Is it time for investors to stop betting on takeovers?
Bank stocks have been popular in recent years because of the industry's robust earnings. But the icing on the cake for investors has been the notion that a bank whose stock they own might be sold for a fat premium over market value.
Yet there may be early signs that the industry's great takeover engine is losing steam. Announcements of commercial bank merger deals actually fell in the first quarter, to 94, from more than 100 a year earlier, according to Securities Data Co.
The drop, while not huge, came in a remarkably hot M&A climate. According to Securities Data, there were $236 billion of first-quarter transactions in all industries domestically, a 23% gain from the year before. The first quarter was still the second-most-active for mergers ever, behind the fourth quarter of 1997.
The only sector besides commercial banking to see a drop in merger volume was telecommunications, where 56 deals were announced in the first quarter, compared with 74 a year earlier. So is the recent slippage in the number of bank mergers the beginning of the end of the merger wave? Not a chance, insist the investment bankers who make their livings putting deals together.
They say it is too early for year-2000 concerns about computer conversions to be affecting mergers, and they say there are still plenty of viable takeover candidates that have not yet been sold. If anything, the slight drop in activity demonstrates that it is simply too early in the year for bank CEOs to contemplate throwing in the towel, they say.
"The first quarter is always light," said Gail M. Rogers, managing director at the financial institutions group of J.P. Morgan & Co. "Most mergers come in the second half of the year because that's when companies go through their yearend reports, figure out their budgets, and think about whether their numbers warrant continuing."
She added that while commercial bank mergers might have dipped somewhat, mergers between commercial banks and thrifts have been unusually heavy of late. Banks have traditionally shunned thrifts because their portfolios, loaded with residential mortgages, generally cannot contribute much to a bank's earnings.
But thrifts do have sizable amounts of deposits and offer access to new customers. So as the field of desirable banks diminishes, buyers are looking to build their businesses however they can. "Banks are realizing that this is their last chance to grab market share," Ms. Rogers said.
Hubco Inc., a commercial banking company based in Mahwah, N.J., exemplifies the trend. It said last week that it would buy two thrifts, IBS Financial Corp., Cherry Hill, N.J., and Dime Savings Bank, Wallingford, Conn.
Union Planters Corp., Memphis, one of banking's busiest buyers, has also been snapping up thrifts, agreeing last week to buy the Florida branches of California Federal Bank.
Anthony R. Davis, a bank analyst at SBC Warburg Dillon Read, said he thinks there is another reason banks are interested in thrifts: Thrift charters are more flexible than bank charters. Thrifts can invest in real estate and sell securities with fewer restrictions.
And since legislation to eliminate differences in the charters consistently fails in Congress, banks are buying thrifts to keep pace with financial conglomerates like Travelers Group that are applying for thrift charters, Mr. Davis said.
The question no investment banker, chief executive, or Wall Street analyst can answer for certain is when the looming year-2000 issue will start to slow mergers. Generally it is agreed that as 2000 approaches, banks will be reluctant to absorb new companies while they struggle to iron out the kinks in their computer systems.
James J. McDermott Jr., chairman and chief executive of Keefe, Bruyette & Woods Inc., said at a recent banking conference that he believes the last big mergers of the decade will occur next February. That would give the acquirer until July to close the deal and then several months to grapple with systems conversions.
Bank CEOs seem to agree.
In a conference call to analysts announcing his company's latest thrift acquisitions, Hubco chairman and chief executive Kenneth T. Neilson said he sees the consolidation wave ending after the first quarter next year.
"By March 31 of next year I don't think many institutions will be doing acquisitions," he said. "The time period needed for regulatory approval and the time needed to ensure computer conversion will be more risk than most institutions will be willing to undertake."