Takeover speculation has returned to Wall Street, with analysts writing scenarios that would have been unthinkable during last year's merger boom.
For the first time in several quarters, merger chatter dominated American Banker's quarterly Analysts Roundtable on Tuesday. One analyst pointed to First Union Corp.-one of the most acquisitive banking companies of the decade-as a likely target in the next round of deals.
The discussion came on the heels of HSBC Holdings PLC's agreement to buy Republic New York Corp. and Firstar Corp.'s pact for Mercantile Bancorp. "The environment is ripe" for dealmaking, said analyst Carole Berger of Berger Jackson Capital Management.
Analysts have speculated before that First Union's a candidate for a takeover because of its falling stock price. But analyst Sean Ryan of Bear, Stearns & Co. raised the stakes a notch by naming the Charlotte, N.C., company as his top takeover pick.
"They haven't been able to translate their superior operating ability into superior returns for shareholders," Mr. Ryan said, noting that he is preparing a report on the subject. "Too much of the value they do create has been transferred to the shareholders of companies they have acquired."
A spokeswoman for First Union said the company doesn't see itself being taken over. "We view ourselves as a company that is building the prototype financial services company of the future," she said. "We see ourselves as being in this for the long term and the end game."
The spokeswoman added, "We continue to build our company and take on a larger perspective, not only as a traditional bank but as an investment bank and a player in the securities industry."
But Mr. Ryan said it is "not uncommon for banks that have been unable to reward shareholders for an extended period of time to be taken over." First Union's shares closed trading Tuesday at $54.8125, 17% shy of its 52 week high.
And in this age of megabanks, finding a buyer for $223 billion-asset First Union wouldn't be a stretch, he said. "The state of the bank mergers market has changed in such a way that the largest banks are losing their immunity."
He said Wells Fargo & Co., Bank One Corp. and Chase Manhattan Corp.-once seen a potential partners for First Union in mergers of equals-are all in the position to take over the superregional giant. Their market capitalizations have crept upward toward $80 billion and First Union's has slipped closer to the $50 billion-range, he pointed out.
Banking companies that are growing their operations, including Fleet Financial Group and National City Corp., may also find themselves big enough to digest a banking company like First Union, Mr. Ryan said.
"Shareholders I talk to have become disillusioned," Mr. Ryan said. "They feel the stock is not cheap at any price. They just don't want to be in it. They are disappointed with the ability of First Union to translate its superior operating ability into superior or even average bottom line gains," Mr. Ryan said. "First Union is living on borrowed time" if the situation doesn't change.
Illustrating analysts renewed willingness to consider the imponderable, Mr. Ryan said even Firstar-whose market capitalization would approach $30 billion with its deal to buy Mercantile-may be in a position to buy First Union after another deal or two.
"It's a stretch, but I like it," said Thomas Finucane, portfolio manager with John Hancock Advisers.
Mr. Finucane, in listing his favorite stocks, said it is plausible, though not likely, that Commerce Bancshares, Kansas City, could be a takeover target as well.
Extensive excerpts from the Analyst Roundtable will appear in an upcoming issue.
