Academic journal article ABA Banking Journal

Shareholders at the Gates?

Academic journal article ABA Banking Journal

Shareholders at the Gates?

Article excerpt

There's a provocative new book out by University of Chicago Law School professor Daniel Fischel, entitled Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution (Harper Collins). That may not sound like your idea of a good vacation read, but it is more compelling than most business books we've seen.

The book will provoke strong reactions, we suspect, because it challenges most of the premises and arguments used to discredit and prosecute Milken and the company he made famous, Drexel Burnham Lambert.

Coming out as it did in the midst of the recent spate of major bank mergers, the book is all the more timely, for it deals in large measure with the takeover tactics of the '80s. While few bank acquisitions are overtly hostile, more than one or two have been prompted by growing investor unrest over performance and value.

You may not agree with all of Fischel's arguments--we didn't--but many of them are thought provoking, particularly those which relate to the isolation of large corporations from their shareholders. Any business manager would do well to consider them carefully.

Shareholder value is addressed in our cover story this month (p.37). In that article, bank analysts from around the country offer their views on whether recent bank mergers have been beneficial from the perspective of increasing value. Naturally their opinions vary, but some common themes emerge: one being a healthy skepticism of acquiring banks' estimates of the enhanced revenue-generating ability that will result from a merger.

Bankers themselves raise similar points in the spirited discussion on credit quality that begins on page 47. Several senior corporate banking executives observe that intense competition has steadily eroded the profitability of commercial lending. Some of them wonder if the business in its present state provides a fair return on shareholders' investment.

A related issue raised in Payback, and by recent events, is the question of how much untapped value lies buried in diversified holding companies. A prime driver of the takeover wave of the '80s was the conviction that giant corporations are worth more broken into their parts than they are intact.

Applied to banking, this view holds that a credit card unit's value is not fully realized by shareholders when it's lumped in with all the other operations of a bank holding company. Bank investor Michael Price raised this point in his dialog with Chase Manhattan Bank several months ago. …

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