Investor relations officers are deeply caught up in the whirlwind of bank mergers that have been sweeping the US. They are in an awkward position, aware that what they do might make their organisation attractive as an acquirer or an acquiree.
If it’s the latter, there’s a strong chance they’ll find themselves out of a job. Lou Thompson, president of the National Investor Relations Institute, points out that in mergers, bank or non-bank, IR people from the dominant partner tend to win out. ‘It’s a way of life,’ he says.
Bill Maletz of Chase Manhattan Bank is one such victim. It’s generally agreed that he was good at his job, but Chemical is the stronger party in the supposed ‘merger of equals’ between Chase and Chemical. As a result, John Borden of Chemical will become the merged bank’s top IR person. In this case, the combined bank will keep the name Chase, despite Chemical’s dominant role.
Fleet Financial Group’s merger with Shawmut Bank was unusual in that the person who headed IR at the acquired bank, Thomas Rice, was put in charge of IR at the merged institution. Rice is now senior vice president of investor relations, reporting to the chief financial officer.
Rice acknowledges that it was a bit strange working as an IR officer for Shawmut as the realisation hit that success could very likely put him out of a job. ‘You can’t help having personal anxiety when you’re working on these things,’ he says.
But, the carnage wasn’t too bad at Fleet and Shawmut. Shawmut had two IR officers and Fleet had four. The combined banks now have four, which means that two lost their jobs – plus one secretary.
One former Shawmut IR officer is still looking for work, but John Raschius, who had been with Shawmut, has become a pharmaceutical salesman. The bank asked Raschius to stay as an IR officer, but he didn’t want to move from Hartford to Boston.
In the meantime, Rice keeps plugging away at IR for Fleet/Shawmut. ‘When you end up a survivor, you’re happy,’ he says. But he quickly adds, ‘There’s always next year – that’s life in the 1990s.’
In short, then, for investor relations people the takeover game has become one of musical chairs. When the music stops, someone is almost bound to lose their seat. But Niri’s Lou Thompson says losing an IR job because of a merger isn’t necessarily devastating. ‘The IR job market today is so robust that someone who loses a job because of a merger can quickly get another one if he or she is willing to relocate.’
Two separate forces have been driving the merger whirlwind in the banking sector. The first is the compulsion to cut costs – including investor relations overheads – which leads to intra-market combinations in which competitors merge. The second is the determination to cover a broad geographic area. The thinking underlying the latter reason is less clear – although it can probably be attributed to the chief executive’s ego in many cases.
Unlike past periods of consolidation, the current torrent of mergers is not aimed primarily at strengthening weak institutions through the merger of a troubled bank into a stronger one. Instead, the primary force driving today’s round of mergers is the search for increased profits through combining banks in the same markets. These consolidations enable banks to slash costs drastically, chiefly by firing huge numbers of staff. Duplicate investor relations people are among the first to go.
The Chase/Chemical consolidation will eliminate 12,000 jobs. But it will do more. In New York City, it will create a banking duopoly – there will be only two significant players in the market vying for consumer, middle-market and small business accounts. They will be Chase and Citibank.
The independent Chase may have been a weak third in this market, but it was at least a significant player. Pre-merger Chemical has assets of $188 bn, compared with Citicorp’s $258 bn. Pre-merger Chase’s assets stand at around $120 bn. So the combined Chase/Chemical operation will have more than $300 bn in assets, making it by far the biggest bank in the US. Although the bulk of these assets are outside New York City, the combined bank’s branches dominate the metropolis.
J P Morgan and Bankers Trust don’t serve consumers or small businesses. The Bank of New York, with $51 bn in assets, hardly has any presence in New York City, focusing rather on the suburbs; and Republic, with assets of almost $42 bn, has a handful of poorly run branches.
Their duopolistic role gives Citibank and the new Chase tremendous pricing power. It also gives these dominant banks tremendous power over their suppliers. Even before the merger was final, Chemical notified its suppliers – such as companies which provide it with janitorial services – that they’d better cut their prices to the new Chase. In so doing, Chemical (oops, I mean Chase, the new Chase) was taking a page out of Citicorp’s book which had already made a similar move.
Ironically, banks are more profitable now than ever. Although they belly-ache about not making much money in the consumer business, the overall numbers belie that story. In the third quarter, for example, Chemical had a 17.34 per cent return on equity, while Chase’s ROE was 13.94 per cent, according to Keefe Bruyette & Woods, the New York-based bank stock firm.
Okay, 13.94 per cent is not great, but in a historical context it’s not too bad, either. Traditionally, banks were thrilled to achieve a 15 per cent ROE. But the profit level of all big US corporations has shot up in recent years. The average ROE for the S&P 400 now stands at about 17 per cent, compared with 10 per cent in the 1950s and 1960s.
