Fleet deal has buyers eyeing smaller rivals

The Star-Ledger, October 29th, 2003

The Star-Ledger Archive COPYRIGHT © The Star-Ledger 2003

Date: 2003/10/29 Wednesday Page: 021 Section: BUSINESS Edition: FINAL Size: 841 words

Bank mergers come in numbers

Fleet deal has buyers eyeing smaller rivals

By SAM ALI STAR-LEDGER STAFF

Who's next?

The surprise $47 billion takeover of FleetBoston Financial by Bank of America has sent a message to bankers everywhere: If a big fish like FleetBoston is considered fish food, just about everyone is on the menu.

Call it a pack mentality.

"In the banking business, there is a lot of 'monkey see, monkey do,'" said David Kungl at SNL Financial, a bank research firm. "One big deal happens and then it seems everyone else follows."

No surprise, then, that investors have flocked around the usual round of suspects - banks thought to be up for sale - driving up their stock prices over the past two days.

PNC Financial Services Group of Pittsburgh and KeyCorp in Cleveland, often rumored to be ripe for a takeover, jumped 4.8 percent and 3.2 percent, respectively.

Banknorth Group, whose stock has risen nearly 10 percent in the past two days, is the biggest remaining independent bank in New England, so it would be a desirable target for any large bank that wants to compete with the beefed-up Bank of America.

Another bank that has been the subject of much speculation is Philadelphia-based Sovereign, which expanded into New England three years ago when it bought branches divested from Fleet Financial Group as part of that company's merger with BankBoston.

Sovereign Chief Executive Jay Sidhu fueled speculation that his bank was up for grabs back in June when he told a Philadelphia radio station that he would consider selling the $14.3 billion-asset thrift for the right price. Since Monday, its stock is up 7.4 percent.

Bank of America's move to acquire Boston-based Fleet is the biggest U.S. bank merger since a frenzy of deals in 1998. When completed, the deal will catapult North Carolina-based Bank of America ahead of J.P. Morgan Chase and create a banking behemoth with roughly $930 billion in assets, second only to Citigroup.

Despite the mega-merger, many analysts believe the most common deals going forward won't be among the biggies.

Instead, banking's next round of mergers will likely come in two waves: mid-size banks in the $10 billion to $100 billion asset range in one or a few states consolidating among themselves, and big bank holding companies picking up what they consider meaty morsels here and there, like Citigroup's purchase of West Coast thrift Golden State Bancorp for $5.8 billion back in May.

In fact, many of the 150-plus bank mergers announced so far this year are among middle-market players, according to Kevin McBreen, a bank analyst at Livingston-based Ryan Beck & Co.

The acquisition ball got rolling in June when New York Community Bancorp agreed to buy Roslyn Bancorp for $1.7 billion in stock, about 2.9 times book value.

In late August, FleetBoston entered the arena, agreeing to buy Progress Financial, a 21-branch Pennsylvania thrift with $1.1 billion in assets.

PNC Financial Services Group then picked up United National Bancorp of Bridgewater, with $3 billion in assets, for $638 million.

The goals in these deals vary, depending on the size, analysts say. But generally, such deals are considered a way for buyers to expand their geographic footprint in specific markets and pick up attractive franchises that are complementary to their business.

For sellers, it often boils down to survival.

Banks are facing some of the heaviest pressure in margins ever as interest rates remain at historically low levels, leaving many banks strapped for revenues in the near term.

One thing is certain however: The coming wave of consolidations almost surely will reshape the banking landscape - again.

Analysts note that bankers tend to hunt in packs and mergers often happen in clusters.

At the height of the bank merger frenzy in 1998, for example, 411 deals were announced, valued at $265 billion.

"Anybody who has a specific regional or state presence is a target at this point," McBreen said. "What the larger guys are going to do now is look at their footprint and see where the gaps are and then try to fill them."

Among the names being bandied about as potential buyers are Citigroup, Wachovia and Royal Bank of Scotland, which already owns New England's Citizens Financial Group and has recently expressed interest in expanding in the United States.

A word to the wise, however.

Investors who want to play the bank merger game should keep in mind that it is risky business.

Consider the case of Hudson United Bank.

Back in August, investors bid up shares of Hudson United Bank after a report surfaced that the Mahwah-based bank had put itself on the auction block, sending the stock up to $40.

When the dust finally settled, no buyer surfaced, McBreen said, and the stock fell back to around $34.

The moral of the story: With so much expectation built into bank stock prices, there could be disappointment down the road.

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