Big Bank Merger May Precipitate Industry Torrent : Finance: Discussions turn quickly to which institutions may be next in line.
The prospective marriage of Manufacturers Hanover Corp. and Chemical Banking Corp. is a watershed event that could trigger a wave of mergers in the next three years and test the long-touted theory by banking experts that combining big institutions is needed to revive the nation’s ailing banking system.
No sooner was the announcement made Monday than Wall Street was abuzz with rumors of who the next merger candidates might be. The talk centered mostly on money center rival Chase Manhattan Corp.
Talk also centered on previously disclosed discussions between North Carolina banking powerhouse NCNB Corp. and Southeast rival C&S;/Sovran, as well as the aborted merger talks last year between California giants Wells Fargo & Co. and Security Pacific Corp.
The merger pressures on banks hurt by real estate loan problems, such as Manufacturers Hanover and Chemical, are growing. Because loan growth is slowing and income from fees is drying up, merging institutions while cutting out overlapping operations and branches represents one of the few ways banks can boost profits. The two banks estimate that they will save $650 million a year.
“The cost savings are compelling,” said J. Michael Shepherd, a banking lawyer at Sullivan & Cromwell in New York and former senior deputy comptroller of the currency.
It also makes raising capital--the financial cushion banks maintain to protect against losses--easier. Capital is needed to satisfy increasingly demanding regulators as well as to take advantage of acquisition opportunities.
Growing competition from non-bank financial services firms, such as American Express and AT&T;’s successful credit card operation, has increased merger pressures, as has increased competition from Japanese banks. Finally, regulators have been actively leaning on weaker banks to consider mergers.
Still, the process will probably take some time, as much as three to five years. Recent increases in loan problems have made bankers wary of joining with other institutions for fear of finding out that the merged entity will turn out to be a basket case. Furthermore, most mergers will continue to be among banks within the same region, where the potential to realize cost savings is greatest, rather than consist of mega-mergers spanning the country.
“I don’t see this as a starting gun for a race to merge. It will be a glacial type of movement, as opposed to a volcanic one,” said John G. Medlin Jr., chief executive of North Carolina-based Wachovia Corp., one of the nation’s top regional banks.
For years, bank executives, Wall Street investment bankers and regulators have bemoaned the banking system’s “overcapacity,” an industry buzzword that simply means that there are too many banks competing for too little business. The remedy, they say, is consolidation through mergers.
Squeezing the bloated banking system, the argument goes, will enable banks to make steady profits and compete internationally with powerful institutions in Japan and Europe. In addition, huge cost savings can be realized by merging and eliminating overlapping operations at a time when other sources of income are drying up and loan growth is slow.
But mergers have often promised more than delivered. “If you look at the history, at least half go wrong,” said McKinsey & Co. banking expert Lowell L. Bryan.
If the Manufacturers Hanover/Chemical merger fails to deliver, experts believe, the conventional wisdom that mergers are the principal solution to the banking system’s ills will be re-evaluated.
Two large Texas banks--RepublicBank Corp. and InterFirst Corp.--ended up one big disaster after they merged to form First RepublicBank Corp. The combined entity failed, requiring billions in dollars in taxpayer funds to bail out.
Likewise, the big regional merger of Citizens & Southern with Sovran Bank--a Southeastern merger hailed as a visionary alliance at the time--was such a bad deal that the combined C&S;/Sovran is in talks with nearby rival NCNB about a merger.
Even the merger that was touted as a model of how combining banks can work--Wells Fargo’s 1986 purchase of Crocker National Bank--was unique because Wells got an exceptional deal stemming from the eagerness of Crocker’s British parent to sell.
One of the main reasons that some mergers don’t work is that executives find it difficult to mesh operations and fire thousands of people, a step needed to cut costs. What’s more, “mergers of equals,” such as the Manufacturers Hanover/Chemical deal, can result in decision-making paralysis if executives don’t establish a clear decision-making authority with clear targets.
“One has to be a bit more equal than the other,” Wachovia’s Medlin said. “There has to be a boss.”
Merger talk among banks and thrifts has gone on informally for years, with a high incidence of breakdowns, often over issues such as who will manage the combined bank or whose employees will be fired. Wells and Security Pacific, for example, have talked on and off for 25 years about combining. And two major Southern California thrifts, GlenFed Inc. and Calfed Inc., were on the verge of merging in 1989.
The latest merger will spark talk in banking boardrooms about what other merger possibilities exist. If nothing else, executives say, bankers will explore possible mergers so they won’t be caught off guard, waking up to find out that their rivals are merging.
“What a lot of guys are afraid of is being left out of the party,” said one longtime West Coast banker.
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Bank Mergers Chemical Banking Corp. and Manufacturers Hanover Corp. have announced a merger worth more than $2 billion. Here are the 10 biggest bank mergers in the past five years, in millions of dollars. Buyer: Sovran (VA) Seller: Citizens & Southern (GA) Date: 10/89 $2,070 Buyer: Bank of New York (NY) Seller: Irving Bank (NY) Date: 9/87 $1,450 Buyer: First Fidelity Bancorp (NJ) Seller: Fidelcor (PA) Date: 9/87 $1,340 Buyer: Security Pacific (CA) Seller: Rainer Bancorp (WA) Date: 3/87 $1,150 Buyer: Hartford National (CT) Seller: Shawmut Corp (MA) Date: 8/87 $850 Buyer: First Union Corp. (NC) Seller: Florida National Banks (FL) Date: 3/89 $849 Buyer: Natwest Corp (NY) Seller: First Jersey (NJ) Date: 9/87 Buyer: CoreStates (PA) Seller: First Pennsylvania Corp. Date: 9/89 $769 Buyer: California First (CA) Seller: Union Bancorp (CA) Date: 3/88 $750 Buyer: PNC Financial (PA) Seller: Central Bancorp (OH) Date: 9/87 $719
The Banks at a Glance Financial figures in millions of dollars
Manufacturers Combined Chemical Hanover (projection) Total assets $74,130 $61,329 $135,459 Capital (shareholder’s equity) $3,988 $3,722 $7,710 Total loans $45,045 $40,190 $85,235 Nonperforming real estate loans $1,156 $385 $1,541 Nonperforming LDC loans $839 $1,511 $2,350 Total deposits $48,904 $39,265 $88,169 Number of Employees 27,000 18,000 38,000 Number of consumer branches 432 228 580 1990 net income $291.2 $139 (no projection)
