The Eye of the Storm

Article excerpt

A pause in blustery band consolidations appears short lived for further frenzied action ahead

The latest wave of merger mania has hit a breaker. After years of sweeping consolidation in the banking industry, analysts and bankers say that market forces and the pesky Year 2000 millennium bug have conspired to slow the latest tidal surge of merger activity-at least temporarily. These same industry observers predict, however, that this expected pause in bank mergers, like the calm within the eye of a hurricane, may be short-lived.

All told, mergers, acquisitions, failures and charter churns have caused the disappearance of 38 percent of all commercial banks over the last 15 years. The number of commercial banks has fallen from 14,482 in 1984 to 8,984 in 1998, according to FDIC figures.

Bank combinations, which began in earnest in the early 1980s when interstate banking barriers began to fall, reached their peak in the second quarter 1998. According to SNL Securities LC in Charlottesville, Va., 42 deals valued at $290 billion were announced last April alone. The value of the blockbuster mergers of Travelers Group-Citicorp, NationsBank-BankAmerica and Banc One-First Chicago NBD totaled nearly half of that month's mergers.

But the merger trend isn't isolated to the big guys. The number of community bank combinations reached a two-year peak as well in the second quarter of 1998 with 117 community bank deals (in this instance, community banks were defined as institutions with less than $2 billion in assets) valued at $273 billion.

Six months later, the wave has parted, losing steam in the wake of a late summer market swoon. Although bank buyout pressures had been fizzling from news of deflation in Japan, inflation in Russia and currency overvaluation in Brazil, the marketplace finally buckled in the last days of August, sending U.S. and global stock prices plummeting and pushing one-third of the world into recession.

Investor anxiety leading up to and following August's stock market plunge due to domestic and global worries caused bank stock values to plummet even faster than the overall market. Some of the largest U.S. banks, including Citicorp and NationsBank, took a 50 percent hit in their stock values before the slide came to a halt.

Once the air cleared, sellers whose expectations had risen along with the stock market earlier this summer were unprepared for the reality of a market correction. The result, compounded by uncertainty over Y2K issues, has been a slow recovery in bank merger and acquisition activity.

Deals Fewer Farther Between

McDavid Stillwell, contributing editor of Bank Mergers and Acquisitions newsletter for SNL Securities in Hoboken, N.J., says in the aftermath of the market drop, "there has been a sharp decline in the number of announcements and total deal values in the second half of the year."

In September and October, there were only 34 deals announced at an average price multiple of 16.9 times earnings, compared with 76 deals at a much higher average of 22 times earnings for the prior two months ending Aug. 31. Moreover, between mid-August and the end of October, 10 previously announced bank merger deals fell apart. "In the number of willing buyers and sellers dropped dramatically," Stillwell says.

A drop in deal volume is an early indication that the overall bank stock market is going through a readjustment process. "A lot of people are pulling back and reassessing," says Bert Ely, president of Ely and Associates Inc. in Alexandria, Va. "Not only is there a greater gulf in pricing, but people on both sides of the equation are saying these are uncertain times and we are unsure about what we want to do." However at press time, Frankfurt, Germany-based Deutsche Bank had just announced its $10 billion takeover of Bankers Trust, the nation's eighth largest bank. So while the pace has slowed, deals such as this prove the activity has not completely petered out. …