Sunday, March 19, 2000
Banks hold off on major deals
Knight Ridder News Service and The Cincinnati Enquirer
Last fall, some important signs pointed to merger mania in the financial services industry this year.
Analysts predicted that banks would rush to craft deals before the end of the year, when an accounting method that lets companies get a better price for their institutions is expected to end. In November, landmark financial services legislation made it possible for banks, insurance companies and brokerages to buy each other and offer similar products.
But what's happening now isn't quite what was expected. No major deal has happened in the industry. The Federal Reserve — whose chairman Alan Greenspan warns that the Fed will keep raising interest rates to slow down the economy — spoiled the party.
“I think you have to lay the blame on Mr. Greenspan's doorstep,” said Tom Burnett, president of Merger Insight, a New York research firm. “Interest rates are perceived to be rising sharply, and (banks) don't want to do anything drastic.”
But even if banks wanted to do deals, their lackluster stock prices wouldn't allow them. Bank stocks in general performed dismally in 1999. The Keefe Bruyette & Woods Index of the largest bank stocks fell almost 5 percent in 1999. Many individual banks, such as Bank of America and First Union, fared much worse.
Banks with major Tristate operations have not been exempt from elements that have slowed down bank deals.
Fifth Third, Firstar and Provident, all busy acquirers the past two years, have not tried to buy a bank or thrift since 1998, after being among the industry's most acquisitive institutions.
Neal Arnold, Fifth Third's chief financial officer, said the bank is interested in doing more deals. Its first goal,
however, is to complete its $2.4 billion purchase of Evansville-based CNB Bancshares Inc.
Mr. Arnold said the bank hopes to wrap up that deal by mid-summer, allowing it to then pursue other banks. He said Fifth Third is not interested now in acquiring insurance companies or brokerages.
He said Fifth Third has received inquiries from potential sellers in the Midwest. The Cincinnati-based banking company would like to expand its presence in states likes Michigan, Illinois and Indiana.
“Our appetite is to be selective and buy companies that allow us to grow the franchise,” he said. “The industry in general has been cautious because many of the deals have not worked as anticipated.”
David Long of First Union Securities in Chicago said declining bank stock deals also have halted bank mergers.
“Until the stock prices rebound, sellers won't be as anxious because they won't be able to fetch the prices they could a year or two ago when banks tried at higher multiples,” Mr. Long said.
Banks are hurt by higher interest rates because they reduce the demand for loans and boost how much it costs for banks to borrow money. And if the economy does slow down, many borrowers could default on their loans — a move that forces banks to subtract those losses from profits.
“Bank stock has been so battered, no one's got the currency to do the deals,” said Tony Plath, associate professor of finance at the University of North Carolina at Charlotte's Belk College of Business Administration. “You'd have to sell so much stock to make it happen, and no one wants their stock diluted.”
Banks also are wary about making deals because Wall Street has put the sector under increasing pressure to prove that previous mergers will work. Analysts pointed to First Union's troubles with its 1998 takeover of Philadelphia's CoreStates — and the market's harsh reaction — as an example. Problems arising from Chicago-based Bank One's rocky acquisition of First USA led to the resignation of the bank's chief executive in December.
“Many of those who have been buyers in the past have seen their buys go a bit sour,” said Jim Schutz, an analyst for Arkansas-based Stephens Inc. “As a result of that, banks are swearing off for the time being.”
Some industry watchers are still expecting deals this year. Mr. Burnett believes they'll begin to happen in the second or third quarter. If the Fed increases rates at least three more times, that tightening would end as early as its meeting in late June. Bank stocks will begin to rise a couple of months before the end of the Fed's tightening phase, some analysts said.
“I just think we need to temper our expectations a little bit,” Mr. Burnett said. “Things will pick up.”
Until bank stocks move up dramatically, few large U.S. banks are in the position to do deals right now, analysts said. But Mr. Burnett is expecting European financial conglomerates to look toward the United States for acquisition targets, especially insurance companies. They're well-versed in owning banks and insurance companies, and the U.S. market looks attractive to them. Just last week, the Dutch insurance and financial-services provider ING Group made a joint bid to acquire Aetna Inc., the largest medical insurer in the United States.
Right now, the best reason for U.S. banks to shop for deals is to get more customers in an existing market, Mr. Plath said. For example, BB&T plans to acquire West Virginia's One Valley Bancorp in a $1.2 billion stock swap that would make the Winston-Salem bank the largest in a state it entered last year.
However, BB&T officials said then that the merger, a pooling acquisition, is likely to be the Winston-Salem, N.C., bank's last for this year.
Said Mr. Schutz: “People are just really busy integrating what they've already bought right now.”
Jeff McKinney contributed to this report.
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