Merger Volume Cracked Quarterly Record
Mondays will never be the same.
Three times during the summer, weekend megamergers that reshaped the banking industry were disclosed on a Monday morning. By any past measure of banks' merger activity, these three deals, worth $11.3 billion, made the third quarter a blowout, according to the latest American Banker survey (see table, page 10).
Similar Themes to Mergers
In each deal, the same theme was repeated: old rivalries undone by compelling economic issues. Besides shoring up balance sheets, the mergers are supposed to trim costs by huge numbers.
The three merger Mondays also have set the stage for more mergers with similar aims.
"This has definitely greased the wheels and pushed things to a new level," said banking analyst Frank Suozzo of S.G. Warburg & Co. "Which means as we get into the first six months of next year that we're going to have another three, four, or five major mergers announced."
Chemical Banking Corp. and Manufacturers Hanover Corp. informed the world on July 15 that they would join to form the country's second largest bank in a $2.1 billion deal. Projected savings over three years by the new company: $650 million.
A week later, BankAmerica Corp., in San Francisco, agreed to pay a stunning $4.6 billion for Security Pacific Corp., in Los Angeles. By spending this princely sum, BankAmerica expects to save $1 billion a year after three years.
Just two weeks later, on Aug. 12, NCNB Corp. in Charlotte, N.C., unveiled a $4.4 billion acquisition of C&S/Sovran Corp., in Norfolk, Va., that joined two southeastern competitors under the new corporate banner of NationsBank. Shareholders were promised a savings of $350 million after three years.
In addition to these deals and the $1.2 billion acquisition of Ameritrust Corp. by crosstown Cleveland rival Society Corp., banks announced 19 unassisted mergers in the third quarter. The total value of these deals was a record $14.2 billion.
More Marriages Expected
Wall Street professionals generally agree that merger prospects will continue to spark market interest in bank stocks, although the year-long rally in banking issues has recently been slowed by investor worries about the nation's economy. Now, however, experts predict that a weak and uncertain economic climate will force hesitant banks to initiate steps rather than face unplanned consequences.
Lending prospects appear so poor that revenue-starved banks may increasingly have to consider mergers and the cost-cutting opportunities they offer as the best available route to earnings growth.
Pressures in Place
"The more protracted the recession or weak recovery, the more likely it is that bank managements will be nudged into negotiating," said Virginia A. Adair of Merrill Lynch Capital Markets.
Although analysts expected many of the mergers in the third quarter to occur, predicting when was a different matter.
Nancy A. Bush, regional banking analyst for Brown Brothers Harriman & Co., said she experienced "a sense of amazement" that was difficult to describe about the developments of the past three months.
"And to contemplate the joining of two such long-time Yankee competitors as Bank of Boston Corp. and Shawmut National Corp. is to realize just how quickly fortunes and futures can change," Ms. Bush said.
The two venerable but ailing New England banking companies said last month they have submitted to federal regulators a merger proposal that hinges on a sizable capital-building effort. It would create the region's largest bank.
Even bullish analysts don't expect the fourth quarter to duplicate the level of action in the third.
"Among other things, commercial real estate has been the source of 20% of bank loan portfolios and it's going to have to be replaced," Mr. Suozzo said. "On the loan side, banks will definitely be struggling. They have to find more ways to reduce costs and a big way to do that is through acquisitions."
In the third quarter, "the frentic pace was partly coincidental," he said "Final decisions in some of those deals may have been made with the knowledge other banks were merging, but all these banks had been talking for some time.
However, signs abound that more mergers could occur at any time. In the Midwest, according to Mr. Suozzo, Banc One Corp., the aggressive superregional in Columbus, Ohio, and NBD Bancorp., the well-regarded Detroit institution, remain "on the prowl" and have the financial capacity to launch major transactions.
Both of them, for example, have been rumored as possible buyers of Chicago's Northern Trust Corp., although Northern has never been seen as a serious seller and such a deal would likely command a high price.
Meanwhile, Pittsburgh's PNC Financial Corp. is seen as poised for another expansion move, perhaps westward, and Philadelphia's CoreStates Financial Corp. is viewed as fueled for new opportunities after the recent sale of a portion of its credit card business.
In the Southeast, the regional banks in both Virginia and Alabama are viewed as potential acquisitions candidates, with the most likely buyers including SunTrust Banks Inc., Atlanta, and Barnett Banks Inc., Jacksonville, Fla.
Targets in California
A trio of ailing California thrifts with large franchises - CalFed Inc., Los Angeles; HomeFed Inc., San Diego; and GlenFed Inc., Glendale - are possible targets for banks looking to achieve critical mass in those markets. HomeFed has already hired an investment banker, Goldman, Sachs & Co., New York, to explore its options.
A deal between Wells Fargo & Co., San Francisco, and First Interstate Bancorp., Los Angeles, remains a popular item of speculation, although many observers are doubtful it will happen soon.
"We are in the early stages of this phase of consolidation, which is creation of mega-regional banks with assets from $150 billion to $300 billion," said Mr. Suozzo. As you get a few of these up and running, such as Chemical, BankAmerica, and NCNB, you are putting pressure on the potential sellers to consider their options."
A Change in Roles
That the scope of industry consolidation has widened, and the fact that banks once seen as buyers may now be sellers, seems obvious.
Bank analysts at Salomon Brothers Inc. noted that "the 1991 consolidation wave already has included four transactions in which the smaller partner has held assets exceeding $40 billion - a level that would have been viewed as merger-proof as recently as 1988."
While each deal had special reasons for happening, the Salomon analysts, Thomas H. Hanley, John D. Leonard, and Diane B. Glossman, said much broader forces are also clearly at work.
Such forces include "the pricing power generated by dominant market share, the powerful economics of in-market consolidation" and the need to prepare for yet another wave of mergers.
Marriage of Paragons?
"Down the road it would not be surprising to see two strong players with a clear vision of these imperatives join forces to create an even more powerful presence," they said. For example, a link between Banc One and Norwest Corp., Minneapolis, would be "awesome."
But there are also a bundle of worries for bank stock investors and others as the consolidation of the industry moves ahead in earnest. Are some prices too high? Will cost savings take place as advertised? And, most troubling, could the cost savings be self-defeating?
Both the Society acquisition of Ameritrust and BankAmerica Corp.'s $398 million purchase of Valley Capital Corp., Las Vegas, carry price tags of over twice the seller's book value, the Salomon analysts noted.
"These prices remind us of the heady atmosphere of 1986, in that the benefits of consolidation seem to be accruing disproportionately to the shareholders of the acquiree," they said.
As for cost-cutting, especially by banks within the same market, "Wells Fargo's acquisition of Crocker National in 1986 is the only intramarket merger that was an unqualified success," noted Mark Alpert and Mark Lynch of Bear, Stearns & Co.
And Ms. Bush of Brown Brothers raised troubling questions about regional banks. Many have been "content to function with homegrown management and homegrown technology which could not keep pace with dizzying developments in banking products and services," she said. She pointed to "a rather profound ignorance of the need for cost accounting systems which could help gauge profitability by line of business and even by product."
Many banks are only now confronting these issues, the analyst noted, saying she was "profoundly concerned that this period of rapid consolidation within the regional banking industry, and the opportunities which these large mergers present for |meat axe' cost cutting, will simply delay the day of reckoning for some of these banks."