Preferred Issues: Citi, CIBC Pick Their Enemies — Or Do They?

On Wall Street, companies are judged by how well their managements choose.

Pick a market that is underserved. Restrict product lineups to those that offer the richest margins. Show a willingness to turn away customers whose value to the bottom line is questionable. Assuming you execute well, chances are the market will place a healthy premium on your shares.

On some level, many such choices boil down to an indirect effort to select one’s competitors; investors have little appetite for battles that don’t have a high likelihood of success. But some recent deals suggest bank managements are taking this sort of selectivity a step farther.

One very clear example of this was last week’s agreement between Canadian Imperial Bank of Commerce and Wells Fargo.

That alliance — in which CIBC agreed to offload to Wells the small-business loan clients that it would rather not have as borrowers — could help CIBC keep customers on its rolls despite its reluctance to lend to them. CIBC was also undoubtedly influenced by the knowledge that small businesses it turned down for loans were likely to turn to arch-competitor Royal Bank of Canada — whose small-business lending operation outstrips CIBC’s in size.

Of course, the possibility that regulators might take umbrage at such machinations means that talk of such motives almost always emanates from the outside, either from critics charging anti-competitive behavior or analysts and journalists occasionally prone to attribute grand strategies to even small deals. Though FleetBoston Financial Corp. may not have been bothered by the praise or criticism it got when it sold off a network of branches to Sovereign Bancorp. — considered by Fleet to be a not-too-threatening buyer and described by one M&A adviser as “the perfect buyer, for Fleet” — regulators were concerned enough to put tight restrictions on Fleet barring it from reabsorbing customers it gave up in the sale.

Similarly, and not surprisingly, Citigroup’s recent pickup of European American Bank from ABN Amro has yielded more than its fair share of follow-up buzz.

The chatter — that the EAB acquisition might serve as a template for larger regional-bank acquisitions (read: First Union) or was aimed at thwarting Fleet, which has all but surrounded the New York market with its purchase of New Jersey’s Summit Bancorp and is believed to have been one of the losing bidders for EAB — was perhaps inevitable. Such may be the price of having a savvy dealmaker like Sanford I. Weill, or Terrence Murray for that matter, at the helm.

But Citi has been particularly blunt in its rejection of the notion that the deal was anything more than a good opportunity to pick up business in its home market.

“We have been very consistent on this topic and I have heard [Citi’s North American branch banking operations chief] Marge Magner state this explicitly,” said Citigroup spokesman Keith Anderson. “This acquisition was made because, when the opportunity was brought to our attention, it made sense as a way to reinforce our position in the New York area.”

“It was not the result of some grand back-room strategy [against Fleet],” he said. “That was not part of any discussion.” To be sure, analysts said the deal made sense strictly on its own merits. David Berry, director of research at Keefe, Bruyette & Woods Inc., said that he saw the deal first and foremost as “an opportunity to aggrandize Citi’s existing branch footprint here in its own marketplace.”

Mr. Berry said that Citi should be able to extract cost benefits from the deal at least in line with those Fleet is gaining from its Summit integration — estimated at about 30% of Summit’s cost base. “There are a lot of costs you can take out when it’s in-market.”

Along the way, Mr. Berry allowed, Citi could get a chance to “experiment” with the process of cross-selling its insurance and investment products through a newly added branch network. As far as Citi’s efforts at cross-selling in its own branches, he said, “it’s still not clear how much success they’re having.”

If only for that reason, he said, the idea of doing bank acquisitions in the United States “is still an open question for them,” Mr. Berry said. “This will give them some more data to figure that out.”

The deal also made business sense to Mark Fitzgibbon, an analyst at Sandler O’Neill & Partners Inc., who said EAB provided a good complement to Citi’s retail business in the area. But for Mr. Fitzgibbon, there was no question that Fleet weighed on Citi’s thinking.

“Fleet has been saying they want into Manhattan in a big way,” he said. “The last thing Citi wants is a competitor like Fleet to come into the market.”