Acquisitions: Hungry, Hungry Bankers

In a crowded market, here are the top targets and suitors

Never mind that thousands of banks have been bought up in the past decade. The market is still too crowded. So big and midsize banks will continue to get bigger by swallowing up smaller ones. Megamergers are always possible, but small, regional banks are the target of choice to pump growth -- which is slowing as interest rates rise and as the mortgage business cools. "It's a consolidating industry," says Jackie Reeves, a senior analyst at Ryan Beck & Co., a Livingston (N.J.) investment bank and brokerage specializing in financial services. "There are too many players."

Acquisition targets usually see their stock prices rise: So which of the takeover candidates offer the biggest payoff for investors? In an exclusive study for BusinessWeek, Ryan Beck drew up a list of the most promising prospects. The banks that might fetch the highest premiums often operate in competitive metropolitan markets, where they have low market share. They sometimes have senior executives on the verge of retirement but without clear successors. The best of them have a strong branch network, a healthy base of deposits, a diversified portfolio of loans, and often strong credit-quality controls.

Topping the list is Philadelphia's Sovereign Bancorp Inc. (SOV ) It has grown rapidly through acquisitions, but its financial performance hasn't matched that of its peers, says Ryan Beck senior analyst Collyn Gilbert. That, coupled with a weak stock, down 7.8% in the past year, "could prompt shareholder discontent and ultimately a sale," he says. An investor buying in at today's price of nearly $22 could scoop up a 59% total return over the next 12 months if Sovereign is bought at its estimated takeover value of $35.

Other chronic acquirers seem to have reached a limit in their ability to absorb other players and they may now become targets themselves. Consider Fulton Financial, based in Lancaster, Pa., which operates branches in Pennsylvania, Delaware, Maryland, and New Jersey, and whose chief executive is set to retire in October. Fulton ranks second on Ryan Beck's list, promising a 45% total return over 12 months if it's taken over.

Most of the banks and thrifts on the list are based in high-growth states. Two in Birmingham, Ala. -- Regions Financial (RF ) and Amsouth Bancorporation -- could also be up for grabs, and would get a sweet price, says Ryan Beck. Likely suitors might include regional powerhouses such as Wachovia (WB ), SunTrust Banks (STI ), BB&T, and Fifth Third Bancorp. (FITB ), according to Ryan Beck analyst Steven C. DeLaney. He doesn't rule out bidding wars.

Some bigger banks with a strong focus in the Northeast could also end up on the block over the next year. Senior bank analyst David A. Hendler of New York research shop CreditSights says many of these potential targets come cheap. One bank that does not show up on Ryan Beck's list is Pittsburgh's PNC Financial Services Group (PNC ), which sells for 12 times estimated 2005 earnings, says Hendler. The bank could be an East Coast entrée for Wells Fargo (WFC ) or U.S. Bancorp (USB ). In addition, Cleveland's KeyCorp. (KEY ) and National City might find themselves on someone else's shopping list.

As the M&A train rolls on, no doubt some bankers will resist selling. Some will continue to thrive by offering customers superior service. But many bankers will find it hard to refuse a top-dollar offer in what will remain a challenging climate.

By Mara Der Hovanesian

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