When it comes to buying nonbank financial companies, banks have been all talk but little action.
At the beginning of the year, many banks expressed keen interest in buying up money managers, mutual funds, mortgage companies, and other financial services firms. Even Citicorp, which usually expands through internal growth, said it was on the prowl for a money management firm.
Yet banks have been conspicuously absent from most of the major nonbank deals announced so far this year.
Many are still digesting earlier purchases of other banks, which is chilling their nonbank acquisition plans. And while banks have the capital to do nonbank deals, many have been wary of paying the steep multiples that money managers and mutual funds have been routinely fetching this year.
"If you ask bankers would they make these deals, I think they'd say they would - at reasonable prices," said Ben Crabtree, a bank stock analyst at Dain Bosworth Inc.
Thanks to a raging bull market for stocks, mutual fund deals have remained pricey far longer than anyone had expected, said William Houlihan, managing partner at Bear, Stearns & Co., New York.
Meanwhile, fewer mortgage companies are up for sale, as sellers wait for premiums to return to where they were two years ago. This has put the kibosh on many banks' plans to buy nonbank firms.
Investment bankers said they are hopeful that the situation may change by yearend. The stock market's recent downturn could make money management and mutual fund firms more affordable, they said. And more mortgage banks are exploring joint ventures as a way of getting servicing risk off their books.
But to date, 1996 has been fairly quiet for commercial banks. In the money management and mutual fund arena, large investment banks and other mutual fund companies have so far been undeterred by hefty prices.
While NationsBank Corp. and First Union Corp. courted fund company Van Kampen/American Capital Inc., they couldn't top investment bank Morgan Stanley Group's $1.1 billion bid in June.
That same week, Merrill Lynch & Co., another investment bank, announced it would pay $200 million for Hotchkis and Wiley, a Los Angeles money manager. And Franklin Resources, a large mutual fund company, said it would pay up to $800 million for Heine Securities.
These nonbank companies paid an average of roughly 9.75 times pretax earnings for their acquisitions - the going rate for money managers since 1994. Prices in that market had been on an upward trend since the late 1980s, when fund companies fetched about seven times pretax earnings, said Gregg Hazlett, director of research at Investment Counseling Inc., West Conshohocken, Pa.
With prices that high, banks for the past two years have been looking for 13% to 15% growth from the asset managers they acquire. But they have been somewhat disappointed in the deals they did make.
"Banks looking at last year's mutual fund deals found that growth at those companies isn't what the acquirers hoped it would be," said Peter L. Bain, managing principal at Berkshire Capital Corp., New York.
"A bank needs to be honest about whether it can create the proper environment where the professionals in the (acquired) firm can focus on what they're good at, and not be distracted by the (acquiring) company," said Richard C. Caldwell, an executive vice president at PNC Bank Corp. in Pittsburgh. A bank has to be sure it can address compensation needs in a money management environment, he added.
In 1994, PNC bought Black Rock Financial Management, a New York-based fixed-income manager, for $240 million in cash and notes.
Banks that began the year with an eye on buying mortgage company assets have fared somewhat better than those on the prowl for fund companies. Executives at BancBoston Mortgage Corp. and Norwest Mortgage Co. started off 1996 looking to acquire mortgage operations.
Norwest quickly made good on its plans. In January, it announced it was buying most of Prudential Home Mortgage - the largest deal in industry history. Three months later, Bank of Boston spun off its mortgage division and formed a joint venture with Barnett Bank's mortgage division and two outside investment groups to form HomeSide Lending, Jacksonville, Fla.
Not all companies fared so well. Mellon Bank Corp. in December signed a letter of intent to buy Source One Mortgage Services Corp., Farmington Hills, Mich. But the transaction between Mellon and Source One's parent company, Fund American Enterprises Holdings, fell apart in May when the parties could not agree on price.
Brenda White, managing director at UBS Securities, said she expects more joint ventures in the months to come. The strategy is a good one for banks wary of keeping mortgage servicing, a volatile asset, on their books, she said.
With a joint venture operation, the investment in the venture remains on the bank's books, but the servicing risk goes on the balance sheet of the spinoff. Other companies have been exploring this option, she said.
Not all banks have stayed on the acquisition sidelines. Foreign banks, for instance, have been snapping up asset managers as quickly as they can. Foreign-based banks participated in five of the 46 asset management deals announced this year, said Mr. Bain of Berkshire Capital. U.S. banks were not involved in any of the 46.
American banks, meanwhile, have shown a healthy appetite for leasing companies this year. NationsBank Corp., for example, made a deal to buy Commerce Finance Co., Germantown, Tenn. Commerce Finance makes small unsecured consumer loans. And First Union Corp. made a deal in May to buy a rail car leasing division from USL Capital.
Specialty finance companies, such as leasing companies, can command as much as 20 times earnings but typically trade in the private market at 12 to 15 times earnings, said Scott Vandermark, an investment banker at Tri River Capital Group, New York.