Earlier this year, American Express chief executive Harvey Golub and Citicorp chairman John Reed sat down to discuss a possible sale of Amex to Citicorp. The two men and their lieutenants and advisers talked over joining the US's largest bank (by market capitalization) with the world's most famous credit card brand. In doing so they briefly contemplated what would have been the largest-ever M&A transaction. A purchase price for Amex of between $90 and $100 a share - and it would probably be closer to $100 - would imply a $40 billion deal.
Amex looked attractive. Citicorp is keen to develop asset management, recently hiring Peter Carman from asset manager Putnam Investment to build business in that area. Amex is strong in asset management. But to progress from talk to action, the two sides would have had to find a way around the obstacle of Citicorp's existing relationship with Visa and MasterCard, which prohibit banks from issuing rival cards.
Actually doing the deal raised even more awkward questions, involving not so much business fit and strategy as politics and personality. Golub and Reed are both 57, and both enjoy formidable status and reputation and are well used to power and autonomy. Could Golub join Citicorp in a high enough position - president perhaps and effectively number two to Reed - to satisfy him? High-profile outsiders have not fared well after joining Citicorp's top ranks. Alternatively, could Amex become a separate subsidiary of Citicorp with Golub still in charge? If Reed had taken that course, he might then have had to forego any cost-savings from eliminating overlap. That might have made the acquisition excessively dilutive and even have halted Citicorp's share repurchase programme, itself an article of faith between Reed and the bank's shareholders, enshrining his commitment, following the mistakes of the 1980s, to keeping up the stock price.
The deal didn't happen. "But it should have done. It made sense," insists a source close to the talks.
Getting the structure right
Bob Khanna, head of corporate planning at Citicorp, is more cautious: "Our view is that there is a role for acquisitions for us only to the extent we require something specific, for example, locking in a low-cost production position or market access in a particular area. It is no secret that we look at things in emerging markets." He adds: "With regards to something big in the US, we would have to be very clear about what it brought to the table."
Despite such protestations, some outsiders still expect the Amex deal to go through, once the right structure is found. "It's too powerful a combination to let slip," says UBS's Thomas Hanley, Wall Street's top-ranked bank analyst. "It will take place before the end of this year."
The general prospect is one of an upcoming frenzy of bank merger activity in the US. In a clear sign of things to come, NationsBank smashed the previous record price for an acquisition, announcing at the end of August that it would acquire Florida-based Barnett Banks for $15.5 billion. Hanley believes that even if the Amex-Citicorp deal doesn't come off, the dam is about to burst and there will soon be a flood of huge bank mergers. "Between now [late July] and the fall," he says, "the amount of bank-to-bank deals will be staggering and the size of banks being bought is going to continue rising. We will reach a point later this year, or maybe next, when $20 billion deals are not uncommon."
For that to happen, some of the banks that are renowned as acquirers, even those as big as Banc One, now the US's fifth-largest by capitalization ($28 billion at end-June 1997), will have to begin considering selling themselves to or merging with other, larger, super-regional competitors.
For most of this year US banks have appeared more intent on buying medium-sized securities brokers in an effort to gain a foothold in the lucrative primary equity market than on striking huge deals with each other. Announced bank acquisitions of brokers include Bankers Trust buying Alex Brown ($1.7 billion), NationsBank buying Montgomery ($1.2 billion) and BankAmerica buying Robertson Stephens ($540 million). In addition three foreign banks have acquired US brokers - CIBC Wood Gundy purchasing Oppenheimer for a total of $525 million, SBC Warburg acquiring Dillon Read for $600 million, and ING acquiring Furman Selz for $600 million.
Bank mega-mergers, comparable to the 1995 combination between Chemical Bank and Chase Manhattan, have not been plentiful. Even when they have not been buying brokers this year, America's most acquisitive banks have been buying other non-bank businesses. For example, Banc One announced a $7.3 billion stock-swap deal to acquire credit card specialist First USA.
That's not to say that conventional bank-to-bank mergers have stopped entirely. There have been some sizeable and high-priced acquisitions by regional banks. At the start of the year, First Bank System bought Oregon-based US Bancorp in a deal worth $9.1 billion. The banking market in Virginia was transformed in a matter of a few weeks in June and July as Wachovia bought Jefferson Bankshares (for $542 million) and then Central Fidelity Banks (for $2.3 billion). Then, shortly after, First Union acquired Virginia-based Signet Banking Corp for $3.6 billion or 22 times estimated earnings per share. Suddenly, Wachovia and First Union are the dominant banks in Virginia.
Merger advisers say that the precedent of First Union's paying 22 times EPS for Signet has suddenly made feasible many other acquisitions banks have been considering but where the obstacle was price. The second half of the year is often busier for merger announcements - senior executives on the selling side know they are guaranteed another full year's pay if they time things this way since it takes at least eight months to clear a typical merger deal past shareholders and regulators.
But the biggest US banks have been quiet for some months now.
To observers like Christopher Flowers, managing director at Goldman Sachs, this is the calm before the storm. "The biggest deals in the US will be banks merging with each other," he says. "This is a long-established trend and we are now entering a late phase. This has been going on for a dozen years and will continue for five or six more years yet. And there will be some gigantic mergers." Kendrick Wilson, managing director of Lazard Frères in New York agrees: "In financial services generally, standing still is not an option. You have got to either buy, sell, or sharpen your focus."