wlm4 at cornell.edu (Will
05-07-1995, 04:14 PM
Fleet Financial Group is now the 800 pound gorilla in New England, thanks
to its recent acquisition of Shawmut National Corp. Valued at $3.7 billion,
the deal will fatten Fleet up to nearly $80 billion in assets (once it has
made some divestitures to placate the antitrust gods) and give it top
market share positions in Connecticut, Massachusetts New Hampshire, Maine
and Rhode Island. Fleet CEO Terry Murray will move the corporate throne
from Providence to Boston.
But market dominance has its price, and picking up the tab initially at
least-will be Fleet's existing shareholders. Murray wanted Shawmut so bad
he was willing to take on significant dilution to get it. Murray is paying
1.8 times Shawmut's book value and will finance the deal by issuing more
stock. This will have the effect of reducing or diluting-Fleet's 1996
earnings per share (EPS) somewhere between 10% and 13%, depending on which
securities analyst's report you read. Earnings this year also will be
dragged down by significant merger-related restructuring charges.
Shareholders and analysts profess not to like dilution - it's like a
currency devaluation where suddenly your monetary holdings are worth less
through no fault of your own. But they're often willing to go along if they
believe a deal's long-term benefits justify the short-term pain. Fleet
expects the merger to boost EPS and thereby earn back the dilution within
12 to 15 months of closing, or by early 1997. Advest analyst Frank Barkocy
argues that the Shawmut acquisition is good enough to justify taking on
dilution. "The long-term benefits kind of scream out at you," he says. It
also makes sense that Murray is willing to pay top dollar because, adds
Barkocy, "no other institution in that market would have benefited as much
as Fleet." But Paul Sowell, an analyst at S.G. Warburg & Co., is less
forgiving. He sees significant risks to the merger, and questions whether
Fleet can restore shareholder value within two years. "We're not really
positive about the deal," he says.
Murray says he will work off this dilution or put another way, restore
Fleet's lost EPS by greatly reducing the expense base of the combined
institutions. The Fleet/Shawmut merger is a fairly typical in-market deal:
Aggressively cut overhead, keep most of the revenue and end up a big winner.
Murray's goal over the next two years is to cut $400 million - or 14% of the
new bank's overhead. Can he do it? When it comes to expense management,
Murray's track record is mixed. He made big cuts in Bank of New England's
expense base - but Fleet's efficiency ratio was still a porky 67% as
recently as 1995, when top superregionals like Wells Fargo & Co., Wachovia
Corp. and PNC Corp. were down in the mid-50s. Then Murray announced a large
restructuring last year and promised to put the bank on a low fat diet.
Murray has delivered, shedding $300 million in expenses and getting Fleet's
efficiency ratio below 60%
But Sowell- who thinks Murray has done a terrific job controlling overhead
of late - worries that cutting costs this time around won't be so easy. The
bank may face local political pressure not to lay off large numbers of
employees, since that could rattle a regional economy still recovering from
a vicious recession in the early 1990s.
In early March, Connecticut Gov. John Rowland threatened to block the deal
unless Murray promised not to cut an already announced 1,200 jobs in his
state. Murray backed down.
One also wonders whether the continued uncertainty about job security will
begin to affect the productivity of Fleet employees. "That's definitely a
concern," agrees Sowell. "At what point do they get fed up?"
Sowell is skeptical about the Shawmut acquisition in part because he
questions whether Murray can really cut $400 million in overhead by 1997. "I
think the payoff period is fairly long, and I think it could stretch out
even longer than one year (from the closing date)," he says.
Barkocy has no great concerns on that score. While acknowledging that no one
likes dilution, Barkocy believes "there is a commitment to get (the cutting)
done and done as quickly as possible." He also agrees that Fleet employees
aren't likely to be thrilled by another restructuring, but figures that a
lot of that $400 million will come out of Shawmut's hide anyway.
There's just one problem with that theory. The merger calls for Shawmut CEO
Joel Alvord to stay on as chairman until 1988. Although Murray holds the
power - he'll be president and CEO in the new bank - he must wonder if
Alvord will let his old company get filleted like a cod at a Boston fish
market.
