FleetBoston appears ripe for merger

The Star-Ledger, February 17th, 2002

The Star-Ledger Archive COPYRIGHT © The Star-Ledger 2002

Date: 2002/02/17 Sunday Page: 001 Section: BUSINESS Edition: FINAL Size: 1061 words

FleetBoston appears ripe for merger


FleetBoston Financial just can't seem to catch a break these days.

For the past year, the nation's seventh-largest bank, with assets of $204 billion, has endured one body slam after another.

Soured venture capital investments.

Bad loans to Enron and Kmart.

The financial crisis in Argentina.

The continued stock market slump.

Combined, this confluence of bad news cast a dark cloud over the bank's fourth-quarter earnings and left investors wondering if FleetBoston's days as an independent bank are numbered.

With 1,200 branches in some of the wealthiest enclaves in the Northeast, FleetBoston is the dominant player in New Jersey.

And following its acquisition of Summit Bancorp. last year, analysts said, it is an alluring target for any bank that wants a foot-hold in this region.

Wall Street has been buzzing with rumors that FleetBoston soon may be gulped up by an even bigger fish, namely Citigroup, which will be flush with cash after it spins off its Travelers Insurance unit in a multibillion-dollar deal.

"It could happen. Absolutely," said Craig Woker, an analyst at Morningstar. "Fleet is really a mini-Citi. The overlap in terms of the lines of business they are in is really remarkable."

Whether this rumor has legs is hard to gauge, as neither bank would comment on merger speculation.

But Fleet clearly is doing some soul-searching these days. Nearly all its major business lines, from its Latin American operations to its credit-card unit to its brokerage and investment banking units - were hard-hit in 2001.

Its return on assets - a key gauge of profitability - fell from 2.2 percent to 0.44 percent in 2001 in an industry where the average is 1.02 percent. And its stock, which closed Friday trading at $33.19, is down 20 percent from its year-ago close of $41.62.

At a Feb. 11 analyst conference hosted by Credit Suisse First Boston, Chief Executive Charles "Chad" Gifford said his top priority for 2002 was to smooth out the bank's earnings volatility and transform Fleet into a more predictable earnings machine.

"The noise level in our company has been too high and has clearly had people wondering about the value of the franchise," he said.

In the fourth quarter of 2001, the bank lost $507 million. For all of 2001, the Boston-based bank had net income of $931 million, or 83 cents a share, compared with earnings of $3.9 billion, or $3.52 a share, in 2000.

Argentina, where Fleet operates 150 branches and has about $6 billion in loans, has been its biggest nightmare. Last month, the bank was forced to delay release of its fourth-quarter earnings by two weeks in order to give itself time to assess the financial crisis there. Last year, the bank took about $1.1 billion in Argentina-business charges, and the road ahead is still fraught with danger and uncertainty.

As Gifford told analysts last week: "We are in Round 3," in what promises to be a 10 to 15-round fight.

But Argentina is not the only thing keeping FleetBoston from sleeping soundly at night.

The continued stock market slump these past two years combined with the economic downturn have both taken man-sized bites out of the bank's capital markets units, which include discount brokerage Quick & Reilly and investment bank Robertson Stephens Inc.

All told, the bank's investing units - which make up about 10 percent of the company's revenue - lost a total of $63 million, compared with earnings of $176 million in the year-earlier period.

"Now is not a good time for Fleet," said Stephen Biggar, a bank analyst at Standard & Poor's. "There are plenty of things that have not gone right in the last year and it cuts across almost all their business lines."

In a normal business environment, having a diverse business mix is generally considered a good thing - a way to hedge against the kind of earnings volatility that has dragging Fleet down. In Fleet's case, however, "they're in too many businesses that are capital-markets sensitive," Biggar said.

They're also pretty thinly spread, analysts said.

Their global operation, for example, consists of just one country - Argentina. Similarly, their investment bank lacks the breadth of a J.P. Morgan. The bank is more of a boutique, catering to telecommunications and technology - two sectors that have slid spectacularly since the dot-com bubble burst in 2000.

Despite the cloud hanging over FleetBoston's future, not everyone agrees the bank is ready to throw in the towel.

"I think the rumors are overblown," said Gerard Cassidy, a bank analyst with RBC Capital Markets. "I'd be very surprised if the company sells out this year."

For one thing, Cassidy describes FleetBoston as a wounded company. "They would not receive maximum value for their shareholders right now. In addition, the Argentine financial crisis is a pretty big poison pill, detracting would-be suitors. After all, who wants to inherit that headache?"

The other reason a sale seems unlikely: Chad Gifford has just been anointed CEO after former boss Terence Murray stepped down in January.

"We have yet to see a CEO whose first major action as the new chief executive is to sell his company," Cassidy said. "It's just not normal."

Cassidy thinks that, rather than selling out, FleetBoston is more likely to spin off or sell some of their less-profitable businesses, including investment bank Robertson Stephens.

Even without a full-scale deal, some analysts think FleetBoston is an enticing value play - trading at a discount to its peers. Its P/E ratio of 10, based on estimated 2002 earning, is lower than the S&P regional bank average of 13.

In a research note, Nancy Bush, a banking analyst at Livingston-based Ryan Beck & Co., continues to rate the bank a "buy."


"While this company does have far to go to get itself right, the period of the worst news should be behind us, barring a depression or another Sept. 11-like event," she wrote. "This has got to be a better year."

Cassidy agreed.

"From a stock perspective, if you're an investor and you believe an economic recovery is coming, you want to own bank stocks that have suffered the most in a downturn because they will benefit the most in a recovery," he said.

NOTES: Sam Ali can be reached at sali@starledger.com or (973) 392-4188.

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