Spurred in part by public statements from vice chairman Michael E. O'Neill that BankAmerica Corp. is hunting for money management and brokerage firms to annex, post-Dean Witter, Discover & Co./Morgan Stanley merger speculation about who is talking cross-pollenization to whom is all the buzz. Will banks recreate themselves by acquiring nonbanks and lead the way to what one industry specialist calls multilingual financial services? Discussions with some of the usual suspects indicate that mergers will continue, but at what level and to what end are up for grabs. Contemplating the effect of such new configurations on the competitive environment in the next three to five years, three camps emerge: gung-ho futurists; wary hopefuls, and the noncommittal/unconvinced.

The rosy-eyed experts eagerly await inter-disciplinary combinations. The time is right. Banks can afford to buy, thanks to record capitalization levels, which are said to total $300 billion for the top 10 institutions. By broadening product capacity and/or customer base, banks will build scale, beef up technology to offer alternative delivery options and one- stop shopping "from cradle to grave," and thus recapture eroding consumer market share. In addition, banks buying outside the fold can establish a presence in a state without the onus of its charter and ensuing CRA requirements.

Post-acquisition depression/oppression is also a thing of the past, futurist thinking goes. Having learned from the botches of yesterday, today's smart banks include cultural integration as a core competence; interbank successes like the recent commingling of Chase and Chemical show this.

Corralling customers

Yet another school of thought holds that time is money, and then some. Bank forays into asset management, consumer finance, insurance, and the like are an attempt to recapture the customer base lost in the last three decades, reports Keefe, Bruyette & Wood CEO James McDermott. "The $64,000 question is: Will banks have enough time to pull those customers back into the corral, cross-sell and data-mine them, or will some other unforeseen competitive threat challenge that effort?"

While the more confident predict that corporate combinations to come will surprise us in their size and scale, the foreshadow of unknown opponents darkens other visions of the future.

The Internet and Microsoft are just the beginning. Any brand- conscious provider up to snuff technologically could cross-sell other products and knit together a network of customers. As McDermott puts it, "What's to stop Republic Industries, Inc. chairman Wayne Huizenga from adding financial products to the already growing army of rental car units and mortgage banking companies he is buying?"

Demographics don't offer much comfort, either. While Baby Boomers shift to a savings and investment mode, the new crop of computer-weaned college graduates emphasizes convenience and time arbitrage over the traditional banking relationship, adds McDermott.

That relationship already took a big hit with the advent of the ATM, says one investment banker who requested anonymity. The ATM eliminated significant bank costs but neutralized the bank itself in the process. "In the past, you had to go to the bank to make a deposit or cash a check. Now I can be in St. Barts and get the same service from any terminal," he says. Bye, bye, brand loyalty; at this rate, sources say, perhaps one should think about barbed wire for those corrals.

While several informed sources warn of the need to act quickly, others say that closing the deal is just the starting line in the race. "It is very important to integrate the two partners quickly in order to get the benefit of the merger before the attention of senior management moves on to the next thing," says James S. Marpe, managing partner of Andersen Consulting Corp.'s retail financial services/commercial banking practice in the Northeast.

is the rationale rational?

Then there is the "Who needs it?" response of these financial mixed marriages. Adherents agree that consolidation comes first and, absent a true national banking system, a lot more is on the way. Consider First Bank's purchase of U.S. Bancorp and The H. F. Ahmanson & Co.-Great Western Financial-Washington Mutual mega-melange.

More to the point, this group holds that synergy is not a panacea for shrinking retail bank market share. "(The word) synergy should go back to the days of conglomerates when we achieved synergy by combining disparate product lines and wound up spinning them all off five years later. Banks need a fundamental business rationale for combining disparate lines of business," says Charles E.P. Wood, managing director in corporate finance for Price Waterhouse. "I am not a firm believer in moving too far afield from what a company is accustomed to doing. The very steep learning curve is by definition very expensive."

Similarly, Wood adds, "There is nothing better for a prospective seller than to find a buyer entering a new market who will pay a premium because he has deluded himself that he desperately needs to be in that market."

And there are other caveats about the cookie-cutter approach toward expansion. First, cross-selling, still an imperfect art, is costly. Second, banks have to cope with the common misperception that investment products are FDIC insured.

For their part, savvy would-be acquirers are watching companies more closely these days. They are demanding disaggregation, reporting lines of business separately to see how they perform after acquisitions, according to KPMG Peat Marwick's Eugene D. O'Kelly, national industry director of banking. "From a strategic standpoint, every line of business is being evaluated in terms of investment needs and what it takes to be successful, including the people to run it and its geographical reach. Then you make a decision: grow and defend it, or shrink and exit."

the role of the acquired

Along the same lines, some wonder what shareholders of the acquired company stand to gain. The Return On Equity (ROE) of a bank is lower than that of a mutual fund company, for example; the company would find it hard to explain to shareholders, for instance, why it is diluting their return just to access a customer list.

This is all the more reason that alliances, instead of mergers, are the right way to bring additional capabilities to customers or vice versa, argues Andersen's Marpe. "Both parties would be reluctant to give up their sovereignty. They would think, 'I own this. Why should I sell it to you?'"

At any rate, stock prices will affect sales of banks. As Bob Harman, banking partner for Deloitte & Touche Consulting puts it, "Stock price makes a big difference. In a downturn, prices fall most quickly for stocks that have irregular performances. People just wait to buy cheaper stocks. There are lots of overpriced stocks. As the market corrects itself, we will see more activity."

Meanwhile, talk of BankAmerica-PaineWebber and Chase Manhattan- Merrill Lynch unions continues. First Union is also cited as a prospective player. Though the above banks were intrigued with the topic, senior executives declined to comment.

How can potential acquirers gauge how much to pay for nonbanks? Earnings flow is one popular criteria. Investment in technology, capitalization, value of customers, intellectual capital, and management team are other guides, sources say.

One banking expert suggests that value depends on what the institution and the shareholders can afford. A second counters that basing a purchase on one's budget rather than the ROE is shortsighted. Financing the investment comes second, after the institution determines whether it can achieve the appropriate level of return through the purchase.

Echoing the views of others, O'Kelly emphasizes the role of personnel in an organization. "In making a valuation, we stress the importance of key people, and the ability to retain them to keep the institution successful," he says.

Taking the staff element one step further, O'Kelly says the risk of operational integration is extremely high today because of corporate downsizing in the last ten years. "Organizations are bigger, much more complex, and with longer tentacles, but the layer of middle management who knew how things run, whom you could rely on to get the job done, doesn't exist. The drill sergeants are gone."

Be that as it may, these increasingly competitive times demand new skills and new outlooks to a future we may just be able to get a glimpse of now.

-bosco tfn.com

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