|
Global isn't only option for banks
|
 |
September 18, 2000: 7:18 p.m. ET
Analysts say regional niche players can survive in era of mega-mergers
|
NEW YORK (CNNfn) - Chase Manhattan Corp.'s $33 billion acquisition of J.P. Morgan Corp. may signal that financial services companies need to be global to survive in the 21st Century. Or maybe not.
In the past few months, Wall Street has experienced a spate of cross-border transactions with European banks gobbling up any available major U.S. financial service firm looking for a stronger foothold on both sides of the Atlantic.
The deals came in rapid succession, led by Credit Suisse First Boston's $11.5 billion purchase of DLJ (DLJ: Research, Estimates) announced Aug. 30, and UBS Warburg's $12 billion acquisition of PaineWebber (PWJ: Research, Estimates) announced in July.
Even the Chase-J.P Morgan union, which featured two U.S. companies, was still international in scope, given the massive international operations boasted by both companies. And on Monday, German's Dresdner Bank AG agreed to buy Wasserstein Perella & Co., a New York merger and acquisition adviser, for about $1.4 billion in stock.
The push to be more international has its roots in the $70 billion merger of Travelers Group and Citibank in April 1998 and the $16 billion union of Fleet Financial Group and BankBoston Corp. in March 1999.
 "The Citigroup deal did mean a lot to bankers across all types of spectrums," said analyst Diana Yates, of A.G. Edwards & Sons Inc. "The perception is that bigger is better."
The Chase-J.P. Morgan transaction is an attempt by an already global Chase looking to expand its reach internationally while also shoring up its investment banking business. But not every financial institution needs to take part in the "global" trend, said analyst Ron Mandle, of Sanford Bernstein.
"If they view themselves as a global capital markets player then they need to be global," she said. "But other companies have different strategies."
Companies looking to perform well internationally need to have a strong grasp of technology, including the Internet, as well as have a good brand and strong customer service, analysts said. A strong investment banking business also doesn't hurt.
Is bigger better?
But just becoming a financial behemoth does not mean that all is well, analysts noted.
Citibank's management has completely changed since the merger and the firm's retail side still needs to be flushed out, analysts said. Citibank has largely performed well in the two years since the deal closed, but analysts are still unsure whether the company is living up to expectations. Analysts credit the strong bull market for helping the banking giant.
"What would have happened to Citigroup under a weaker operating environment?" A.G. Edward's Yates said.
Analysts believe that most companies involved in recent global mergers will continue to benefit from the strong stock market. But these firms must still perform well through various cycles before analysts can determine whether a particular merger is working.
"A bull market can cover a lot of sins and cultural issues," Yates said.
To merge or stay independent
Analysts do not believe that all financial services institutions need to be global, but rather can survive as niche players focused on one particular sector to survive and profit. Still, to avoid a takeover or outright failure, firms need to be leaders in their particular business segments, they said.
Analyst Sharada Vibhakar, of Parker/Hunter Inc., pointed to Mellon Bank Corp., with $46 billion in assets. The firm is the No.1 trust asset manager in terms of fees for bank, she said. The long-term prospects for Pittsburgh-based Mellon Bank (MEL: Research, Estimates) are more favorable than for investment bank Bear Stearns Co. (BSC: Research, Estimates), which is a more likely acquisition target because it does not dominate in any one particular area, analysts said.
"In order to stay independent, you need to be top in your business lines," Vibhakar said."
Analysts singled out Bank One Corp. and Bank of America Corp. as financial institutions whose recent problems may make them prone to considering a merger.
In March, Bank One Corp. (ONE: Research, Estimates), the nation's fourth largest bank, named former Citigroup president James Dimon to head the troubled financial institution. The Chicago bank is also in the process of reorganization and has issued several earnings warnings.
In July, Bank of America Corp. (BAC: Research, Estimates), the biggest U.S. bank, disclosed that it would cut up to 10,000 jobs, or 7 percent of its work force. The move is an attempt by the Charlotte, N.C-based bank to shore up its financial performance.
However, analysts do not believe such problems require the banks to merge with a larger institution, saying a merger is only one potential route.
"Some banks want to stay regional, "Vibhakar said. "Just because there is a consolidation wave, doesn't mean that it is the necessary path to take."
Likely to stay U.S. firms
A trans-Atlantic merger also isn't necessarily the best option for some banks. Some firms will likely choose to stay away from global mergers and keep their strong U.S. presence.
Wells Fargo (WFC: Research, Estimates) and First Third Bancorp (FITB: Research, Estimates) will probably shun any global deal because they are much more retail oriented, said Bernstein's Mandle.
 "I don't see them involved in any global merger. No way," he said.
The San Francisco-based Wells Fargo usually acquires five to eight community banks a year, analysts said. "They do small deals and it doesn't seem like a lot but it does help the bank grow," Vibhakar said.
State Street Corp. also got top marks by analysts and is not expected to follow the consolidation wave. Lehman Bros. (LEH: Research, Estimates), the smallest of the U.S.-based investment banks, has seen its stock run up on speculation that it would be the next firm to be acquired.
In the past few weeks, Deutsche Bank weighed in as the most likely to acquire a firm while Bear Stearns has been pegged as most likely to be bought out.
Where to invest?
Investors hoping to get in on the cross-border wave should consider the risks before plunging all their money into a likely takeover target, like Lehman Brothers or Bear Stearns.
Lehman has experienced a run-up recently based on merger rumors. Up until the Chase-J.P. Morgan transaction, Deutsche Bank was rumored to be buying J.P. Morgan.
 "We never recommend a company based solely on acquisition speculation," Vibhakar, of Parker/Hunter, said. "If invested in Lehman and it doesn't get bought out, then you are stuck with a company that is not a great grower. This is really for the risky investor."
It is a safe bet that Citigroup (C: Research, Estimates) will not be acquired, analysts said, but such security makes the short-term windfall not as lucrative.
'If you buy Lehman then you are hoping lightning strikes twice," Mandle said. "Citigroup is a very good acquirer so there is less near term risk." 
|
|
|
|
|
 |
|
