DEAL WATCH: FOR FIRST CHICAGO THE CHOICE IS SIMPLE: BUY. . . OR BE BOUGHT: BANKS ARE CONSOLIDATING AND A LOW PRICE/EARNINGS RATIO MAKES A COMPANY A MORE ATTRACTIVE TARGET.

First Chicago NBD Corp. promised to decide by the end of 1997 whether it needs a new name to foster growth beyond its home territory.

So much for New Year’s resolutions.

Is the blown deadline an indication that a rapidly consolidating banking industry will soon render the issue moot? The Chicago-based bank holding company cites trademark issues as the principal delaying factor, but some current and former officers point to deferred issues like this as a sign of something more fundamental – a drift toward a buyout.

Recent mega-deals have begun to buttress speculation that banking is about to ride its biggest merger wave ever. That makes First Chicago a natural target for aggressive banks with nationwide aims.

regional focus

Chairman Verne D. Istock has declared that First Chicago is interested in acquisitions, but only in the “greater Midwest.”

So far, however, he hasn’t stepped up to the plate, except for last month’s purchase of a Detroit brokerage.

Heeding the industry mantra, “Buy, sell or focus,” the bank has been opting for the last, sharpening its approach and actually shrinking as it sorts out the two-year-old merger of First Chicago Corp. and Detroit-based NBD Bancorp Inc.

The industry’s merger frenzy has been fueled by a house-of-cards effect: Buyout speculation raises the price of bank stocks, which in turn makes it easier for banks to use their own inflated paper to pursue deals.

But despite a healthy run-up in its own stock this year, First Chicago still lags the market in price-to-earnings and price-to-book value ratios, both crucial measures in appraising stock-driven deals.

That means that because its own stock is so cheap relative to that of other banks, First Chicago can’t afford to pay up for them without diluting its own shareholders’ stake.

“I don’t think they can buy anybody, because the market would just crucify them if they did,” points out Russ Feltes, managing director in Chicago for New York-based investment bank Sandler O’Neil
l & Partners.

Conversely, First Chicago’s low p/e ratio – around 75% of the market average – renders the bank that much more attractive to banks with higher p/e ratios.

Says a First Chicago spokesman, acknowledging market perceptions, “We continue to tell our story to Wall Street and always look to improve our p/e.” (Mr. Istock declined to schedule an interview for this article.)

Thus, With it trading at about $82, a typical 25% premium would push its acquisition price above $100 a share. But that could be doable for, say, a Minneapolis-based U.S. Bancorp, whose recent price-to-book value was 60% higher than First Chicago’s.

Furthermore, according to a former executive, First Chicago has the three characteristics of prime takeover targets: market dominance, middling results and no black holes on the balance sheet.

Another hurdle for the bank is the composition of its overall portfolio. Though its $113 billion in assets make First Chicago the nation’s ninth-largest bank, it competes against more-focused players across three categories – large corporate banking, retail banking and credit cards.

technology issues loom

Some similar-sized banks are better-positioned, according to a former executive now working at another large bank, because they do not try to do as much.

For example, First Chicago’s once-lucrative credit card returns have fallen amid ambitious – and sometimes reckless – promotions by pure credit card companies. Its wholesale banking operations have long been pressed by clients issuing their own commercial paper. And lately, First Chicago’s jewel – mid-sized corporate business owned by American National Bank – has been under assault.

Looming technology-related costs, including year 2000 computer problems, could push consolidation to the benefit of single-mission banks. “Managements may be more willing to acquire during the first half of 1998, while they still have time to consolidate a deal and maintain compliance,” reports Salomon Smith Barney Holdings Inc.

Add
s Marcus W. Acheson IV, a BankAmerica Corp. executive vice-president: “Some institutions are going to be driven into each other’s arms just to avoid double spending (on millennium issues).”

The race is on: Can First Chicago NBD, on its own, do the things that will push its stock to a level that dissuades predators?

Crain News Service