When bankers get itchy to do a merger, Richard Barrett's phone is usually the first to ring.

Co-head of Donaldson, Lufkin & Jenrette's financial services mergers and acquisitions practice, Mr. Barrett has been one of the industry's key dealmakers for nearly a decade.

This year he advised Fleet Financial Group on its $16 billion bid for BankBoston Corp., Firstar Corp.'s $10 billion merger with Mercantile Bancorp., and Amsouth Bancorp's $6.3 billion deal for First American Corp.

In a recent interview, Mr. Barrett outlined what he sees as the coming trends in banking M&A, especially for companies interested in building the nontraditional sides of their businesses.

The banking M&A market today "is not so different than it's been," he said. "It's still a market driven by cost-saves."

Mr. Barrett said that deregulation seems almost certain for banks. The industry he believes will be the next acquisition target for banking companies is the insurance business.

"Insurance is the biggest thing that's going to be opening up," he said. "It's a logical product extension for banks. The risk Citi took (in its merger last year with Travelers Group) isn't appropriate for everyone, but there is a place for insurance."

Boosting the trend is the recent push for demutalization of large and small insurance companies. Demutualization effectively transfers ownership from policyholders to shareholders through an initial public offering.

"Banks are the primary buyers right now because of size, capital, and experience," the 50-year-old executive said.

Mr. Barrett is not the only investment banker who believes that insurance companies are ripe for the picking. Peter Roth, a financial services M&A adviser with Fox-Pitt, Kelton Group in New York, said most big banks have cross-selling agreements with insurance companies-but they want more.

"The big banks are going to be out there," he said. "They're going to want to be owning the carrier and they want to own manufacturing and distribution."

At DLJ, Mr. Barrett works closely with Pedro Galban, who heads insurance M&A. Together they oversee an 80-member financial services team that includes 30 M&A executives in London.

It may come as a surprise that banks are less interested in buying investment banks, Mr. Barrett said.

The Federal Reserve Board has so loosened regulation of equity and debt underwriting that many banking companies are likely to build those businesses in-house.

Passage of a financial services reform bill is really just a catch-up move at this point, he said, and probably would not open the floodgates to a wave of deals.

There are a few banking companies that may be open to such transactions: Chase Manhattan Corp., which lacks equity underwriting capability, and First Union Corp., which has only a fledgling operation, Mr. Barrett said.

Most of the money-center banks, like J.P. Morgan & Co., Citigroup Inc., and Bank of America Corp., already have investment banks in the fold. Smaller banks have all but given up on competing with these megabanks and Wall Street, he said.

"All but the largest banks are retreating except in the middle market," Mr. Barrett said. "Regional banks are starting capital markets divisions to serve their middle-market clients. It's a defensive move because they don't want to lose those relationships."

Surprisingly, banking companies are taking a cautious approach toward buying Internet-based banking or financial services firms. Most, like Bank One Corp., are trying to build those operations internally.

Banking is "far and away from being a Web-based element," Mr. Barrett said. "When you look at how hard it is to make a deposit, it shows that Web banking isn't as simple as it sounds."

The Web continues to be an important way of distributing financial information, Mr. Barrett said. He added that he spends a lot of time these days brokering joint ventures between Internet companies and banks to provide complementary services. For example, a bank may refer a customer to a nonbanking site. Through agreements, banks get paid for those referrals.

The Internet is "still such a wild West," he said. "We don't know what the infrastructure is. We're building the highway as we talk."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.