MergerTalk: Rich Fleet price may stifle some deals Thu October 30, 2003 12:00 PM ET (Page 1 of 3) By Tom Johnson NEW YORK, Oct 30 (Reuters) - While Bank of America Corp. (BAC.N: Quote, Profile, Research) and FleetBoston Financial Corp. (FBF.N: Quote, Profile, Research) executives bask in the glow of the largest U.S. bank merger in more than six years, investment bankers are struggling to predict what might come next. Some see the $47 billion deal as the catalyst to spark a wave of mergers mimicking the deals that permanently altered the U.S. banking landscape in the second half of the 1990s. But others are more cautious, saying Fleet's lofty premium may stifle short-term M&A activity in the industry by providing cover for reluctant takeover candidates and boxing out all but a few potential buyers. While the Fleet deal represented a good return for a bank not looking to sell out, industry bankers and executives said finding other companies to pay that price will be tough, particularly after the pounding Bank of America shares have taken since the agreement was announced on Monday. "I don't think the Bank of America/Fleet transaction represents the spark in the next wave of merger activity," SunTrust Banks Inc. (STI.N: Quote, Profile, Research) Chief Executive L. Phillip Humann told an investor conference this week. "Sellers have been reminded once again that the premium you had on Sunday night is gone on Monday morning." Bank of America raised more than a few eyebrows when it agreed to pay what was then $45 a share in stock for New England's last remaining bank of significant size. That represented a whopping 43 percent premium to Fleet's stock price and was 276 times Fleet's book value, compared with an average multiple of 220.1 times book for bank mergers so far this year. Even though its market doesn't overlap with Fleet's, Bank of America believes it can achieve $1.1 billion in cost savings. But analysts have repeatedly questioned that assertion, and investors responded by wiping nearly $13.5 billion off Bank of America's market capitalization in two days, lowering Fleet's current payout to about $41.30 per share. DEEP POCKETS In one respect, the Bank of America deal instantly became the stalking horse that other large banks must now chase. After the merger, the Charlotte, North Carolina-based company said it would claim 9.8 percent of all U.S. deposits, more than double its closest competitor, and become the nation's first truly coast-to-coast retail bank. Investors, in turn, quickly made their bets on who might take the plunge next. "You will see some consolidation going forward because fundamentals have improved," said one senior industry investment banker, who asked not to be named. "But if you take Citigroup out of the equation, there's no one left in the 50 U.S. states who can pay these kinds of prices." Outside of Citigroup Inc. (C.N: Quote, Profile, Research) , the global leader in financial services, others said likely buyers are Wachovia Corp. (WB.N: Quote, Profile, Research) , an East Coast behemoth that is the No. 5 U.S. bank, and fourth-ranked Wells Fargo & Co. (WFC.N: Quote, Profile, Research) , which presides primarily over the West Coast. Among the potential targets are Banknorth Group (BNK.N: Quote, Profile, Research) , New England's largest remaining independent bank, and Comerica Inc. (CMA.N: Quote, Profile, Research) , a strong Midwest regional bank. Some also believe SunTrust could be a prime target. The nation's ninth-largest bank, it offers an attractive branch network in the fast-growing Southeast. But SunTrust's size may be exactly what complicates a transaction now. To buy the Atlanta-based company on Fleet's terms would mean a price between $95 and $100 per share, or upward of $28 billion -- a price tag very few U.S. banks could meet. BANKING ON EUROPE? With many U.S. buyers perhaps being priced out of the market for now, some see an opportunity for a handful of deep-pocketed European banks like HSBC Holdings Plc (HSBA.L: Quote, Profile, Research) , Royal Bank of Scotland (RBS.L: Quote, Profile, Research) and ABN AMRO Holding (AAH.AS: Quote, Profile, Research) , which already have solid U.S. franchises. Royal Bank of Scotland, for example, has been particularly aggressive in expanding its U.S. business through its Providence, Rhode Island-based Citizens Financial Group and has proved a solid integrator of acquisitions. Still, while it could outbid most U.S. buyers, RBS saw its shares fall in European trading earlier this week as investors feared it now might be forced to overpay for acquisitions. Indeed, if anything, the Fleet deal may give banks targeted as takeover candidates - such as Pittsburgh's PNC Financial Services (PNC.N: Quote, Profile, Research) or New Jersey's Sovereign Bancorp (SOV.N: Quote, Profile, Research) - more time to remain independent, analysts and bankers note. The deal "must make their CEOs quite happy," one banker said, "because they know they can defend against any offer except for one that's over the top." (Additional reporting by Jonathan Stempel in New York and Sean Farrell in London)
