What lies behind the bank merger and acquisition frenzy?

Business Economics, April, 1996 by John W. Spiegel, Alan Gart

The banking industry is in the midst of a consolidation phase that is likely to reduce the number of banks by at least 25 percent before the end of the decade. Bank merger and acquisition activity rose to record levels during 1995. This movement acted as a catalyst to lift banking stock prices considerably more than either the Dow Jones Industrial Average or the S&P 500. Contributing factors to the increase in bank consolidation are the passage of an interstate banking bill, a lack of revenue opportunities in a slowing economy, the prospects for another round of credit quality difficulties over the next few years, and cost-cutting potential following mergers.

The banking industry is undergoing a restructuring. This movement results from (1) the large number of bank and thrift failures in the 1970s and 1980s (See Figure 1), (2) the deregulation that followed, (3) technological change, and (4) the desire to improve profitability by serving customers more efficiently and by increasing sources of revenue in the highly competitive environment of the 1990s.

[Figure 1 ILLUSTRATION OMITTED]

Prior to the 1980s, geographic restrictions, especially the prohibition against interstate banking, limited where and how banks could compete. Some states even restricted in-state branching. Often, the only way that banks could expand was through multibank holding companies, which were formed to acquire banks and other nonbanking companies in different geographic locations or markets. Bank regulators evaluated all transactions closely to ensure that the acquiring company did not gain too large a market share. While there is still some concern regarding market dominance and the lack of competition, this problem has been reduced in today's environment because there are few constraints to consolidation.(1)

Catalysts in increasing the size and number of bank mergers were: (1) the revised and more lenient guidelines of the Reagan Administration (1982), (2) rising deposit and labor costs, (3) pressures on banks to economize by seeking large-sized and more efficient operations, (4) the desire to penetrate new markets in order to expand bank revenues, and (5) the opportunity to rescue failing depository institutions at relatively favorable prices. The Reagan Justice Department guidelines and the Garn-St. Germain Act (1982) made it possible for hundreds of mergers or acquisitions to take place that would have been challenged under the old guidelines.(2)

Many analysts believe that the removal of the Glass-Steagall Act will be the next step in banking deregulation. If that sixty-year old act dies, it would not be surprising to witness regional banks begin to acquire regional brokers as another source of fee income. Some banks may reengineer themselves into financial services conglomerates.

CONSOLIDATION TRENDS

Consolidation within the banking industry has been dramatic over the past ten years, and there are no signs that acquisition activity will abate. The top fifty banks now account for over 75 percent of total U.S. banking assets. Some analysts suggest that before the end of the decade, the fifty largest banks could consolidate to fifteen following the next wave of merger activity. Bigger, stronger banks continue to buy smaller depository institutions, so that the number of banks and thrifts has been declining. For example, in 1983 the industry was composed of approximately 14,500 banks. At year-end 1995, the number fell to about 10,000. Most analysts expect somewhere between 5,000 and 8,000 banks by the end of the decade after a wave of merger activity sweeps the industry.

The number of bank acquisitions from 1983-94 totaled just under 3,100, with a lowly 129 acquisitions in 1989 and a high of 441 acquisitions in 1994. The average number of banking marriages per year averaged 256 over the same time frame. In the first eleven months of 1995, there have been just under $60 billion in announced mergers, well ahead of the previous record set in 1991 of $22 billion in market capitalization. Five of the largest banking acquisitions in U. S. history were announced during 1995 (See Table 1.): the merger of Chemical Banking with Chase Manhattan; the acquisition by Fleet Financial of Shawmut National; the acquisition of First Fidelity by First Union; and the merger of First Chicago with NBD, and an agreement to merge between First Interstate and First Bank Systems.(1)

Table 1
Ten Largest Mergers
(Billions of $)

                                         Announcement   Market
                                                        Date Value

1. First Bank Systems/First Interstate      11/95       $10.4e(1)
2. Chase Manhattan/Chemical Banking          8/95        10.0
3. First Union/First Fidelity                6/95         5.4
4. First Chicago/NBD                         7/95         5.1
5. BankAmerica/Security Pacific              8/91         4.7
6. NCNB/C&S-Sovran                           7/91         4.5
7. Key/Society                               8/93         4.0
8. Fleet/Shawmut National                    2/95         3.6
9. CoreStates/Meridian                      10/95         3.2
10. PNC/MidLantic                            7/95         3.0