Merger Route A Dead End, Contrarians Say
Many parties to the current wave of bank mergers insist this consolidation is good for the industry. Redundant operations can be streamlined, which in turn will boost earnings and make it easier to attract capital. Or so the argument goes.
But evidence is emerging that the process may not cure what ails the industry. Indeed, the big mergers announced this year may be introducing just as many problems as they purport to solve.
The issues: Acquirers may be hurting their chances of success by overpaying. Overconcentrations of risky assets cloud some deals. Entrenched bureaucracies may thwart cost cutting. And there's no conclusive evidence that bigger banks are better banks.
"I don't see anything in the data suggesting this trend is necessarily good for the industry," said John H. Boyd, senior research officer of the Federal Reserve Bank of Minneapolis.
The latest red flag on megamergers came just two weeks ago.
54% Growth Needed
In winning the bidding for Cleveland-based Ameritrust Corp., Society Corp. agreed to an exchange giving Ameritrust stockholders $1.2 billion -- double the book value of their shares.
According to a study published in Cates MergerWatch, a trade publication, Ameritrust's earnings must rise 54% in each of the next five years just for the acquired Ameritrust shares to gain par in earnings power with Society's existing shares. That's assuming 8% annual appreciation of Society's current shares.
What's driving the aggressive bidding, according to one analyst, is a stampede of banking companies embracing takeovers as a corporate strategy.
"So many banks are trying to get into the act that bidders are spending away many of the benefits of the transactions just to get their hands on the targets," said bank analyst Felice Gelman of Dillon Read & Co., New York. "More and more, the value is going to the seller and not the buyer."
Society cites potential cost savings as the rationale for the Ameritrust price tag. The company expects to complete the integration of Ameritrust operations within four months after the deal is consummated, and to realize $130 million of annual cost savings commencing 12 months after the deal closes.
Such cost-cutting feats require a quick paring of bureaucracies and merging of overlapping operations -- acts predicated on commitment and levels of cooperation that some merger partners may have a hard time mustering.
Chemical Banking Corp., for example, has set its sights on a 14%, or $650 million, reduction in annual noninterest expenses for itself and merger partner Manufacturers Hanover Corp. But keeping the peace in this "merger of equals" may entail preserving unnecessary jobs, analysts worry. And what's the track record of these two banks?
"Neither of [the] two predecessor companies has compiled a superior record of cost control," according to Keefe, Bruyette & Woods Inc.
Among the Least Efficient
Though softening its stance by adding that Chemical's cost-cutting targets appear modest, Keefe Bruyette notes: "In fact, both companies ranked in the final third of the nation's 50 largest banks when measured by their 1990 efficiency ratio."
While that is less than a ringing testament to the cost-cutting prowess of relative newcomers to the merger game, even some old hands will apparently have trouble improving efficiency.
NCNB Corp., for example, faces the daunting task of melding the stubborn bureaucracies of the former Citizens and Southern Corp. and Sovran Financial Corp.
"The inability of these partners to consolidate is what made C&S/Sovran vulnerable to takeover by NCNB," said Frank Anderson, a senior analyst with Stephens Inc., Little Rock, Ark. "The problem still needs to be fixed, but now the stakes are even higher."
Deepening lending woes further cloud the outlook for some merger partners.
In acquiring Security Pacific Corp., Los Angeles, BankAmerica Corp., San Francisco, is taking on a company that suffered a 57% increase in problem assets during the 12 months ended June 30.
"Strong banks can pick up only so many distressed banks before they themselves become weak," said John Snow, a banking analyst with Chicago Corp.
The realty loan portfolios of both companies are coming under pressure. But realty, ironically, will be the centerpiece of the merged BankAmerica: At March 31, real estate loans accounted for an astonishing 45% of total loans at the combined entities, according W.C. Ferguson & Co., Irving, Tex.
Realty lending will also be the centerpiece of NationsBank, which will contain the merged NCNB and C&S/Sovran Corp. At March 31, the merger partners together had 37.2% of their loan portfolios tied up in realty credits, according to Ferguson.
One reason for a seeming dearth of analysis of the proposed NationsBank merger is that "half of Wall Street is involved in the deal and can't write about it," said Mr. Anderson.
The Self-Preservation Factor
Self-interest could be skewing perceptions of the desirability of mergers inside the boardrooms of banking companies as well.
Executive egos and the desire to preserve lush salaries are powerful motivating forces in the merger game, contends David Cates, the Washington-based chairman of W.C. Ferguson & Co.
"These mergers aren't necessarily designed to enhance shareholder values," said the consultant. "They are imperial expansions by adventurous CEOs."
And the rationales presented for the deals fly in the face of the evidence, said Mr. Boyd of the Minneapolis Fed.
Bigger banks are not necessarily more efficient: Their returns on assets and equity, in fact, have lagged behind those of smaller banks for years. And in a shrinking market, said Mr. Boyd, it's the smaller, more flexible institutions that have the best chance of survival -- not the bureaucratized behemoths.
Obviously, these concerns did not did not impede the merger deals struck this year. But contrarians say switchmen should reconsider before putting too many more cars on the merger track.
Said Mr. Boyd: "These issues deserve much more debate -- and at higher levels -- than they have gotten to date."