M&A Roundup: Commercial Banks To Drive Finance Deals Cross-Sector Diversification Plans Whet Acquisition Ardor

Freed at last from Depression-era restraints on their operations, America’s financial services firms are revving up their acquisition engines to seize opportunity quickly from the unprecedented diversity of products and services they now can offer to customers. But, the payoffs might not materialize as fast as the deals. The last barrier to diversification came down in November when President Clinton signed landmark legislation repealing the 1933 Glass-Steagall Act and allowing commercial banks, investment banks, and insurance companies to sell their wares in all of these fields. The law also ratified the 1998 formation of Citigroup, which preempted the legislation by melding the Citicorp banking organization with Travelers Corp.’s insurance and investment banking segments. Acquisitions, especially by commercial banks, are expected to spur additional cross-sector invasions because of the speed of entry they can provide for expansion-bent competitors. However, authorities on the financial services industry caution that the three areas offer such wide differences in culture and marketing techniques that it may be easier to do acquisitions than to reap the gains. “It’s easy to make a merger,” says banking industry consultant Alan D. Gart. “It’s not so easy to make it work. It’s easy to get married but it’s not so easy to have a good marriage.” As a result, experts such as Gart are projecting a significant number of m&a transactions in the wake of the new law, but don’t expect an immediate binge that can drive target prices to astronomical levels or trigger intense bidding contests for the most coveted targets. Instead, they expect acquisitions to be spaced over a long period of time while the main players learn each other’s businesses and figure out ways to integrate the traditionally disparate financial sectors in one house. The gateway to success, says Gart, is getting everyone on the same page so that a combined organization can cross-sell everything to its customers, e.g., peddling insurance policies to checking account depositors, consumer loans to stock market investors. “It would be very easy for them to cross-sell but it won’t be an instantaneous cross-sell,” he says. “They are going to have to learn how to do it and they are going to have to train people how to cross-sell products.” Jeffrey A. Schmidt, managing director for strategy and organization at Towers Perrin, says the growth of the Internet has handed financial services supermarkets the added challenge of both innovating superior products and services and delivering them at a low cost. “The real issue in this regard is being able to take advantage of the skyrocketing power and influence of the Internet with its diversity of financial service offerings delivered at the least cost,” he said. Noting that cross-selling has a spotty record at best, marketing maven Mark Clemente said that those programs that succeed get employees to both focus on new products and understand the complexities of their new wares. “It requires a lot of training and communications and a lot of breaking down of barriers,” notes Clemente, head of Glen Rock, N.J.-based Clemente Green-span & Co. Based on the problems posed by cross-selling and other issues, authorities see these broad acquisition trends developing in financial services: Commercial banks will drive the acquisition train Across the board, banks have the size to do the most important deals. Moreover, banks have more motivation to acquire because they are not growing as fast as other financial organizations. Gart thinks that bank acquisitions of insurance companies will generate about three-quarters of the deal flow, with insurance company purchases of banks comprising the rest. The size and ability of banks to swing bigger deals represent major catalysts in the acquisition mix, Schmidt said. “The people doing the buying have to do material transactions because they already are so big,” he asserted. “They must do fairly large acquisitions because smaller ones wouldn’t have a material effect on business. They must show earnings growth of 15% on higher revenue bases.” Life insurance companies will be preferred targets Gart sees a lot of banks taking over life insurers. Their earnings are more predictable than more volatile property and casualty, and life insurance is easier to sell by bank employees than other types of insurance. Also on the banks’ preferred list are insurance companies with asset and fund management operations that are both showing growth and can be allied with bank trust departments. Investment banks form a question mark Commercial banks already have gobbled up most of the top-line regional investment banks thanks to a Federal Reserve Board edict that skirted Glass-Steagall in 1997. The order triggered a spate of acquisitions when commercial banks got the right to increase trading and securities underwriting proceeds to 25% of their business from 10%. But it is not yet clear whether commercial banks will shoot for the larger New York investment houses – or vice versa. However, Gart said he would not be surprised to see three or four more combinations based on the Citigroup model. Synergistic cost savings can be had in time There are “tremendous opportunities to cut costs,” Gart insisted, but the vast cultural and skill differences might temper immediate results. Eventually, he says, combined firms will eliminate redundant units but they must be careful not to drive away people they need. “You had better be a lot more gentle in achieving those objectives,” he said. “You need these people to blend things in.” Patience is a virtue “I don’t believe this will be an instant success,” Schmidt says, pointing out that it takes time to reassure customers of the worth of the services and to get those who have been buying from multiple institutions to “change their purchasing behavior.” “Give it time,” Clemente states. “Monitor it constantly to see whether it’s working and make changes along the way. If the customers are not willing to go to just one shop, you have to shift gears.” The First MoversMajor Acquisitions of Investment Banks By Commercial Banks (1997 – 1999) ValueAcquirer Target ($mil)Bankers Trust New York Corp. Alex. Brown Inc. (Baltimore) 2,077*Fleet Financial Group Inc. Quick & Reilly Group Inc. (New York) 1,525Chase Manhattan Corp. Hambrecht & Quist Group (San Francisco) 1,350BankAmerica Corp. Montgomery Securities (San Francisco) 1,200First Union Corp. EVEREN Capital Corp. (Chicago) 1,172US Bancorp Piper Jaffray Cos. (St. Paul) 768KeyCorp McDonald & Co. Investments Inc. (Cleveland) 577First Union Corp. Wheat First Butcher & Singer (Richmond) 484BankAmerica Corp. Robertson Stephens & Co. (San Francisco) 470**PNC Bank Corp. Hilliard-Lyons Inc.(Louisville) 275*Bankers Trust later acquired by Deutsche Bank AG **Robertson Stephens later sold to BankBoston Corp.<\TBL>