Drip
Portfolio Report
Monday, April 13, 1998
by Dale Wettlaufer
([email protected])
ALEXANDRIA, VA (April 13, 1998) -- It might not be the largest bank merger ever, as last week's Citigroup announcement takes the cake there, but it's the largest bank-on-bank merger in U.S. history. Charlotte, North Carolina-based NationsBank Corp. (NYSE: NB) and San Francisco, California-based BankAmerica Corp. (NYSE: BAC) this morning announced a merger of equals with a pro-forma market capitalization of $133 billion.
NationsBank holders will receive one share of the new BankAmerica Corp. while BankAmerica shareholders will receive 1.1316 share of the new company, which gives no premium to Thursday's close for either shareholder base. NationsBank holders will receive approximately 55% of the new company's equity, but in all other respects, this is an equal pooling of interests to form the nation's largest bank with 8% national deposit share, 29 million household accounts, two million corporate customers, nearly 5,000 branches, and nearly 15,000 ATMs.
Although NationsBank traded at a price/cash EPS discount of 3.4 points as of Friday as well as a discount on a price/tangible assets and price/assets basis, it did trade at a 13% premium to BankAmerica on a price/tangible book value basis due to NationsBank's higher return on equity, whether cash-based or goodwill amortization adjusted. Any way it's looked at, the deal was pretty fair to both sets of shareholders and was somewhat well-received by the Street, as Nations traded up $4 3/16 to $80 5/8, while BankAmerica gained $4 5/8 to $91 1/8.
The new company will be geographically diversified and diversified by business lines, which are two concerns of any banker looking to spread dynamic risks across an enterprise. The combined company's net income breakdown for 1997 looks like this:
4% asset management
6% other
15% middle market banking
27% corporate finance
48% consumer banking
The company will also have top market share in California, Washington, Nevada, New Mexico, Georgia, Florida, Texas, and Washington, D.C., with top-five positions in 11 other states. Other features BankAmerica brings to to the fold are its BA Robertson Stephens investment banking, asset management, and brokerage unit, its transaction processing services capabilities, and international exposure with assets in Asia ($24.1 billion); Europe, Middle East, and Africa ($20.7 billion); Latin America and the Caribbean ($4.6 billion); and Canada ($2.5 billion). Though NationsBank has been active in doing smaller acquisitions in Latin America, the merger increases by far its international exposure.
With the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 breaking down various interstate banking compacts and the combination of separate state bank holding companies into one national corporation, there are still efficiencies to be had in this merger, as it hasn't even been a year since some of provisions of the Act have been in place. Repeating the mantra of the huge financial services mergers over the last year, this isn't about cost-cutting. Rather, as NationsBank Chairman Hugh McColl quoted Victor Hugo this morning, "An invasion of armies can be resisted, but not an idea whose time has come." National branch banking and branding is an idea whose time has indeed come with this merger.
In another major bank merger announced today, Banc One (NYSE: ONE) will join forces with First Chicago NBD Corp. (NYSE: FCN). The agreement values First Chicago NBD, the product of the 1995 merger between First Chicago Corp. and Detroit's NBD Corp., at approximately $30.7 billion. Together, the new Banc One Corp. will have a market capitalization of approximately $72 billion.
One of the strengths of the merger is First Chicago NBD's sizable credit card business, which will bring Banc One to the number-two spot in the industry behind Citicorp (NYSE: CCI). The combined company will have credit card receivables of over $60 billion. The combination of Banc One's First USA credit card unit with First Chicago NBD's card operations along with Banc One's superior middle market and small business lending capabilities will lead to considerable cost savings of $930 million, or $0.65 per share after tax, for the merged companies. That's before counting yearly revenue synergies of $275 million the companies are expecting.
In all, 1998 is turning out to be the year of the super-merger in American financial services. Don't believe the press reports on the urgency created by the Citigroup merger. It's not as if all the people at these four banks suddenly scrambled into action last week after the Citigroup announcement. Although the NationsBank deal with BankAmerica happened very quickly, it still took a few weeks to get all the details worked out. That's nearly overnight for such huge banks, but it's not so fast that these companies are acting in a reactionary fashion. Both NationsBank and Banc One have been acting very deliberately for years to build national brands. Today's announcements were another step in their long-planned movements up the banking food chain.
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