By William Patalon III
Money Morning/The Money Map Report
While the U.S. government's plan to invest $250 billion in U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, the recapitalization plan is likely to have a secondary effect – one that whipsawed U.S. taxpayers won't be very happy to learn about.
Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is.
One last point: Experts say that takeovers financed by the government infusions are likely to have less of a beneficial impact on the economy than an actual increase in lending levels would have. And because so much of this money will be used for buyouts, the reduction in the benchmark Federal Funds target rate announced yesterday (Wednesday) by central bank policymakers will likely do very little to actually spur lending, experts say.
Fueled by this taxpayer-supplied capital, the wave of consolidation deals is "absolutely" going to accelerate, Louis Basenese, a mergers-and-acquisitions (M&A) expert and the editor ofnewsletter, told Money Morning. "When it comes to M&A, there's always a pronounced 'domino effect.' Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive."
Lining Up for Deal Money
Late last week, the Pittsburgh-based PNC Financial Services Group Inc. (PNC) became the first U.S. bank to make use of the government's Troubled Assets Relief Program (TARP), announcing plans to purchase the beleaguered National City Corp. (NCC) for $5.2 billion. To help finance the purchase, PNC will sell $7.7 billion worth of preferred stock and warrants to the U.S. Treasury Department, as part of that the Treasury's bank-recapitalization program.
With regards to the recapitalization program, U.S. Treasury Secretary Henry M. "Hank" Paulson recently said, yet again, that the government's goal was to restore the public's confidence in the U.S. financial services sector – especially banks – so that private investors would be willing to advance money to banks and banks, in turn, would be willing to lend, The Wall Street Journal reported.
"Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital," Paulson said last week.
Whatever the Treasury Department's actual intent, the reality is that banks are already sniffing out buyout targets, thanks to the TARP money. Indeed, they've been quite open about it during conference calls related to quarterly earnings, or in media interviews.
Take BB&T Corp. (BBT). During a conference call that dealt with the bank's third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank "will probably participate" in the bailout program, accepting federal infusions. Allison didn't say whether the federal money would induce BB&T to boost its lending. But he did say the bank would likely accept the money in order to finance its expansion plans,
The Journal said.
"We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill]," Allison said during the conference call.
He's certainly brazen. But he's not alone. For instance, there's also Zions Bancorporation (ZION), a Salt Lake City-based bank that's feeling financial crisis pain due to losses from bad real-estate loans. On Tuesday, Zions announced it would be receiving $1.4 billion in capital from the Treasury Department – cash it would use to boost lending and keep paying a dividend, albeit at a reduced rate.
"As a strong regional bank with a major focus on financing small and middle-market businesses, we are pleased to have this additional capital to better serve the lending needs of customers throughout the Western United States," Chairman and CEO Harris H. Simmons said. " . This new lending will be good for our country's economy, our customers and our company."
However, during a recent earnings conference call, Zions Chief Financial Officer Doyle L. Arnold said that while new capital might allow it to boost lending, the increase wouldn't necessarily be a dramatic one, The Journal said. Besides, Zions will also use the money "to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters."
Buyouts Already Accelerating
With all the liquidity the world's governments and central banks have injected into the global financial system, the global game of "Let's Make a Deal" has already become a reality.
Indeed, as WSJ.com reported a week ago, global deal volume for the year has already passed the $3 trillion level – only the fifth time that's happened, although it took about three months longer this year than it did a year ago.
This time around, the new kings of deal making aren't such highly compensated "Masters of the Universe" as The Blackstone Group (BX) LP's Stephen A. Schwarzman, or KKR & Co. LP's Henry R. Kravis, The Journal's blog reported. Instead, they are the much-lower-paid – but decidedly more powerful – civil servants of the U.S. and U.K. governments: Treasury Secretary Paulson, U.S. Federal Reserve Chairman Ben S. Bernanke, U.K. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling, the Web site stated.
At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial sector deal making.
According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn't include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, similar to the amount it may invest in smaller banks, or other deals that the feds are helping engineer [JPMorgan Chase & Co.'s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).] [For a better understanding of just how dramatic this upswing in deal making has been, check out the accompanying chart, "Packing a Punch."]
When the dust settles on this buyout boom, we may well have a record in hand that's even less beatable than Joe DiMaggio's 56-game hitting streak. That's because with the Fed, the U.K. and other governments and central banks doling out the capital, there's no financial-sector equivalent of Kenny Keltner to bring this buyout fest to an abrupt close.
That means that the "hits" – the buyout deals – will just keep coming.
If You Can't Beat 'em… Buy 'em?
When it comes to identifying possible buyout targets, M&A experts such as's Basenese say there are some very clear frontrunners.
