Market Conditions Put Brakes on Mergers

It all started out innocently enough when Firstar Corp.'s executive team hosted a conference call for clients of Goldman Sachs Group to talk about how to do mergers well.

But the May 12 conference call sparked a five-day, 9% decline in Firstar's stock. The drop was accompanied by a swirl of rumors that the Milwaukee banking company was shopping for yet another acquisition, possibly even Minneapolis-based U.S. Bancorp, whose stock rose 6% in the days after the call.

Apparently the market interpreted Firstar's participation in the call as a signal that it was about to go out and do more deals. Firstar and U.S. Bancorp have declined to comment, and no deal has been announced.

Investors and shareholders are longing for the heady days of 1998, when several blockbuster combinations created a new class of banking giants. Similar combinations this year have given way to rising interest rates, the decline in technology stocks, and a preoccupation with the possible breakup of Microsoft Corp.

"M&A has moved to the back burner," said Tom Burnett, whose firm, Merger Insight, tracks deals and publishes the details for shareholders. "We are not going to have another 1998 again, ever."

That dismal outlook for mergers certainly has not stopped the rumor mill from grinding.

In Michigan talk is again picking up that National Australia Bank Ltd. is interested in divesting itself of Michigan National Corp. - its sole U.S. commercial bank. "I've heard that mentioned twice in the last six months," said an industry observer familiar with Michigan banking companies, who asked not to be identified.

Two possible bidders have been mentioned: Dutch banking giant ABN Amro, which owns and might be interested in expanding its Standard Federal operations in Michigan, and Grand Rapids, Mich.-based Old Kent Corp., which might be interested in expanding its reach in the state.

Several large U.S. and foreign banking companies also have been mentioned as possible suitors for Dime Bancorp, which is busily fending off a hostile advance from Melville, N.Y.-based North Fork Bancorp. ABN Amro and New York's HSBC USA Inc. have been among the most frequently mentioned bidders. Both companies have indicated they were not interested in the company.

Michael Mayo, an analyst at Credit Suisse First Boston, says the feeling is that more deals should be happening with the advent of accounting changes that will eliminate pooling-of-interests. Companies may be a little gun shy about pursuing deals because of recent merger disappointments experienced by other banks. "You've had your problem acquisitions over the last few years," Mr. Mayo said.

For example, the marriage of Charlotte, N.C.-based First Union Corp. and Philadelphia's CoreStates Financial Corp. resulted in a series of integration problems that sent customers and employees out the door. U.S. Bancorp warned of a slowdown in December, in part because of the struggles it was having trying to integrate its holdings with U.S. Bancorp of Portland, Ore.

Some people think things will not pick up until the market does. "We are definitely the tail," Mr. Burnett said, "and the market is definitely the dog."