With stock prices still high and enabling mergers of unprecedented size, bank executives have a way of explaining the strategic benefits of getting bigger. They say they will stave off competition, gain scale and technology economies, and solidify a national or superregional business.

None of this is possible without a large number of customers. The conventional wisdom is that it is cheaper to buy customers than to expand one's own customer base. In a form of "irrational exuberance," huge premiums are being paid to acquire banking customers.

Recent analyses of bank mergers indicate that the median premium paid per banking customer was around $6,000.

Banks that pay this much put themselves in a difficult position. High prices pressure chief executives and their management teams to justify the investment by keeping customers longer, cross-selling, and generating higher margins.

Andersen Consulting just completed a study, published in Strategic Finance, the Economist Intelligence Unit's quarterly, that helps put these premiums into perspective.

A customer at a large multiline bank generates about $100 per year in pretax profit. Even without discounting, this puts the payback time per customer in the range of 60 years. A customer would have to stay with the acquiring bank that long before the value of the transaction could be fully realized.

What is significant and daunting about this is that traditional retention measures indicate that customers stay with their bank only six or seven years.

Under what conditions does paying huge premiums for customers make sense? When it is part of an overall customer portfolio strategy that uses such extraordinary acquisition expenses as interludes to achieve some set of mergers of equals.

We can look to the NationsBank-BankAmerica, Banc One-First Chicago, and Citicorp-Travelers agreements as examples where companies have moved smartly to acquire customers.

Before each of these deals, one or both parties had recently bought customers at very expensive premiums-NationsBank-Barnett, Banc One-First Commerce, Travelers-Salomon Smith Barney. Because of these strategic acquisitions, each had put itself in a better position to find a mutually agreeable merger of equals.

Though these three large mergers offer smart examples, there will be stupid ones. In the panic not to get left out, there will be banking and other financial companies that buy customers at big premiums without giving much thought to subsequent moves to gain the necessary scale.

The reality is that few banks of any relevant size are available to challenge the largest banking companies. New combinations would have to be thoughtfully created in a way that assembled large numbers of additional customers without making expensive mistakes.

Here are some banks that need to be very careful about the path they choose to get bigger: Bank of New York, Mellon, Fleet, BankBoston, First Union, Wachovia, and Chase. As the game of musical chairs continues, it will be interesting to see who gets stuck.

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