The Merger of Banks

A mental picture that is simple to formulate is the look on the
neighborhood mortgage banker's face if a would-be customer walked in
without warning and without proof of having any financial worth himself,
and proceeded to announce that he had found a property without any great
distinction, that may be somewhat structurally weak, possessed only
questionable appeal, was not in the greatest of neighborhoods. And for all
that great value and “exposure,” he wanted to offer only three or four
times its market value? Oh yes, he also wants to repeat the process the
following month with a different property.
The commercial, private or mortgage banker would summarily dismiss
the deranged soul, but that is precisely the manner in which the flurry of
mergers and acquisitions have been managed lately: “Consolidation in the
banking industry reached a near-record pace in the third quarter, with
acquirers paying unprecedented prices to build their empires” (Elstein,
1997; p. 1). Households cannot make purchases of the magnitude of cost and
irresponsibility that these banks and other businesses in nearly all
segments of the economy are doing as quickly as they can manage. Where we
have to live on a budget and within our means, they can always increase
their revenues simply by tapping their customers on their collective
shoulder for more input into their businesses to help pay for their
purchases while we also finance their business activities.
Sheshunoff Information Services reported that between July and
September, 1997, $23.2 billion was committed by banks and thrift companies
for the purpose of acquiring some of their competitors. During the spring
quarter, the bank acquisition budget was limited to $7.8 billion (Elstein,
1997). While banking certainly is not the only industry indulging in the
mad merger race, it does appear to be the largest in the country by most
estimates.
Houlihan Lokey Mergerstat of Los Angeles says that the total spent
by the financial sector alone for mergers and acquisitions for the first
nine months of 1997 totaled $145 billion, meaning that the first quarter
total was around was in the neighborhood of $114 billion. That $145
billion total for the financial sector, as much as it was, equated to only
32 percent of the total merger activity in the country for the first three
quarters of 1997. Perhaps even more astounding than the actual total spent
for these purchases is the manner in which the deals are made. “‘I just
kept stacking billion-dollar bills on the table until Mac said yes,'
commented First Union chief executive Edward E. Crutchfield Jr., referring
to Signet CEO Malcolm S. McDonald. That surely was banking's most
memorable quote of the summer” (Elstein, 1997; p. 1).
Not only the manner in which the deals are made is surprising to
those of us who live while uttering words and phrases such as “budget,” “
affordable,” and “I'll have to wait to next week to pay that bill” examine
open-mouthed the percentages of book value for which these banks are being
sold. During the summer quarter of 1997, the medium-spending quarter of
the year, the average price paid for these various financial institutions
was 233 percent of seller's book value, the amount that analysts say the
business is worth. During the same period a year earlier, that percentage
was still high, though it had not hit 200 percent. In 1996, that price was
179 percent above book value(Elstein, 1997). To be fair, book value has
not perfectly followed the earnings potential of some of these banks that
are so frequently being sold. Purchasers have still been paying an average
of 17.4 times more for the financial institution they are buying than they
can expect to receive in earnings. In 1996, that factor was 14.4 time
annual earnings (Elstein, 1997).
Of what causes the waves of activity in the bank merger arena, one
investment banker says that “You need a catalyst. Once one bank sells,
that usually triggers others in the area to make deals, too” (Elstein,
1997; p. 1). The banker's observation seems to hold true. When Wachovia
Corp. of Winston-Salem, N.C., announced that it was planning to buy a
matched pair of Virginia-based banks, Jefferson Banks and Central Fidelity
Banks, in June, 1997, First Union Corporation, also a NC-based bank, made
its own move. Based in Charlotte, NC, First Union bought Richmond-based
Signet Banking Corp. The total price tag was $3.2 billion; Signet Bank was
then worth well under $1 billion. The price First Union paid, $3.2 billion,
was 3.5 times the book value of Signet Bank.
“Many investors questioned the price First Union paid for Signet,
which was not considered a premiere franchise. But people who advise on
mergers said Wachovia's penetration into Virginia had forced First Union to
make a move” (Elstein, 1997; p. 1).
Forced First Union to make a move? For what purpose? First Union
was one of the first big southeast banks to begin rapid growth through
merger several years ago. Until NationsBank, another North Carolina-based
bank, went on their buying frenzy several years ago, First Union was the
largest in the state, and one of the largest in the country. They lost
that distinction to NationsBank, not to Wachovia. No matter, though. The
attitude seems to be that if anyone is buying banks, then nothing will do
but we all join in.
Some mortgagors are selling out because of low interest rates that
have been with us since the early 1990s. Unhappy with the returns they can
generate with the use of their money in a climate of such low interest
rates, some are choosing instead simply to sell out and move on.
Mortgagors handling Fannie Mae and Freddie Mac mortgages are particularly
unhappy with the returns they can muster, and are more than happy to sell
out when mortgaging has not been their core business but rather an aside
(Muolo, 1996).
A bank buying the assets of a mortgage company is understandable,
but if the mortgagor is selling out because of the low rate of return on
investment, then what justification can the banks find for paying several
times over book value for the company and its assets?
Their are advantages for the stockholders of businesses rumored to
be close to being acquired by another entity. Consistently, the first hint
of an impending merger drives up the stock value of the business being
acquired. Barnett Banks Inc. put their business up for sale after noting
that highly inflated price that was being paid for banks everywhere, but
especially in the southeast. “A flock of major banks-including Wachovia,
First Union, and SunTrust Banks Inc. of Atlanta-made very generous bids for
Florida's biggest independent banking company. But NationsBank Corp. won
the bidding war with a mammoth offer of $75 per share, a 37% premium over
Barnett's market price” (Elstein, 1997; p. 1). The price paid by
NationsBank was a high of 4.1 times Barnett's book value and 23 times the
banks' earnings, and Barnett's stockholders were elated.
The merger route seems to be an expensive route to increasing
assets. In these days of increasing competition, having a broader business
base is more profitable than having a smaller one. Mergers are going on
all around and in all industries. Banking is only used as an example here
because of the confoundingly inflated prices the buyers are paying. Since
the financial institutions are filled with people who are supposed to be
able to recognize the value in not paying far more for something than it's
worth and in investing in sound ventures. Oil companies have been rampant
in their mergers (Broyles, 1997), as have been several areas of retail.
None, however, have been more active than the financial sector.
Not only within our country is merger mania in full flower. London
banks have set out on active recruiting excursions for investment bankers
to specialize in the rampant mergers throughout all of Europe. Mergers are
compact packages by which businesses of all types can quickly and
substantially boost their assets, but it would also seem that “the old
fashioned way” of building assets through solid business activity while
giving customers the best value possible is still the most reliable and
time-tested way of building a business.

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