National City Corp., expanding its reach through the Midwest, has agreed to buy First of America Bank Corp. of Kalamazoo, Mich., for about $7.1 billion in stock.
The deal, announced Monday, would create the nation's 13th-largest banking company. It would merge the $53 billion-asset National City-which is based in Cleveland and operates in Ohio, Indiana, Kentucky, and Pennsylvania-with the $22 billion-asset First of America, which operates in Michigan, Illinois, and Indiana.
"We add another strong Midwest banking franchise that is culturally and demographically similar to our own," said David Daberko, chairman and chief executive officer of National City.
The merger, he said, "represents a tremendous opportunity to expand our business and take our products and technology to adjacent and familiar markets."
The deal, at a rich 3.8 times First of America's book value, is expected to spark more acquisitions in the Midwest, a region in which banks have been slower to consolidate than in other areas of the country.
"The lower the supply of available candidates," said James Schutz, an analyst with ABN Amro Chicago Corp., "the more urgent it becomes to buy."
First of America, which has been considered an acquisition target for many years, is the third-biggest bank in Michigan and the fifth-biggest bank in Illinois, based on deposits and assets. National City would enter the attractive Chicago and Detroit markets for the first time through the merger.
It would also strengthen its No. 3 position in Indianapolis and other parts of Indiana.
With the merger's closing, which is expected in the second quarter, National City would take a pretax charge of about $350 million. National City estimated it would reduce First of America's expenses by $243 million, or 30%.
An undetermined number of First of America's 10,700 jobs would be cut.
As part of the transaction, National City agreed to move 700 jobs to Kalamazoo and establish a charitable foundation that would be initially funded with $30 million. National City said it would increase First of America's annual charitable giving from $3 million to $5 million. Pledges of jobs and charity money are becoming standard procedure in large bank mergers, said Mr. Schutz, the analyst, noting that National City is trying to minimize community backlash.
There is minimal branch overlap between the two companies because Indiana is the only state where National City and First of America both have a presence. But analysts noted National City is used to staffing its banking offices with fewer people than First of America does, so branch jobs are likely to be reduced. A number of back office positions would also be eliminated.
A combination of cost savings and added revenue, primarily from untapped commercial business customers, would help the deal to add to earnings by 1999, National City predicted. The deal, to be accounted for as a pooling of interests, would be moderately dilutive to 1998 earnings.
Despite the transaction's steep price tag, analyst Joseph Duwan of Keefe, Bruyette & Woods Inc. said National City's track record on acquisitions has been good.
Robert G. Siefers, a National City vice chairman and the company's chief financial officer, has been placed in charge of overseeing the integration. He was responsible for National City's successful merger of $14 billion- asset Integra Financial Corp. of Pittsburgh. That deal closed in May 1996.
National City officials said they view the two deals in a similar light. The Integra merger made National City the third-largest bank in Pittsburgh and gave it a new base of midsize business customers.
Like Integra, First of America is primarily a consumer bank that National City officials think has untapped potential to be a business lender.
Though Mr. Daberko noted that cost savings and revenue growth at Integra exceeded expectations, Mr. Schutz said National City will face more competition in First of America's markets than it does in Integra's.
In Michigan, Illinois, and Indiana, National City will face First Chicago NBD Corp., Banc One Corp., ABN Amro North America, Comerica, Michigan National Corp., and Old Kent, among others.
Richard F. Chormann, First of America's chairman, chief executive officer, and president since early 1996, has been aggressive in cutting costs and selling off businesses. First of America sold its $1.1 billion- asset Florida thrift, 30 small-town branches in Michigan and Illinois, and pieces of its mortgage banking and credit card operation. The moves have helped boost First of America's earnings.
"I believe our efforts over the past two years have been reflected in our performance," Mr. Chormann said Monday. "I think this transaction has demonstrated our commitment to shareholder value."
With the deal's closing, Mr. Chormann is slated to become a vice chairman of National City. He said First of America sold itself in a "very controlled" bidding situation. He did not identify the other suitors, but First of America would have also made a logical acquisition for Banc One, Comerica, and First Chicago NBD.
