|Merger of Equals' Don't Always Work Out

What three words make bank investors break out into a sweat? "Merger of equals."

And for good reason. The banking battlefield is littered with merged equals that simply did not fit together very well. Two notable examples: the deals that created C&S/Sovran Corp. and First Fidelity Bancorp.

So when Keycorp and Society Corp. announced their engagement this week, investors and analysts reacted with a lot less enthusiasm than they might have for a straight-out acquisition.

"The track record of transactions like this really isn't very good," noted Lawrence R. Vitale of Bear, Stearns & Co., who on Tuesday sliced his investment rating on Keycorp shares to "hold" from "buy."

Concerns About Succession

The biggest concern centers on whether anyone will take charge at the combined company.

Society, based in Cleveland, and Keycorp, headquartered in Albany, N.Y., tried to allay such fears. They declared that the new company will have a single headquarters in Cleveland and that Keycorp's chief executive, Victor J. Riley Jr., will turn over the reins in two years to Robert W. Gillespie, his counterpart at Society.

Power Vacuums

But Wall Street is not a believer in power-sharing arrangements. Investors recall that in similar deals, power vacuums have arisen, delaying both cost savings and revenue increases. And for money managers who are graded quarterly on their performance, such uncertainty raises concern.

That factor, plus sales by investors who had banked on a takeover premium, drove down the shares of both companies Tuesday. Keycorp was off $1.50, or 4%, to $36 on volume running about five times normal, following a 2.6% slide Monday. Society was off $1.75, or 5.4%, to $30.75 in less frenetic activity.

In a merger of equals, two bank companies of similar size combine and form a new company, ostensibly doubling market capitalization, management talent, and competitive power.

But that's not how it worked out when Atlanta-based Citizens and Southern Corp. merged with Sovran Financial Corp. of Norfolk, Va., in 1988. The plodding merged company was acquired soon after by NCNB Corp. of Charolotte, N.C., creating NationsBank Corp.

Rescue Required

Likewise, the marriage of Philadelphia-based Fidelcor and First Fidelity of Newark in 1988 floundered badly, requiring a rescue by new management.

More recently, some bank analysts have been disappointed at the pace of expense savings from the merger of equals of Comerica Inc. and Manufacturers National Corp., both in Detroit.

Comerica's second quarter return on equity, at 15.73%, was well below the 17.38% it boasted at the time of the deal Similarly, BankAmerica Corp.'s return on equity has fallen to 13.09% from 16.28% before its merger with 1991 Security Pacific Corp., although a recessionary California economy is partly blamed.

Conversely, Chemical Banking Corp. has risen to 15.97% from 10.05% before its merged with Manufacturers Hanover Corp. But both the banks were previously seen as underperformers, unlike Keycorp and Society, which have been highly profitable.

In many cases, stocks of the combined companies, while outperforming the stock market during the big bank stock rally of the past three years, have not kept pace with bank stocks overall.

Among the most successful merger of equals was the 1987 combination of Norstar Bancorp, Albany, N.Y., into what is now Fleet Financial Corp.

Untimely Death

In that case, the line of succession became clear after Norstar's chief executive officer, Peter D. Kiernan, died unexpectedly and J. Terrence Murray, Fleet's current chief, assumed the top post ahead of schedule.

The 1985 combination of Wachovia Corp., Winston-Salem, N.C., and First Atlanta Corp. is also viewed as a successful merger of equals, but Wachovia's managers were the clear successors.

"There is no question that this is a very hard kind of deal to make work well," said John J. Lyons, partner in Lyons, Zomback & Ostrowski, a New York consulting firm to banks and thrift institutions.

Costs Versus Savings

Mr. Vitale said he was concerned about costs of the Society-Keycorp merger exceeding the cost savings from the deal. That means the benefits from the deal will have to be gotten from revenues later rather than expense savings earlier, as they are in many other banks deals.

But Steven R. Schroll of Piper, Jaffrey & Hopwood, Minneapolis, said he is "very positive" on the deal. "These are two strong, well-managed companies that have few problems to distract them in the integrating process," he said.

While cost savings are more apparent for in-market transactions than in the Society-Keycorp deal, "too often you have people in in-market deals worried about whose ox is being gored today and whose tomorrow.

As for Mr. Riley, the Minneapolis analyst said "he wants to leave his legacy and wants this to work. I find it hard to believe he would do anything to harm the progress of this merger." Mergers of Equals: Mixed Performance ROE Gain in stock before ROE price since S&P 500 announcement 2Q '93 announcement gainChemical Banking/Manufacturers 10.05% 15.9% 110.5% 22.1%HanoverJuly 15, 1991 Comerica/Manufacturers 17.38 15.73 28.7 18.9NationalOct. 28, 1991 BankAmerica/Security Pacific 16.78 13.09 28.3 19.0 Source: Morgan Stanley

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