected a hot merger market for financial services firms. The financial sector has accounted for $145 billion of transactions-32% of all merger deals-for the year to date, according to a study released this week by Houlihan Lokey Mergerstat, Los Angeles.
Among banks and thrifts, the average deal price this summer shot up to 233% of the seller's book value, from 179% in the summer of 1996, and to 17.4 times trailing earnings versus 14.4 times earnings a year earlier.
Such swings are typical, as banks periodically retreat to integrate previous mergers, then rejoin the fray after a competitor makes a noteworthy deal.
"You need a catalyst," observed one investment banker. "Once one bank sells, that usually triggers others in the area to make deals, too."
Wachovia Corp. of Winston-Salem, N.C., apparently lit the match that sparked this summer's merger bonfire. In June the company said it planned to buy Jefferson Banks and Central Fidelity Banks, extending its reach into Virginia.
A few weeks later, First Union Corp., Charlotte, N.C., responded by buying Richmond, Va.'s Signet Banking Corp. for a whopping $3.2 billion, or 3.5 times its book value.
"I just kept stacking billion-dollar bills on the table until Mac said yes," commented First Union chief executive Edward E. Crutchfield Jr., referring to Signet CEO Malcolm S. McDonald. That surely was banking's most memorable quote of the summer.
Many investors questioned the price First Union paid for Signet, which was not considered a premiere franchise. But people who advise on mergers said Wachovia's penetration into Virginia had forced First Union to make a move.
The First Union-Signet deal demonstrated to the market that, more than ever, bankers will shell out big bucks for franchises they deem especially valuable.
This point was driven home when managers at Barnett Banks Inc., undoubtedly with an eye to the deal prices being paid, decided to seize the moment and put the company up for sale in mid-August.
A flock of major banks-including Wachovia, First Union, and SunTrust Banks Inc. of Atlanta-made very generous bids for Florida's biggest independent banking company. But NationsBank Corp. won the bidding war with a mammoth offer of $75 per share, a 37% premium over Barnett's market price.
The price tag of 4.1 times book value and 23 times trailing earnings that NationsBank agreed to pay for Barnett set new highs for a bank acquisition, and they unleashed a flood of speculation that inflated the stock prices of such southern banks as Amsouth Bancorp. and SouthTrust Corp.
Shares of Mercantile Bancorp., Missouri's largest bank, also soared on speculation that someone would buy it at a high premium.
Merger fever rose so high that even bank executives, who normally are reluctant to divulge anything that moves the market, started talking openly about acquisitions. First Chicago NBD Corp. chairman and chief executive Verne G. Istock, for example, stated publicly that his company is interested in buying another bank.
Meanwhile, on another consolidation front, the convergence of commercial and investment banking that began in April gathered speed. First Union, again invading Richmond, said it would buy Wheat First Butcher Singer Inc., and Fleet Financial Group unveiled a deal to acquire Quick & Reilly, the New York discount brokerage.
Foreign institutions also joined the fray; ING Group NV of Amsterdam said it would buy Furman Selz, and Canadian Imperial Bank of Commerce, Toronto, announced its much-anticipated acquisition of Oppenheimer & Co.
Much more may be in store. The quarter ended with a bang as Travelers Group-deflating rumors that it would buy Bankers Trust New York Corp.- rocked the financial industry Sept. 23 by saying it would spend $9 billion to buy Salomon Brothers Inc. and merge the firm into its Smith Barney brokerage unit.