The critical force is that banks must now compete for capital in this new atmosphere. And for Chemical and Chase, their numbers haven’t been as spankingly good as those of other banks.
Look at Wells Fargo & Company, based in San Francisco, which had a spectacularly good third quarter, raking up an amazing 30.14 per cent return on equity and a 1.99 per cent return on assets. The runner-up was First Interstate of Los Angeles, with a 25.62 per cent return on equity.
Wells has always had a lust for First Interstate, and with a soaring stock price (three times book value) Wells, unable to control its desires, made a hostile takeover bid for its Southern California neighbour. In banking, hostile offers are rare. Wells initially offered 0.625 shares of its stock for each share of First Interstate. It was reported that Wells subsequently raised that offer to 0.65 of its shares for each share of First Interstate. The latter bid was valued at about $137 per First Interstate share.
First Interstate, trying to keep its independence from its California neighbour, accepted a lower bid from First Bank Systems in Minneapolis, whose cost-cutting leader, John Grundhofer, originally learned his skills at Wells. If Wells acquires First Interstate, the current chairman, William B Siart, is almost sure to lose his job. Also, although John Grundhofer has a reputation as an avid axe swinger, fewer First Interstate people are likely to lose their jobs because there is very little overlap between First Bank’s and First Interstate’s markets.
Shareholders may not like the fact that Siart and the First Interstate board went for the First Bank System bid, but they may not have much choice. The First Interstate board introduced a poison pill of a sort, which requires a $200 mn payment by either party if it backs out of the deal. As this issue went to press, the fight was not over, but First Bank System is looking like the winner.
But if Wells does win, the situation in California will be similar to that in New York City (although the California banks tend to be far more profitable than the New York banks). Two banks dominate the state: BankAmerica, with assets of $230 bn, and Wells, with assets of $50 bn. First Interstate comes in third, with $55 bn in assets.
The numbers are a bit misleading because BankAmerica’s assets are spread across the globe, whereas almost all of Wells’s assets are in California. But unlike Bank of America, which has a strong presence throughout the state, Wells’s strength is primarily in northern California. That’s why it’s so eager to acquire First Interstate, with its southern strength. If First Interstate is absorbed by Wells, commercial banking in California will become a virtual duopoly, just as is the case in New York City.
The tremors resulting from these merger moves among the giants are stimulating talk of other consolidations: for example, stories of merger talks between BankAmerica and NationsBank, the North Carolina-based $182 bn colossus, popped up in the press.
The benefits of intra-market mergers may be clear, but the advantages of inter-market mergers are less obvious. What, for example, will the benefit be of the pending merger between Detroit-based NBD Bancorp and the First Chicago Corp? First Chicago is primarily a wholesale-oriented bank, even a money centre-type institution, with assets of $87 bn. The $49 bn-asset NBD (National Bank of Detroit), on the other hand, mainly serves small-town Michigan’s middle market.
The cultures of the two banks are almost opposites, and melding the companies is likely to be extremely difficult. NBD’s strength has been its solid but conservative performance.
Located in motortown and having learnt its lessons during the Great Depression, there is nothing flashy about NBD. Its third-quarter return on equity of 15.74 per cent was clearly respectable, but ranked it 36 out of the 50 largest banking companies. Although NBD is not among the highest earners, it did avoid the disasters that afflicted most other banks during the 1980s.
First Chicago is the opposite. Its third-quarter ROE was a handsome 18.3 per cent, but it usually gets hurt by the vagaries of any trend affecting the banking centre, whether that be Third World lending, real-estate speculation or, maybe, today’s mega-merger craze.
Because there is very little, if any, overlap between the two banks’ markets, there is relatively little room for cost-cutting, except, of course, for jobs like that of the investor relations officer.
Another large intermarket merger is First Union’s pending acquisition of First Fidelity, which operates throughout New Jersey and in the Philadelphia area. First Union, like its northern Carolina-based neighbour, Nationsbank, has been growing rapidly through acquisitions. Expanding from its mid-south base, it first swallowed up banks in the southeast, where it is a powerhouse, then began moving up the East Coast. The acquisition of First Fidelity is a logical continuation of that strategy.
By the standards of the highest earning banks in the US, First Union’s record has not been great. It was hard hit during the years prior to 1993, but has been performing relatively well since then, with an ROE in the 16-18 per cent range.
First Fidelity is 30 per cent-owned by Banco Santander of Spain, which appears to have been eager for the merger. It is unlikely that Anthony Terracciano is happy about it, however.
He hopped around seeking to be CEO of a major bank, finally landing that post at First Fidelity, a mid-sized player. Before going to First Fidelity, he was a top officer of first Chase, and then Mellon in Pittsburgh. First Fidelity has assets of about $35.4 bn, while First Union’s stand at about $88.3 bn. The combined organisation would have assets of $127.7 bn.
