While there were only a few large deals in November, the next major wave of bank mergers is on its way, according to a major new survey of industry consolidation activity by Salomon Brothers Inc.
The rise in bank stock prices this year is only one of a number of reasons that activity will soon accelerate, according to Salomon analyst Michael A. Plodwick.
"Loan demand has slowed in most regions, placing further revenue pressure on those banks that do not enjoy the benefit of large fee-based businesses," he said. "In addition, many banks are faced with difficult decisions on the rapidly changing technology front."
Last month's largest deal involved a foreign bank, Dutch-based ABN Amro Holding, which said it will pay about $1.9 billion, or 205% of book value, for Standard Federal Bancorp., the well-regarded Michigan thrift institution.
During November, 22 deals valued at just over $4 billion were announced in the month.
This year has understandably been a torpid consolidation period in the wake of the mega-deal frenzy of 1995, Mr. Plodwick said. But he asserted that the "digestive phase" of integrating those sizeable mergers is nearly over.
It was also unlikely that a banking company would unveil yet another large merger before it had demonstrated to Wall Street that it was delivering on the promises made in earlier deals.
However, "many of the banks involved in large mergers in 1995 should hit their projected run-rate of expense savings by the fourth quarter of this year," the analyst noted.
In addition, several large companies that did no major deals in 1995 could soon weigh in with expansion plans. This group includes Banc One Corp., Norwest Corp. and BankAmerica Corp.
The general movement of bank stock prices this year favors such activity, he said. Stocks of the large capitalization superregional banks, most of whom are acquirers, have outpaced stocks of the small to midsize regional banks that are usually targets.
In short, the "valuation gap" between larger and smaller regional banks has closed. "The larger banks now enjoy the benefit of much stronger currencies with which to pursue acquisitions if they so desire," he said.
Mr. Plodwick thinks many deals are financially feasible right now. Indeed, his list of potential acquisition candidates includes all the midsize regional banks in Salomon Brothers' 50-bank universe and several others besides.
Even several of the largest superregional banks are possible targets, he noted,"since recent events have shown that virtually no bank is too large to be acquired."
For investors, he said the banks with the "most attractive upside potential in the event of an acquisition" are Mellon Bank Corp., Summit Bancorp., Huntington Bancshares, First American Corp., KeyCorp, Firstar Corp. and U.S. Bancorp.
In his new 166-page "Merger Modeler" report on the industry's consolidation trend, Mr. Plodwick offers more than 325 merger possibilities. He assumes cost savings of 30% for overlapping market deals, 10% to 20% for other deals and acceptable earnings dilution to buyers of 2% to 4%.
There are eight takeover scenarios involving Mellon, starting with Bank of New York Co.
"This combination could create a potential powerhouse in some of the nonbank processing business," he said. "The combined company would have one of the highest percentages of fee income of any bank in the country. In addition, both banks are focused on cost control and Bank of New York could improve Mellon's credit card operations."
Mr. Plodwick calculated that Bank of New York could pay from $87.75 to $101.54 per share for Mellon, assuming minimal dilution and reasonable cost savings. Mellon currently trades around $72.
Other possible buyers of Mellon, ranging from more likely to less so, are Banc One, BankAmerica, CoreStates Financial Corp., First Union Corp., NationsBank Corp., First Bank System and Fleet Financial Group.
NationsBank in the near term "will likely be preoccupied" with its acquisition of Boatmen's Bancshares, St. Louis, he noted. But Mellon's huge nonbank activities are probably tempting.
Of course, Mellon may or may not sell out. Indeed, Mr. Plodwick lists it as a potential acquirer in a number of scenarios.
He also sees some midsize banks as holding such strong currency right now, in the form of stock valuation, that they are probably too expensive to be acquired by most buyers and may themselves turn out to be buyers.
Indeed, Crestar Financial Corp., Mercantile Bancorp., and Southern National Corp. have recently done just that. Southern National's announcement that it will pay $980.7 million, or 284% of book value, for United Carolina Bancshares was the second largest deal unveiled in November.
This group includes both major Cincinnati banks - Star Banc Corp. and Fifth Third Bancorp - as well as First Tennessee National Corp. and Synovus Financial Corp.
Banc One, a superregional bank built through acquisitions but recently preoccupied with matters other than expansion, could move in a number of ways, Mr. Plodwick suggests.
The Ohio company is "one of the few out-of-region banks" that has the size and market valuation to consider an acquisition of Florida's Barnett Banks, he noted. Barnett, the last major independent bank left in Florida, is viewed as among the plum acquisition targets in the country. The company has given no sign it would entertain offers of a deal.
Banc One is also viewed as plausible buyer for U.S. Bancorp., Comerica Inc., CoreStates, First Tennessee, KeyCorp and a number of other companies.