Goldome Deal Dramatizes Benefit of Cooperative Bidding

The FDIC's sale last week of Goldome's New York operations to KeyCorp and First Empire State illustrates the extraordinary opportunities available for banks to engineer major franchise expansions by joining forces in submitting bids to the Resolution Trust Corp. or the Federal Deposit Insurance Corp.

The Goldome deal increases market share and reduces competition in the state for both the Albany-based KeyCorp and Buffalo-based First Empire State at a cost significantly lower than if the two had been engaged in a head-to-head bidding.

The blueprint for the Goldome deal was laid last September when KeyCorp and First Empire State jointly acquired the 53 New York State branches of Empire Federal Savings Bank from the RTC.

An examination of the Empire Federal deal shows how the two rivals, which compete against each other in western New York, managed to cooperate well enough to win an RTC bid.

A Premium on Cooperation

It also provides insights into the attitudes of government agencies toward joint bids. These insights are valuable because if the government allows two competitors to essentially set the price for failed franchises, banks that can cooperate will be able to set bidding strategies that allow for expansion and consolidation moves that are extremely cost-effective.

The Empire sale, announced by the RTC on Sept. 28, 1990, marked a transition for the RTC. When it placed Empire into conservatorship in January 1990, the RTC had planned "to merge or sell Empire to a healthy institution," according to spokesman Kurt Reid.

At the time, Empire had $8.2 billion in deposits in 125 branches in New York and several other states. When the agency resolved Empire eight months later, the deposit base of the savings bank had shrunk, and the RTC was content to sell the New York, Michigan, Florida, and Texas components to different bidders.

The New York operation, consisting of 53 branches and $4.1 billion in deposits, was sold to KeyCorp and First Empire.

Detroit-based Comerica bought the 18 branches and deposits of $1.1 billion in Michigan; Barnett Banks, Jacksonville, took the 20 branches and $815 million of deposits in Florida; and Bank One Texas absorbed the 14 branches and deposits of $658 million in Texas.

Although 1,400 potential purchasers had been invited to bid on Empire, the RTC received only six formal offers, all for parcels. While it was gathering the bids, the RTC sold portions of Empire's assets individually.

In August, for example, the agency sold $915 million in automobile loans to General Electric Capital Corp. Despite the success of its Sept. 28 sale, the RTC still faced the task of selling 43 subsidiaries of various sizes, including Empire Realty Credit Corp.

Packaging Successful

"If we had insisted on selling Empire as a unit, I don't think we would have received any bids," said Herb Held, assistant director for resolutions.

Instead, spitting Empire into parcels brought the RTC an average premium to core deposits of 1.55%. The five-parcel transaction consisted of 105 branches, $6.4 billion in deposits including $5.5 billion in core deposits, and $3.9 billion in noncash assets. The assets sold by the RTC accounted for 58% of Empire's noncash assets.

In New York, the Empire operation was sold in two parts. The eastern component, with 25 branches and deposits of $1.3 billion in the lower Hudson Valley and Long Island, was purchased by KeyCorp through two of its units, Albany-based Key Bank of Eastern New York and Syracuse-based Key Bank of Central New York.

The deal also included the purchase of $899 million in assets, consisting mostly of mortgages in the one-to-four-family category. Key Bank of Eastern New York paid a premium of $26.1 million to do the deal, and kept the operation for itself.

The western New York component was the object of the effort in which another KeyCorp unit, Buffalo-based Key Bank of Western New York, bid jointly with Manufacturers and Traders Trust Co. (M&T), the main banking unit of First Empire.

In that transaction, which proved to be the only bid submitted for Empire's western operation, 28 branches with deposits of $2.5 billion and assets of $2.8 billion, including $1.2 billion in residential loans, were purchased from the RTC for a premium of $24 million. The KeyCorp unit kept 15 of the branches, and the other 13 were transferred to M&T.

A Tricky Negotiation

The deal to divide the deposits of $2.5 billion in the Buffalo and Rochester branches between Key Bank of Western New York and M&T nearly unraveled several times before Sept. 28.