"I'd put regional banks with solid footprints in the Southeast high on the list, and for two reasons," Basenese said. "First, demographics point to stronger growth [in this region] as retirees migrate to warmer climes – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage."
With a lot of bigger deals already in the books, many analysts agree with Basenese's assessment, and are now watching to see if regional banks will succumb next to dealmakers' bids. Indeed, earlier this month, Matthew Schultheis, a senior analyst at Boenning & Scattergood Inc., told a reporter that he expected this to be a "trend that continues at least through the first half of '09, unless some of these [companies] stabilize. It could even last beyond that."
There's a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It's toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors. Regional banks have a tougher time, says Doug Landy, a partner in the U.S. banking practice of the law firm of Allen & Overy.
"A regional bank lacks both the international access and the local character," Landy told The Associated Press.
Several big regional banks at least acknowledged the possibility of buyouts on recent earnings conference calls, The Journal reported.
The Cincinnati-based Fifth Third Bancorp (FITB) talked about raising $1 billion in capital by selling non-core assets. Bank executives said that a difficult 2009 is "a view that continues to seem likely to us." They confirmed discussions with a number of possible investors or asset-purchasers, and said they were "confident that an attractive transaction would be available to us as the opportunity and timing are appropriate, including the ability to generate capital in excess of our original expectations." Earlier this week, however, it announced that it was getting $3.4 billion in TARP funds, the Cleveland Plain Dealer newspaper reported.
Clearly, the bank isn't thinking in terms of an outright sale, or at least doesn't admit to that publicly.
One other potential buyout candidate includes Huntington Bancshares Inc. (HBAN), a Columbus, Ohio-based regional that just received a $1.4 billion federal infusion of its own, the Plain Dealer said.
Who will be doing the buying?'s Basenese tells investors to "also look for banks with foreign ownership" to be on the prowl for acquisitions.
"Just like Spain's Banco Santander SA (ADR: STD) [which earlier this month said it would buy the 76% of Philadelphia-based Sovereign Bancorp Inc. (SOV) it didn't already own for about $1.9 billion], foreign-based banks will likely jump at the opportunity to expand their U.S. presence at a discount," Basenese said. "M&T Bank Corp. (MTB) fits the bill, as Allied Irish Banks PLC (ADR: AIB) already owns a 24% stake."
Then there's the Minneapolis-based U.S. Bancorp (USB), which is one of the few regionals still in a strong position. CEO Richard K. Davis has reportedly rejected the idea of buying large banks that are already in trouble and was asked if the new rescue plans might change his mind.
"It makes it a little easier to do those things," Davis told The Journal. "But first and foremost, whether the capital is less expensive or the opportunity that TARP is present, we'll continue to look at deals on an accretive basis where they make sense and where they would fit into this company's long-term structure. So it would definitely make it more attractive, and so some of our positioning and our targets look more attractive and our valuation is easier now."
There's also another point to consider, Davis said.
"To the extent that [a deal] has to hit all of the normal bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal. So it doesn't really change our philosophy, but it does make it easier to find our way to partnerships that might be more accretive sooner," he said.
Basenese, the M&A expert, believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be "big spenders," using the TARP funds to help accelerate their conversions from an investment bank to a bank holding company – a transition that will require them to bulk up their deposit bases. And the quickest way to do that is to buy other banks, Basenese says.
"One thing [the wave of deals] does is to restore confidence in the sector," Basenese said. "It will go a long way in convincing CEOs that it's safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank."
[Editor's Notes: For more information about , check out this . Also, make sure to read Money Morning next week, when retired hedge fund manager and Contributing Editor Shah Gilani gives readers an inside look at how the capital infusions and the merger deals they finance are totally subverting what the rescue plan should have been. Gilani's series on the credit crisis has been read by more than a quarter of a million people on the
Money Morning Web site alone.]
News and Related Story Links:
- Money Morning News Analysis:PNC Becomes First Bank to Utilize TARP Funds with Acquisition of National City.
Deal Making Surpasses $3 Trillion.
Troubled Assets Relief Program.
- The Associated Press:Analysis: How low can Fed go on interest rates?
Bank Deals: Who Is Ready to Buy? Who Is in Denial?
U.S. Rescue Fund Is Likely to Foster Bank Takeovers.
Banks in record Fed borrowing.
- The Baseball Almanac:Joe DiMaggio's 56-Game Hitting Streak.
- BaseballReference.com.Ken Keltner.
Potential Deal for Sovereign Could Signal More M&A.
- Money Morning News Analysis:
Japan's Mitsubishi UFJ Takes 21% Stake in Morgan Stanley as Spain's Santander Moves on Sovereign.
- Cleveland Plain Dealer:
Key, Fifth Third, Huntington get Treasury money.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.