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Business consolidation won't stop


In the year 2001 we may receive this news flash:

"Giganto Bank, the nation's largest with $1 trillion in assets, has announced its merger with Waterworld TV, an international network-entertainment conglomerate with 1,000 stations and 100 film studios.

"Synergy was the reason given for the combination. After all, banks have money. Media and entertainment executives are good at spending it.

"Wall Street rejoiced at the news, calling it long overdue. Stocks of both companies skyrocketed. One sticky point is the trimming of 5 million employees, but there's hopes of doing so primarily through attrition and misplaced records."

Sound far-fetched? Not after events of recent weeks.

Announcement of a deal to combine Chase Manhattan with Chemical Banking Corp. and form the nation's largest bank, along with the tentative merger of Time Warner with Turner Broadcasting to form the world's largest media and entertainment company, shows that U.S. business is thinking very, very big.

A summer frenzy over banking and media deals dramatically changed the investment landscape. It has all been in the making a long time, but it finally hit with the force of lightning.

I can recall interviewing Walter Wriston, then chairman of Citicorp, a decade ago. He spoke of a need for U.S. banks to grow in size through acquisitions to compete effectively worldwide and take advantage of new technologies. It took a while, but he was on the money.

I also remember attending a CBS Inc. annual meeting in the 1980s at which the Tiffany network top brass scoffed at upstart ** Ted Turner's plan to buy the company. Images of Edward R. Murrow and Walter Cronkite were evoked to point out that business could go on as usual, that change could be avoided. Although a Turner takeover of CBS didn't occur, the network's concept of the future was off-base.

We've had the most advance warning about banking change.

"Forces that started this megamerger deal-making are probably a century old," said Robert Albertson, analyst with Goldman Sachs. "The capital levels have been restored to banks, and the laws are starting to change enough domestically to make it happen."

Banks save a dramatic amount of money by cutting office overlap and can strategically "bulk up" at the same time, Mr. Albertson said. There is, of course, a darker side, too.

"There's a lemminglike mentality, and while about one-third of bank deals are good deals, two-thirds are actually bad deals from the perspective of the acquiring company," warned Thomas Brown, analyst with Donaldson, Lufkin & Jenrette. "Every bank is in play and everybody is [capable of acquiring or being acquired]."

DTC Investors should avoid blindly buying a portfolio of takeover targets, since prices of many stocks already reflect any sort of premium an acquirer could pay, Mr. Brown said.

"Some projections indicate the number of banking companies could be cut in half the next couple of years, and I wouldn't rule out that possibility," added Jim McDermott, president of Keefe Bruyette & Woods. "But investors must be careful, since valuations of many banking stocks are already up 35 percent to 50 percent."

It's a numbers game. "There just isn't enough business for the 10,000 banks in this country," noted Joel Gomberg, analyst with Duff & Phelps. "Overcapacity means they must seek further consolidation."

Computers play a role. "Technology has been a significant trend in consolidations, since it makes banks less geographically defined and permits customers to deal with financial institutions in lower-cost ways," said Diane Glossman, banking analyst with Salomon Brothers.

Play the takeover game cautiously. Salomon humorously titled its recent industry report "Bankers in Heat." In that study, some banks that could theoretically become takeover targets included Huntington Bancshares, Central Fidelity Banks, Mercantile Bancorporation and Bancorp Hawaii.

Meanwhile, Mr. Brown believes First Tennessee National, Crestar Financial, BayBanks Inc., Mark Twain Bancshares and Magna Group are potential takeovers. Mr. McDermott points to Bay View Capital, Coast Savings and First Interstate Bancorp, AmSouth Bancorp and U.S. Bancorp. Mr. Gomberg cited Barnett Banks.

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