Mergers and acquisitions will pick up in California, Texas, and Florida, because they have strong demographics and plenty of potential sellers, a Citigroup Inc. analyst said.
Michael Diana wrote in a note last week that his "favorite potential takeover names" are Greater Bay Bancorp in East Palo Alto, Calif.; Compass Bancshares in Birmingham, Ala.; and South Financial Group in Greenville, S.C.
Pressure to sell will come from the mounting cost of restating earnings and complying with laws such as the Sarbanes-Oxley and Bank Secrecy acts, he wrote.
"A catalyst for bank takeovers in 2007, for both buyers and sellers, should be difficulty in growing earnings," Mr. Diana wrote.
KBW Inc.'s Keefe, Bruyette & Woods Inc., which included Greater Bay and Compass in a list of potential targets last month, agreed.
"A tough fundamental road makes the certainties of a premium acquisition look better for the sellers," Jefferson Harralson, an analyst at the firm, said in an interview Monday.
Predicting takeovers, Mr. Harralson said, is like "trying to predict where lightning is going to strike." Deals are usually driven by personalities rather than fundamentals, but analysts try to look at the "life cycle" of a firm and find "mileposts" such as lack of succession or a difficult operating environment.
Mr. Diana wrote that Greater Bay's home in the San Francisco area is "very desirable and would give an acquirer an immediate, meaningful presence in northern California, as well as an opportunity to develop a consumer banking" business.
The $7.3 billion-asset Greater Bay is likely to sell itself for $31 to $34 a share, he wrote, which works out to a takeover premium of about 22%.
A deal for Greater Bay is the only one Mr. Diana predicted for this year; he wrote that the $34 bilion-asset Compass is more likely to be bought next year, and that the $14 billion-asset South Financial could be bought as late as 2010.
Compass may sell at a 12% premium, and South Financial could fetch 16%, he wrote.
The other banking companies he views as likely to sell in 2008 include Sovereign Bancorp Inc. in Philadelphia and New York Community Bancorp Inc. in Westbury, N.Y.
The targets he lists for 2009 to 2010 include City National in Beverly Hills; Colonial BancGroup in Montgomery, Ala.; Huntington Bancshares in Columbus, Ohio, and Pacific Capital Bancorp in Santa Barbara, Calif.
Premiums are not likely to exceed 25% this year, Mr. Diana wrote, because price-earnings multiples have come down and the market has punished buyers for high premiums.
Compass is "the best vehicle to enter the Texas banking market," he wrote, and it may be willing to sell because it has no apparent succession plan for its chief executive, Paul Jones. A company spokesman would not comment.
South Financial is "very desirable," Mr. Diana wrote, because the bulk of its operations are in Florida and the "best-growth markets in South Carolina." A company spokesman did not return a call for comment by press time.
Mr. Diana pegged Wachovia Corp. as a potential buyer of any of the three companies.
