Bank Deals At Nearly Any Price

Even at big multiples of book value, mergers keep getting done

Eight weeks ago, Signet Bank Chairman Malcolm S. McDonald announced plans to shut or sell a fifth of his bank's branches, cut its 4,400-person workforce by a quarter, and slash expenses by $58 million. That doesn't seem like performance that would justify one of the priciest bank buyouts in history. But on July 21, First Union Corp. announced it would pay $3.25 billion for Signet, based in Richmond, Va., a breathtaking 3.5 times book value. First Union Chairman and CEO Edward E. Crutchfield was so keyed up about the deal that, unable to sleep, he left his New York City hotel at 4:30 on the morning of the announcement to go out in search of an all-night newsstand.

The price of banking deals these days is enough to give anybody insomnia. Two years ago, few bankers would have dreamed of paying so dearly for a bank in Signet's shape. But for Crutchfield and other CEOs of major banks, who believe financial services will be dominated by a dozen or so major players, the options are simple: merge or molder.

So the prices keep rising. NationsBank Corp. paid 2.6 times book value for St. Louis-based Boatmen's Bancshares Inc. in a $9.5 billion deal last October. Then First Bank System bought U.S. Bancorp in March at 3.4 times book, and Wachovia paid 2.8 times book value in June for Central Fidelity. "The trend is clearly up as we get fewer and fewer trophy franchises available," says R. Harold Schroeder, analyst with Keefe, Bruyette & Woods Inc. The top trophies still out there, say analysts and industry sources, include Summit Bancorp in New Jersey, Mercantile Bancorporation in St. Louis, and Firstar Corp. in Milwaukee.

The hot stock market is fueling the price spiral--raising the tags of targets and giving buyers inflated shares to use as currency. Shares of both First Union and Signet are up more than 50% since last July. And with First Union's stock dropping only 3% the day the Signet deal was announced, investors seem to be comfortable with the price tags.

Still, Crutchfield himself admits to sticker shock. In his 13 years at the helm, he has notched nearly 80 deals while building First Union, based in Charlotte, N.C., into the nation's sixth largest bank. "It would not have occurred to me 10 years ago that I'd ever pay 1.5 times book, much less what I'm paying for Signet," Crutchfield says.

"YARDMEN"? But he thinks he can make the Signet deal work. He may close as many as 100 branches, yet still be the top bank in the state. And First Union's strong back-office operation as well as its financial-management and brokerage services should improve efficiencies and revenues. "First Union has a great track record of quickly integrating and carving out costs," says Sandra J. Flannigan, a banking analyst at Merrill Lynch & Co.

Crutchfield says he expects to feel right at home in the wealthy Virginia market. "People who live in North Carolina used to be yardmen for the people in Virginia, so we feel very close," he jokes. Still, at the prices Crutchfield and others are paying, there will be lots of tilling and uprooting before many of the current deals pay off.