MERGER OUTLOOK Short-Term Freeze; More to Come
Journal article by Bill Streeter; ABA Banking Journal, 1998
Journal Article Excerpt
MERGER OUTLOOK Short-term freeze; more to come. by Bill Streeter A bank dealmaker and a buy-side analyst say the merger party still has plenty of life left, but not until the punch bowl returns In the space of four months, the bank merger scene has gone from white hot to deep freeze. The culprit, of course, is the big slide in the equity markets, which hit bank stocks particularly hard. But while bank consolidation has moved off center stage for the moment, few would question that in time it will return. At the least, the epic spate of gargantuan deals in the first half--now all completed--begs for some perspective and analysis. To provide that, we brought together two bank-merger experts in late September for what turned out to be a spirited discussion. P. Michael Brumm has been with Fifth Third Bancorp, Cincinnati, for 28 years. In mid 1997 he was promoted to a new position for the company: executive vice-president and manager, corporate development--a.k.a. chief merger scout. Since his appointment, Fifth Third has made 11 acquisitions including two mid-sized thrifts, two money managers, and a community bank. Fifth Third, consistently a top performer, ended the third quarter with $28.3 billion in assets and a return on equity of 19.3%. Its price/earnings ratio, which ended the quarter at 34.64, is legendary. Felice Gelman is a senior analyst with Keefe Partners, the financial services hedge fund group run by Harry Keefe. She covers banks, including Fifth Third, and other financial services companies on behalf of the funds' investors. Before joining Keefe in 1994, Gelman was a "sell-side" bank analyst at Dillon Read and Fox-Pitt, Kelton. The following dialog is a condensed, and edited recounting of the actual hour-and-a-half conversation. THE AMAZING FIRST HALF Q. Until the market turmoil began, we had an incredible year going. Will the first half of 1998 be seen to have been the climax of bank merger activity? In terms of the number of deals, there will be a pause for banks to resolve year 2000 problems and feel comfortable with their systems. But because some deals were put on hold by the market plunge, and because it's clear that some companies still want to do deals--First Union for example--I think we'll see a new wave. Brumm: There are still thousands of banks out there, including quite a few that probably shouldn't continue to go forward on an independent basis. If there's been a climax in anything, I would hope we've seen the last of the big mergers of equals [MOEs]. They don't seem to have held up too well in this market, and I don't see any value added whatsoever. Q. So in your mind, Michael, there hasn't been a successful merger of equals among major-size banks? Brumm: From the shareholders' perspective, there hasn't. I'm going to cite the exception that may prove your rule, which would be the Chase\Chemical combination and Chemical\Manny Hanny before it. They've actually managed to do two in a row that have worked well for shareholders. Brumm: The in-market MOE might make some sense inasmuch as you can wring some cost savings out of it. But I think those are the exceptions rather than the rule. The ones that were done earlier this year were largely out-of-market deals. Q. What was driving the rash of big mergers of equals in the first half? Brumm: Other than testosterone? You had a pretty frothy market. Premiums just got too high. It looked too scary to pay a 30% or 40% market premium on top of 18 times earnings which is what we were looking at with some of the smaller takeover candidates. It depends on how merger-dependent you are. If you're mainlining mergers then you've got to do something. Q. On the basis of in-market cost reduction, wouldn't the perfect merger of equals have been First Union and Nationsbank instead of Nationsbank and Bank of America? That would require more psychiatrists than the United States has. But Nationsbank has seemed willing to pay premiums. When I look at Nationsbank\Bank of America there are not too many CEOs who could achieve manifest destiny on their watch; it was an enormous opportunity whatever you might see as the theoretical obstacles of a merger of equals. The Citigroup stunner Q. Did the Citicorp\Travelers deal surprise you?It was very surprising. If you would have said to me this bank and insurance company are going to merge I would have been extremely skeptical because of all the regulatory ... |
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