Companies decide to merge and acquire rivals for several reasons, and one industry that has seen a lot of it over the years is the banking industry. Let's take a look at some of the biggest M&A deals in banking history, and what the future might hold.
The "big four" are a product of many M&A deals
What do MBNA, Summit Bancorp, NationsBank, U.S. Trust, and Fleet Financial have in common? All five are now part of the banking giant known as Bank of America (NYSE:BAC). In fact, all of the "big four" U.S. banks as they exist today are largely the product of some big M&A activity along the way. Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and Bank of America were actually 35 separate companies in 1990. Even before the activity that took place as a result of the financial crisis, the banking industry has a long history of big M&A deals.
Citigroup has had the lowest number of M&A deals among the big four, but there was one big deal in particular that led to the company's current state. Citigroup was formed from two major financial corporations: Citicorp and Travelers Group, which merged in 1998 in a $140 billion deal. At the time, it was the largest corporate combination in history.
Wells Fargo had some big deals in the '90s, completing a merger with First Interstate in 1996 valued at $11.3 billion and another merger with Norwest in 1998 worth $31.7 billion.
JPMorgan Chase, as its name implies, arrived at its current form from the 2000 purchase of J.P. Morgan by Chase Manhattan Bank for approximately $30 billion in stock. Then, in 2004 the bank purchased Bank One in a $58 billion deal that resulted in JPMorgan becoming the second largest bank in the U.S. at the time.
Bank of America was perhaps the busiest of the four in terms of big deals. First, the 1998 merger of Bank America and Nations Bank created the entity known as Bank of America, with assets of $570 billion and an extensive network of 4,800 branches. Then in the mid-2000s, Bank of America completed one major deal every year. Between 2004 and 2007, the bank bought FleetBoston Financial for $47 billion, credit card giant MBNA for $35 billion, U.S. Trust for $3.3 billion, and LaSalle Bank for $21 billion.
The financial crisis was a busy time for bank M&A
We generally see a lot of M&A activity during times of poor economic conditions, and the financial crisis of 2008 was definitely full of banks buying out (and bailing out) their weaker rivals.Just look at the performance of some major banks during this time -- and these are the ones that survived!
Some of the more significant deals of 2008 included:
- Bank of America acquired Countrywide Financial for $4.1 billion, despite reports that the FBI was investigating the mortgage giant for fraud.
- Bank of America's acquisition of Merrill Lynch in a $50 billion all-stock deal. However, since the deal was in Bank of America stock, the actual value turned out to be significantly less, as by the time it was completed on Jan. 1, 2009, Bank of America's share price had dropped by nearly half since the deal was announced. The deal actually led to massive losses for Bank of America, and it was later revealed that CEO Ken Lewis was pressured into completing the deal by federal officials.
- JPMorgan Chase's acquisition of Bear Stearns, in what was the most notable M&A deal of the early days of the crisis. The original deal was for just $2 per share (Bear Stearns' 52-week high was $133.20), but ended up being increased to $10 per share.
- JPMorgan Chase's acquisition of Washington Mutual for $1.836 billion, after the bank had been placed into receivership by the FDIC. Washington Mutual shareholders got wiped out, as the bank was purchased directly from the FDIC.
- Wells Fargo's acquisition of Wachovia for $14.8 billion in what is arguably the most successful of the crisis-era deals. Wells Fargo was already one of the most profitable banks, even during the crisis, and the acquisition of Wachovia expanded Wells Fargo's operations into the Eastern and Southern states. Since this deal, Wells Fargo has grown into the number one U.S. bank in terms of market capitalization.
It is worth noting that even though some of these deals may sound relatively small in terms of their dollar value, keep in mind that just a few months earlier, these banks had been valued significantly higher, and their values had plummeted as a result of the crisis. In other words, the dollar values of these acquisitions don't accurately reflect the assets that were acquired.
More M&A deals to come?
As I recently wrote in another article, I think that we'll start to see some more consolidation in the banking industry, particularly in smaller regional banks.
The obvious reason that banks merge is to create more efficient operations. For example, if two regional banks can combine their operations into one smaller branch network, there is tremendous cost-savings that comes with it. The less obvious reason has to do with the post-crisis regulatory environment. Regulatory costs are a major expense for banks, and can be crippling for smaller banks. By combining assets, banks can move up the "regulatory brackets" and operate at a significant cost advantage.
Plus, in good economic times, shareholders can expect more of a premium when being bought out, making it somewhat easier to gain shareholder approval for big deals. This is why the majority of the deals I mentioned occurred during strong markets -- either in the late '90s while the tech bubble was still going strong or during the precrisis years when the markets were at then-record highs. We could be gearing up for another acquisition wave now.
Matthew Frankel owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.