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After two years of hunkering down, many of the nation's major banks are itching to start growing again the fast way -- by buying other banks.
With their stock prices on the rise, low-cost capital at their disposal and internal growth prospects slowing, chief executives at the banks have begun dropping hints that they are on the prowl for acquisitions.
Citigroup Inc. Chief Executive Sandy Weill, a serial-acquirer who hasn't announced a major bank acquisition since May 2002, has said he is on the lookout for retail-banking acquisitions. J.P. Morgan Chase & Co. Chief Executive William Harrison recently said he would consider an acquisition to expand the bank's consumer-banking business. Wells Fargo & Co. and Bank of America Corp. honchos have said they are looking. G. Kennedy Thompson, chairman and chief executive officer of Wachovia Corp., recently opined to investors that "a handful of national banks" is likely to emerge in the coming years, and he expressed a desire to be one of them.
The American banking industry has been consolidating for more than a decade, with the number of deposit-taking institutions dropping to 9,314 at the end of March, from 15,158 at the end of 1990, according to the Federal Deposit Insurance Corp.
"We've been doing it for 16 years, and we expect to continue doing it," says Dick Kovacevich, chairman and chief executive of Wells Fargo, who attributes the deal-making lull of the past couple of years to "uncertain economic times."
It remains to be seen whether bankers have learned from their miscues during the last round of mergers and acquisitions, which peaked in 1998, when big banks took part in 10 big mergers valued at $155 billion. Some of those deals, analysts say, were overpriced and poorly executed. After paying nearly $33 billion for J.P. Morgan in 2000, for example, Chase Manhattan watched last year as the value of the entire, combined entity fell close to that level. In many cases, acquirers had to compensate for rich acquisition prices by slashing costs deeply, which eroded customer service and cost them business.
"This time, I don't think we'll see such rich pricing, particularly in the big deals," says Michael A. Plodwick, banking analyst for Blaylock & Partners, a New York-based research firm.
Money-center banks such as Citigroup and J.P. Morgan had been largely sidelined from deal-making during the past year as corporate scandals, regulatory scrutiny and bad loans pounded their stock prices. Now, as evidence mounts that those pressures are receding, their stocks have been rising, giving them an improved currency for acquisition.
A number of banks are considered ripe for potential takeover, particularly smaller regional banks. Some small and midsize institutions have felt a pinch of late on their profits. While low interest rates have decreased their costs of funding, long-term rates at which they lend and invest are falling as well, narrowing profit margins. That could drive some into the arms of larger suitors that are more diversified, and therefore less reliant on the lending business.
The largest potential targets mentioned by analysts and banking executives include such "super-regionals" as New England powerhouse Fleet Boston Financial Corp., Pittsburgh-based PNC Financial Services Group Inc., Detroit-based Comerica Inc., KeyCorp in Cleveland, and U.S. Bancorp, of Minneapolis.
But for money-center banks, making a run at such targets probably would require their shares to trade at a higher multiple to earnings than their targets. Currently, the gulf between would-be acquirers and some of these super-regionals is narrow, and in some cases, nonexistent. Shares of the top-30 financial institutions trade at an average of 14.84 times current earnings, according to SNL Financial, a Charlottesville, Va., research firm. The biggest banks, including Bank of America, Citigroup and J.P. Morgan, trade below that level. Shares of potential acquirer Bank of America fetch 12.41 times current earnings, while those of FleetBoston, which has been mentioned as an attractive target, trade at 14.3 times current earnings.
FleetBoston declined to comment on potential overtures. "We expect that as the economy recovers, we will continue building our franchise through targeted acquisitions," a FleetBoston spokesman says.
"We've always said we're striving to earn the right to remain independent," a Comerica spokesman says. A spokesman for PNC declined to "speculate about M&A." A KeyCorp spokesman also declined to comment, other than to say that the bank is focused on "increasing shareholder value." A U.S. Bancorp spokesman also declined to comment.
Citigroup, whose executives describe the company's retail-banking footprint as "limited," hasn't unveiled a major retail-bank acquisition since announcing its $5.8 billion purchase of Golden State Bancorp in May of 2002, which boosted its presence in California.
"The U.S. retail-banking profit pool is the largest profit pool in which we are not a number 1, 2, or 3 player," says Citigroup President Robert Willumstad, who heads consumer operations. "We unequivocally have a desire to build out our franchise," he says, particularly in the bank's core retail-banking markets -- Northeastern states, California and Florida.
Mr. Kovacevich of Wells Fargo says his company has averaged 15 or so bank acquisitions a year for the past decade. Deal-making stagnated last year, he says, because "the prices that the sellers wanted were higher than we thought were prudent." He attributes the pricing gulf to what had been an uncertain forecast for the future. Now that the economy is firming up, he says, it might be easier for buyers and sellers to agree on price.
Mr. Kovacevich says Wells Fargo, which currently has retail-banking operations in 23 states in the Midwest and West, would consider using acquisitions to expand its footprint west of the Mississippi, but not into the East.
Bank of America is likely to consider a number of acquisitions, including ones that would fill in Midwestern and Northeastern gaps in its coast-to-coast franchise, or buying a securities-brokerage sales force. The company wasn't in a search mode a year ago but is now actively shopping, people familiar with the bank say. A bank spokesman declined to comment. Kenneth Lewis, Bank of America's chairman and chief executive, has said his bank would be interested in making an acquisition if it wasn't dilutive to earning.
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