First Union offered 1.35 shares of its common stock for each share of First Fidelity, valued at $64.29 at the time of the merger, or 1.92 times book value. The reason given for the merger is economies of scale – for which read getting rid of at least one IR officer, in addition to other staff – and leveraging ‘delivery of First Union’s broader product line in the new markets’, if that accounts for anything.
By contrast, Corestates Financial Corp in Philadelphia, an earnings powerhouse which produced a 23 per cent return on equity in the third quarter of this year, is merging with an in-market competitor, Meridian Bancorp, which had a 17.3 per cent return on equity. Both operate in the so-called Lehigh Valley, and much of their business overlaps.
As long as bank stocks stay relatively strong, the trend towards mergers seems likely to continue. But whether profitability can get much higher than it has been to date is another question. The answer, however, remains to be seen.
Right Pair on Lombard Street the UK’s financial sector is also in merger frenzy. Richard Carpenter reports on Lloyds-TSB
When news that Lloyds Bank was planning a merger broke in the October 8 edition of the Sunday Times, it gave many in the UK financial sector a jolt. None more so than Raymond Wakefield, Lloyds’s chief manager of IR. Although he and his colleagues had been aware of heightened activity, Wakefield says that he knew nothing of the deal until his CFO rang him on the Sunday evening to suggest an early start in the morning. And Wakefield wasn’t alone in being caught on the hop by the leak to the newspaper. Sir Brian Pitman, Lloyds CEO, was in Washington at the IMF conference and had to dash back to deal with the revelations. Joining him in the trans-Atlantic race was Sir Nicholas Goodison, chairman of the Trustee Savings Bank (TSB).
Having had their hands forced by the weekend’s revelations, the two banks made a preliminary announcement on the Monday to confirm discussions. The merger would create the UK’s third largest high street bank with assets just under 130 bn. Proposed terms would give Lloyds shareholders 70 per cent of the combined bank. Detailed briefings for the analysts and press followed on the Wednesday once final terms were agreed.
Behind the scenes, IRO Wakefield got together with his opposite number at the TSB, Laurence Gallagher, early on the Monday morning to exchange views and discuss strategy.
‘In situations like this both IR departments have to be saying exactly the same thing,’ says Wakefield. ‘Because this is an agreed merger we’ve been working very closely together.’
Well, nearly. In fact, Wakefield had a holiday booked for the Tuesday after the Sunday’s leaking of the merger news. Surprising, he went ahead with that holiday, leaving much of the initial briefing to his deputy, Mike Oliver.
TSB’s Gallagher says that in many ways the IR function has been largely secretarial since the deal went public – organising the briefings on the Wednesday and developing the timetable of events. ‘You can’t feed anything into the market at all,’ he says.
‘There are no meetings being held.’ Indeed, although the IR officers have been fielding calls from analysts and institutions, they have only been able to detail information contained in the briefing pack or to provide supporting facts and figures already in the public domain, such as the distribution of branches.
Catherine Newton, a banks analyst at UBS in London, notes that leaking the news to the papers probably wasn’t the best way of going public on the merger. ‘There was a lot of confusion on the Monday,’ she says, pointing out that analysts had only a few sentences outlining the deal and no comment under any circumstances from the respective banks. ‘Still it gave people a chance to think about what it meant before the briefing on the Wednesday.’
Newton and her colleagues have been ‘hassling’ the IR officers to get clarification of the limited amount of information which the banks have been able to release. ‘Most people have been tending to call Lloyds because they’re by far the dominant player,’ she says. ‘I think it’s been handled very well despite the leaks, holidays and so on because of the strengths of the chief executives. They’ve managed to do a good job in convincing everyone it’s a good deal.’
So while the final documentation is pored over by analysts and shareholders in the run-up to the EGMs to ratify the merger, what does it all mean for the IROs? ‘One of the whole points of the deal is to put the head offices together,’ says Wakefield, which are currently a few doors away from each other on Lombard Street in the City. ‘At the moment there’s two of everything. I’d be very surprised if both Laurence and I are in the same jobs in six months. In the meantime it’s a matter of working for the common good. We’re just getting on with it.’
And that’s what other investor relations officers in the sector are also doing. Royal Bank of Scotland, Bank of Scotland, Abbey National and a number of others have all been named in the press as possible targets in the wake of the Lloyds-TSB announcement.
David Calder, investor relations controller at Royal Bank of Scotland, says that he just sticks to making no comment on market speculation under any circumstances. ‘We’ve managed to get that message out,’ he says. ‘All in all it’s not been as bad as expected. There’s been no change to our strategy.