John W. Milligan
US Banker April 1995
This post transferred from the cdb-l mailing list
to its recent acquisition of Shawmut National Corp. Valued at $3.7 billion,
the deal will fatten Fleet up to nearly $80 billion in assets (once it has
made some divestitures to placate the antitrust gods) and give it top
market share positions in Connecticut, Massachusetts New Hampshire, Maine
and Rhode Island. Fleet CEO Terry Murray will move the corporate throne
from Providence to Boston.
But market dominance has its price, and picking up the tab initially at
least-will be Fleet's existing shareholders. Murray wanted Shawmut so bad
he was willing to take on significant dilution to get it. Murray is paying
1.8 times Shawmut's book value and will finance the deal by issuing more
stock. This will have the effect of reducing or diluting-Fleet's 1996
earnings per share (EPS) somewhere between 10% and 13%, depending on which
securities analyst's report you read. Earnings this year also will be
dragged down by significant merger-related restructuring charges.
Shareholders and analysts profess not to like dilution - it's like a
currency devaluation where suddenly your monetary holdings are worth less
through no fault of your own. But they're often willing to go along if they
believe a deal's long-term benefits justify the short-term pain. Fleet
expects the merger to boost EPS and thereby earn back the dilution within
12 to 15 months of closing, or by early 1997. Advest analyst Frank Barkocy
argues that the Shawmut acquisition is good enough to justify taking on
dilution. "The long-term benefits kind of scream out at you," he says. It
also makes sense that Murray is willing to pay top dollar because, adds
Barkocy, "no other institution in that market would have benefited as much
as Fleet." But Paul Sowell, an analyst at S.G. Warburg & Co., is less
forgiving. He sees significant risks to the merger, and questions whether
Fleet can restore shareholder value within two years. "We're not really
positive about the deal," he says.
Murray says he will work off this dilution or put another way, restore
Fleet's lost EPS by greatly reducing the expense base of the combined
institutions. The Fleet/Shawmut merger is a fairly typical in-market deal:
Aggressively cut overhead, keep most of the revenue and end up a big winner.
Murray's goal over the next two years is to cut $400 million - or 14% of the
new bank's overhead. Can he do it? When it comes to expense management,
Murray's track record is mixed. He made big cuts in Bank of New England's
expense base - but Fleet's efficiency ratio was still a porky 67% as
recently as 1995, when top superregionals like Wells Fargo & Co., Wachovia
Corp. and PNC Corp. were down in the mid-50s. Then Murray announced a large
restructuring last year and promised to put the bank on a low fat diet.
Murray has delivered, shedding $300 million in expenses and getting Fleet's
efficiency ratio below 60%
But Sowell- who thinks Murray has done a terrific job controlling overhead
of late - worries that cutting costs this time around won't be so easy. The
bank may face local political pressure not to lay off large numbers of
employees, since that could rattle a regional economy still recovering from
a vicious recession in the early 1990s.
In early March, Connecticut Gov. John Rowland threatened to block the deal
unless Murray promised not to cut an already announced 1,200 jobs in his
state. Murray backed down.
One also wonders whether the continued uncertainty about job security will
begin to affect the productivity of Fleet employees. "That's definitely a
concern," agrees Sowell. "At what point do they get fed up?"
Sowell is skeptical about the Shawmut acquisition in part because he
questions whether Murray can really cut $400 million in overhead by 1997. "I
think the payoff period is fairly long, and I think it could stretch out
even longer than one year (from the closing date)," he says.
Barkocy has no great concerns on that score. While acknowledging that no one
likes dilution, Barkocy believes "there is a commitment to get (the cutting)
done and done as quickly as possible." He also agrees that Fleet employees
aren't likely to be thrilled by another restructuring, but figures that a
lot of that $400 million will come out of Shawmut's hide anyway.
There's just one problem with that theory. The merger calls for Shawmut CEO
Joel Alvord to stay on as chairman until 1988. Although Murray holds the
power - he'll be president and CEO in the new bank - he must wonder if
Alvord will let his old company get filleted like a cod at a Boston fish
market.
John W. Milligan
US Banker April 1995
This post transferred from the cdb-l mailing list