With acquisition prices still high in the banking industry, mergers of similar-size banks could rise again soon.
Little has been heard recently about such mergers, after such arrangements peaked during the explosion of big deals last year.
The trend this year has been toward larger banks paying premiums for smaller institutions.
But the pendulum is poised to swing back as bankers become increasingly conscious of overpaying for acquisitions, said industry analyst Michael L. Granger of Fox-Pitt, Kelton Inc.
That change, he said, might be helped by the successful outcome of the largest merger of equals unveiled during 1995 - between Chase Manhattan Corp. and Chemical Banking Corp.
Many previous mergers of equals were plagued by management upheavals and failures to meet expense-cutting and revenue-growth projections . As a result, Wall Street became disenchanted and stock prices suffered.
But Mr. Granger said the Chase/Chemical merger, which resulted in the "new" Chase Manhattan, "appears to be working as planned, with the cost savings promised being delivered on time." He said the company "has maintained strong revenue-growth momentum."
He said that deal, as well as the First Chicago-NBD Bancorp combination, demonstrates that mergers of equals can offer substantial cost savings and increase market share in business lines, such as mortgage banking, credit cards, investment management capital markets, and processing.
And in the cost-saving realm, "pure in-market mergers with substantial branch overlap can result in reduction of over 15%," he said, pointing to the Chemical-Chase deal.
Most mergers of equals are likely to occur in the Midwest, the analyst said, because it is the least consolidated general banking market in the country.
Mr. Granger defines a merger of equals as "a no-premium combination between two companies with equal or nearly equal market capitalizations."
Such deals should not be thought of as equal partnerships between management teams of companies, he said. Chemical management has been the guiding force in two successive mergers of equals, with Manufacturers Hanover and now Chase, he noted.
In the Midwest, he said, two prospective mergers that would make sense strategically while offering considerable value creation for shareholders could combine Huntington Bancshares with Star Banc Corp. and KeyCorp with First Bank System.
Huntington and Star Banc could create "the only bank with leading market share in each of the three largest metropolitan areas in Ohio," Mr. Granger wrote. And as an in-market transaction, "the cost savings from the merger would be significant. "
Joining KeyCorp and First Bank System "would create a franchise coast to coast," he said. "The strong operational and cost control mentality at First Bank would be combined with the innovative and focused marketing emphasis of KeyCorp."
Mr. Granger gave high marks to the prospective combination of Mark Twain Bancshares and Magna Group Inc., both of St. Louis. But Mark Twain has agreed to join Mercantile Bancorp., another St. Louis rival, in a premium- based deal.
Among the nation's larger banks, successful mergers of equals might be accomplished by Bank of New York Co. and Fleet Financial Group, Fleet and PNC Bank Corp. or Bank of New York and PNC, he said.
"It is reasonable to expect a further number of mergers of equals when the deal makes strategic sense and in the right circumstances," said J. Mikesell Thomas, managing director with Lazard Freres & Co. "And the current level of bank stock prices can make premium acquisitions a financial challenge."
Scott Edgar, director of research at Sife Trust, noted that Wall Street's longstanding negative about mergers of equals in banking are finally changing.
"In the past, investors did not perceive mergers of equals to be attractive mergers," he said, citing the combination of Society and KeyCorp, which initially disappointed many shareholders. "But that perception has been replaced by successful deals, such as the Chemical and Chase merger."
Another seasoned observer, J. Christopher Flowers, a partner at Goldman, Sachs & Co., also expects mergers of equals to increase in the future. Still, he adds, these deals probably will occur only sporadically, in contrast to standard premium-driven deals.
"Mergers of equals are mostly a matter of chance rather than indicative of trend," Mr. Flowers said. "They are also hard to put together." Two of the biggest obstacles, he said, are deciding which management will run the merged bank and where the headquarters will be located.
Mr. Granger concedes that integrating two management teams can be disruptive to the companies and has caused revenue loss.
"Some would argue that the mergers of equals between Chemical and Manufacturers Hanover and Comerica and Manufacturers National created difficulty in revenues," Mr. Granger said. But he noted that revenue issues resulting from those deals have long since been resolved.
Another significant obstacle are shareholders, who are often dissatisfied with mergers of equals because they lack a premium, said Mr. Edgar. Disappointment can be keen.
"When there is a merger of equals," he noted, "nobody sees an upside in their stock price on the day of the announcement."
