Is merger mania making a comeback?
A $9 billion pact in the works between Deutsche Bank AG and Bankers Trust Corp., aggressive talk by the chairman of Fleet Financial Group, and a recovery in bank share prices suggest that it is about to. But analysts are divided.
"We have all the components," said James Ellman, portfolio manager at GT Global Financial Services Fund. "But it is like a thunderstorm. You see some lightning, you smell ozone, and you see some clouds, but you're not sure if you are going to see rain."
Analysts said another downtick in the stock market could still deter dealmaking, and dealing with year-2000 problems could preoccupy banks after that.
Analysts said they were not surprised, however, to hear that Fleet could be on the prowl again, particularly since it has become a powerhouse through several well-executed nonbank acquisitions. In 1997 the company actually was considered a takeover target because of underperformance.
Terrence Murray, chief executive of Fleet, which recently agreed to buy the commercial finance unit of Sanwa Bank Ltd., told The Wall Street Journal that he wants to add $50 billion to $100 billion of assets via acquisitions.
However, analyst Anthony Polini of Advest Inc. said he doubts that Fleet is likely to do a major bank acquisition.
"The last five deals have been accretive and Fleet has a slight premium to its peers, so the odds of Fleet going out and doing a dilutive deal is ridiculous," said the analyst. "I think the Summits of the world are safe," he said, referring to the midsize bank in Princeton, N.J., that might be attractive to Fleet.
One analyst who expects a flurry of activity is Michael L. Mayo of Credit Suisse First Boston.
"We still are predicting additional and significant mergers between now and yearend," said Mr. Mayo, who expects more deals this fall. "It's late but the door is not shut."
The biggest catalyst driving consolidation is year-2000, said the analyst referring to the year-2000 computer bug. "Banks will not want to plan mergers next year because it could exacerbate their year-2000 risk."
Another driver could be the recent boom in share prices, which gives acquirers currency to do deals. Since bank stocks hit bottom on Oct. 8, many regional and superregional banks have recouped the bulk of their losses.
The Standard & Poor's bank index has risen more than 22% since its low that day.
One of the biggest hindrances to consolidation in banking has not been the year-2000 problem, but the collapse in bank stock prices, said analyst Sean Ryan of Bear, Stearns & Co.
However, with the rise in share prices, "the gap between a buyer's ability to pay and seller's expectations have narrowed," the analyst said.
Another driver is the "lemming-like instinct of bankers," added Mr. Ryan. "If the banker across the street is doing something then they feel pressure to do it also. They will shoot first and ask questions later."
Mr. Polini of Advest Group said that he expects the wave in bank mergers to slow.
"From a financial standpoint, it is conducive for banks to merge," acknowledged Mr. Polini. But the culture in many banks stands in the way of many mergers, said the analyst. He cited proposed mergers that fell through between Fleet and BankBoston and Mellon and Bank of New York. "Those deals should have been done."
Mr. Polini said that in each of the last three years, his company has predicted 10 bank merger deals. His team predicts only three large bank mergers next year.
"We've done too many mergers too fast," said the analyst.
The Deutsche-Bankers Trust deal is not likely to be a catalyst, Mr. Polini argued.
"Bankers Trust is a unique business which suffered during a detrimental environment," he said. "There is no other shoe to drop."