"We both wanted the same pieces," said Key Bank's chairman, Gary Allen. "Everyone's hackles were up at certain points," he added.

The joint bid, with Key Bank as the lead or "correspondent" bank, began with a surprise telephone call from Victor Riley, KeyCorp's chairman, to Robert Wilmers, president of First Empire State, M&T's parent.

Mr. Riley told Mr. Wilmers that he "got this idea while he was shaving." The alliance between the two rivals was kept secret; M&T characterized reports of a deal as "rumors" just five days before the RTC announcement.

Flipping over Property

Exactly how to allocate the 28 western New York branches was decided six weeks before the RTC announcement -- by a flip of a coin. William Buckingham, the executive vice president of M&T, and Key Bank's president, Peter Zaleski, got together on Aug. 17; "just the two of us," recalled Mr. Zaleski.

Mr. Buckingham came to the meeting armed with a computer and extensive statistics on each branch. Mr. Zaleski suggested a "simpler method," and pulled a quarter out of his pocket.

The two executives conducted their own version of the childhood ritual of choosing sides to play a game. M&T's Buckingham won the toss and got his first choice, Empire's main office across the street from the M&T headquarters.

Mr. Zaleski got the second and third choices, and then picks alternated one by one.

A Win-Win Deal

Both executives parted satisfied. M&T concentrated on the larger offices, getting 57% of the deposits but two fewer branches. Key Bank expanded in Buffalo and established a new presence in rural areas south of the city, blocking any possible M&T designs in the southern satellite cities of Olean and Jamestown.

M&T's banking market share in western New York rose from fourth to second, with 20.3%, and Key Bank rose from sixth to fourth, tripling its market share to 12.9%.

Thanks mostly to its share of the RTC transaction, the deposits of M&T's parent company, First Empire State, increased by 22% from the second quarter to the third quarter of 1990. Without the joint bid ploy, the opportunity for a major expansion would never have been available to the company.

M&T's operations are largely limited to the five counties of western New York, but the bank is considering out-of-state expansion. For several years, $19 billion-asset KeyCorp has restricted itself to serving "Snow Belt" markets, with operations in eight states from Maine through Alaska.

Looking at the Northern Tier

Chairman Victor Riley said the company was reviewing "opportunities" for more acquisitions in the northern tier, including Vermont, New Hampshire, Kansas, Montana, and North and South Dakota.

Empire, formerly the Erie County Savings Bank, was incorporated in Buffalo in 1854, and was the epitome of a conservative local bank for the next 130 years. The 1980s expansion was, according to one local business leader, "all over the map, with no apparent plan."

Empire's western New York branches proved especially lucrative for the successful bidders, in part because for two years before the RTC takeover, Empire had aggressively cut costs (eliminating over 550 positions, 13% of its employees), retreated into traditional businesses like home mortgages, and sold nonbanking assets.

Surprisingly Good Assets

At resolution, an unusually high percentage of Empire's assets were good, especially in its home territory.

Even so, a major disagreement between Key Bank and the RTC nearly scuttled the deal at the last moment, and the official announcement was delayed three hours until the dispute was resolved. RTC wanted Key Bank to be responsible for the employees and operations of Empire's computer operations center in Amherst, a northern suburb of Buffalo.

"Computers are always an issue," said the RTC's John Quinn, special assistant to the director in the resolutions and operations division. RTC and Key Bank compromised, with Key Bank operating the center, but RTC covering the payroll and indemnifying Key Bank against any foulups.

Transferring the responsibility for computer operations to the buyer, especially with "antiquated systems" like Empire's, is a major consideration when the RTC considers a bid. A detailed plan to manage computer assets will make a small bid more attractive.

Getting computer systems to allocate assets to branches can be "a pretty expensive and time-consuming process" for the RTC, said Mr. Held, adding that Key Bank and M&T "did a lot of that work."

Mr. Daniel Piro is senior editor and Mr. McRae a contributing editor for Bank Mergers & Acquisitions, a monthly newsletter published by SNL Securities, a bank research and publishing firm based in Charlottesville, Va.

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