After a lackluster first half of 2008, merger and acquisition activity in the banking sector picked up in the second half as the financial crisis worsened and regulators moved aggressively to pair the most troubled banks and thrifts with healthier institutions. And with economic conditions deteriorating rapidly, particularly in pockets of the west and southeast, M&A experts say marriages arranged by the Federal Deposit Insurance Corp. and other regulators will again drive activity in 2009.

The value of deals announced and completed between July 1 and Dec. 31 rose to nearly $61.1 billion from just under $28 billion in the first half of the year, according to SNL Financial LC. (The figures do not include deals involving failed banks and thrifts.) The largest were Wells Fargo & Co.'s $15.1 billion acquisition of Wachovia Corp., and PNC Financial Services Group's $5.6 billion acquisition of National City Corp., and both involved a hefty amount of government assistance.

"I doubt any deals will occur [in 2009] without government involvement," says Kevin Conn, a financial market equity analyst at MFS Investment Services. "There will be a lot of FDIC-forced mergers and acquisitions." He also predicts there will be a number of "in-between deals" in which regulators strongly encourage wounded banks to find partners or face possible receivership. What Conn does not foresee any time soon is a return of pure, private-play dealmaking. "Most management teams are saying they're paid to wait, and they're waiting," he says.

Healthier banks are also waiting on the sidelines for details about the Obama team's rescue plan for the financial sector. "They are hunkering down and retaining capital and even getting further capitalized," said Terry Moore, managing director of Accenture's North American banking practice. Moore sees an increase in M&A activity "in the back end of 2009," along with a "fair amount of foreign bank acquisitions," especially by institutions that already have a U.S. presence.

Craig Zander, head of the core banking practice at CapGemini, said that the bulk of the deals done in second-half 2008 were atypical. "These government-assisted mergers did not go through normal due diligence and discussions between the parties," says Zander. And it will be a while before traditional M&A practices return because valuing assets remains difficult. "Nobody knows what anything's worth," he adds, "so people are depending on the government to offset that uncertainty."

Some industry observers expect that some newly formed bank holding companies, eager for access to low-cost deposits, could jump into the M&A fray this year. Jim Eckenrode, research executive, banking, at TowerGroup, says he expects Morgan Stanley will be on the prowl because its charter "is a more traditional bank charter," he says. "They are nationwide, and would be more likely to build deposits through acquisitions." Goldman Sachs opted for a New York state charter; it is more likely to be looking at deals that would expand its private bank and wealth management business, according to Eckendrode.

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