The next round of mergers and acquisitions may begin taking shape next week as companies start submitting unusually detailed regulatory reports, top bankers and dealmakers say.
These quarterly reports to the Securities and Exchange Commission, called 10-Qs, will contain the most elaborate disclosures to date about companies' efforts to deal with year-2000 computer conversion issues.
By putting a spotlight on banks with compliance problems, the reports could identify potential acquisition targets. And some may be so vulnerable as to drive down deal prices.
"There will be deals struck from what's contained in these reports, some at fire-sale prices," said Thomas H. Jacobsen, chairman and chief executive of Mercantile Bancorp. in St. Louis. (See related report on page 4.)
Mr. Jacobsen recently visited New York to tell investors that his company is out of the acquisition business until he can cut Mercantile's costs. But he acknowledged in an interview that he would at least have to consider buying a smaller competitor in his area if he could get it cheap.
Ordinarily, 10-Qs are filled with detailed information about a company's operations and financial health. In recent quarters, companies have begun estimating expenses for the vexing century-date changeover in information technology systems.
But in July the SEC notified companies that third-quarter 10-Qs would have to contain far more specific and detailed information about year-2000 issues than ever before.
Companies must disclose their current year-2000 readiness and the costs of making their systems compliant. They must also present a worst-case scenario of what could happen to operations and financial soundness if they fail to comply.
The disclosures will be found in management's discussion and analysis section of each 10-Q.
Will the worst-case scenarios come to pass? The Federal Deposit Insurance Corp. has said that 94% of the 10,687 institutions it insures were making "satisfactory" progress toward year-2000 compliance as of July 31, but it graded 5% "needs improvement" and 0.3%-34 institutions- "unsatisfactory."
"As far as financial institutions are concerned, I am encouraged by the progress that has been made over the past year," said Federal Reserve Board Governor Edward W. Kelley Jr. in a speech Thursday at Houston Baptist University in Texas. "There is every reason to be confident that our financial system will be ready."
But dealmakers believe it is reasonable to assume trouble at more companies than regulators' early numbers suggest.
The final exam for year-2000 readiness is set for no later than the middle of next year. If any bank managements demonstrate between now and then that they do not have their act together, regulators may force them to sell, said Robert H. Ledig, a partner who follows year-2000 issues for the law firm of Fried, Frank, Harris, Shriver & Jacobson.
"If regulators determine the company won't be compliant," Mr. Ledig said, "they're likely to pressure management to do something dramatic, like put themselves in the hands of another company." And if regulators force the hands of many companies, "that will likely have a depressant effect on sale prices," he said.
For bankers like Mercantile's Mr. Jacobsen, all this could present an unprecedented and perhaps one-time opportunity to seize market share for significantly less than it would cost now.
At the same time, a sudden surge in such activity could create a bureaucratic nightmare for bank regulators.
Dealmakers say the Federal Reserve is informally advising banks not to strike any deal after April 30 because regulators would have difficulty approving them next summer while they focus on ensuring that all banks are year-2000 compliant.
"No official statements have come from the Fed, but the more frequent acquirers are being told to cool it," said Ronald H. Janis, partner at Pitney, Hardin, Kipp & Szuch, a Morristown, N.J., law firm.
The Fed's message does not quite amount to a merger moratorium, but it comes close. If the central bank declined to approve deals, the savings that banks could realize from buying others would be delayed and the economic rationale for the deals would be wiped out.
Some merger advisers also speculate that the Fed and other regulators want experienced buyers available in case the need arises to arrange a "supervisory sale"-federally brokered sales of bank assets not seen since the days when bad real estate loans were driving some financial institutions into insolvency nearly 10 years ago.
In any case, the problems banks face with year-2000 issues may pale in comparison with the difficulties other industries are experiencing, Mr. Ledig said. Utilities generally lag the banking industry in compliance.
The nation's electricity companies need to improve their performance quickly, he said. "Y2K compliance could be irrelevant if you're operating in the dark."