Since he took the top job at First of America, Mr. Chormann has never ruled out a possible sale, and with each divestiture, analysts predicted that the bank was shedding unprofitable assets so it could get a higher price when it eventually did sell.
Mr. Chormann said Monday he has known Mr. Daberko for several years and described the merger as the result of a normal strategic review. In the end, he said, the company's board decided it couldn't compete at its current size. "I do believe size does have some importance," he said.
Midwest Market Hot On Deal Speculation
By AARON ELSTEIN
Shares of most midwestern banks soared Monday as investors focused on the possibility of additional mergers in the region.
The announcement that Michigan-based First of America Bank Corp. plans to sell out to Cleveland's National City Corp. for a 36% premium caused investors to bid up stocks in companies deemed likely targets in future deals.
Until now, the pace of banking consolidation has been less frenzied in Michigan, Wisconsin, and Ohio than elsewhere. In fact, acquisition activity in the Midwest during the past several years has largely been confined to Missouri.
Last week, however, rumors that First Chicago NBD Corp. had agreed to be acquired by Banc One Corp. prompted a big run-up in First Chicago shares. First Chicago later denied the reports.
News of the First of America deal was just one factor on a record day for bank stocks. The Standard & Poor's bank index rose 25.06 points, or 4.1%, led by a $9.50 rise at Citicorp, after Goldman, Sachs & Co. analyst Robert B. Albertson said that Asia's economic problems shouldn't affect Citicorp's earnings.
Among the midwestern banks, Old Kent Financial Corp., Grand Rapids, Mich., rose 5.5%; Comerica Inc., Detroit, rose 2.7%; Huntington Bancshares, Columbus, Ohio, rose 4.6%; and Firstar Corp. and Marshall & Ilsley Corp., both of Milwaukee, rose 5.3% and 2.8%.
"Everyone is asking, 'Is this deal the catalyst?'" for more activity, said Richard J. Barrett, who heads the financial institutions group at UBS Securities, an investment bank that with NationsBanc Montgomery Securities co-advised National City on its planned acquisition. "The raw material is there to create large franchises."
And indeed, there is recent precedent for one merger sparking others in the same state.
Last summer Wachovia Corp., Winston-Salem, N.C., helped to trigger a merger wave in Virginia when it said it would acquire Jefferson Bankshares of Charlottesville and Central Fidelity Bankshares of Richmond.
Those deals were quickly followed by First Union Corp.'s rich deal for Signet Banking Corp., Richmond, viewed by many analysts as a defensive move by the North Carolina superregional bank.
While no one is willing to predict that the pending National City-First of America marriage will provoke a similar reaction, investment bankers and analysts say looming technology costs will no doubt force many midwestern franchises to seriously consider selling in the next six months.
"Almost all the banks in the Midwest face big year-2000 issues," said Thomas Lefebvre, portfolio manager at Phoenix Duff & Phelps, Chicago. "The big banks are spending huge amounts of money to resolve the problem, but it's not clear to me that the midsize banks are or can. I think they have to resolve how they are going to handle the issue by the middle of next year."
First of America chairman, president, and chief executive Richard F. Chormann said year-2000 technology issues were "not a significant factor" in his decision to sell. "We're well along in that area," he insisted.
But he added: "Certainly the need for significant expenses in technology" to further develop and deliver products to customers "was an important factor."
In addition to the year-2000 issue, the prices being offered these days are getting hard for the most independence-minded banker to resist.
"It's like spring break at Daytona Beach-everyone is checking each other out," said Joseph Stieven, an analyst at Stifel Nicolaus, St. Louis.
Moreover, bankers may be inclined to take the money now because some investors are finding the deal prices increasingly hard to fathom.
National City is "paying a very full price" for First of America, Mr. Lefebvre said. "You have to wonder if this is a sign of the top because at some point these deals aren't about lending anymore but speculation."