In a year that saw a flattening of merger and acquisition (M&A) activity in some financial service sectors, deals involving securities and investment firms were at a blistering high in 2000. Banks recorded a warm year, too, although nearly 80% of the announced aggregate deal value of $89.9 billion came towards the end of 2000. The annual total rose significantly at the end of the third quarter when Chase Manhattan Corp. and J.P. Morgan & Co. announced a merger valued at $34.4 billion. That news led to a rush of deals priced above $5 billion in the fourth quarter.
By contrast, 2000 was a comparatively tepid time for M&A among insurance companies and thrifts. The $4.3 billion in announced aggregate deal value for the thrift sector was about 60% of 1999's total. The bulk of 2000's thrift deals was modest, however, with only one, Washington Mutual Inc's $1.5-billion stock transaction with Bank United Corp., coming in at more than $200 million.
The coldest setting by far was the specialty finance sector, however. Aggregate deal value was deceptively high - $38.4 billion - thanks to a single transaction - Citigroup Inca $31.1 billion bid for Associates First Capital. But overall deals numbered merely 145, a record low since SNL Securities began tracking M&A activity in 1996.
Yet even as M&A activity across all financial services was inconsistent, the rankings of deal advisers remained steady. Measured by deal value, Goldman Sachs & Co. took the top spot in 2000, advising on 36 deals valued at $113.02 billion. Credit Suisse First Boston USA, which ranked number one in 1999, took second place in 2000, advising on 37 deals valued at $63.3 billion. Advisers Merrill Lynch & Co., Morgan Stanley Dean Witter and Salomon Smith Barney Holdings retained the three, four and five positions, respectively, from 1999 to 2000.
Three legal advisers rotated among the top rankings, too, with 1999's third-place adviser, Sullivan & Cromwell, earning the lead in 2000, advising on 34 deals valued at $85.2 billion. Skadden Arps Slate Meagher & Flom held steady in second place according to deal value, advising on 20 deals in 2000 valued at $80.3 billion. 1999s leader, Wachtell Lipton Rosen & Katz fell to third place in 2000 with 20 deals valued at $70.4 billion.
Securities and investments
The year 2000 took securities and investment M&A activity to a new high. The aggregate deal value for the transactions hit $66.9 billion, exceeding 1999, 1998, 1997 and 1996 combined. Of the 170 deals struck during 2000, 13 carried price tags topping $1 billion, 11 involving either foreign buyers or sellers.
The year also brought not one, but two, transactions with individual deal values exceeding what had been the four-year high: $10.7 billion, the value for the 1997 acquisition by Dean Witter, Discover & Co. of the Morgan Stanley Group Inc. The second biggest deal of 1997 was almost as pricey - $9.2 billion the amount the Travelers Group Inc. committed for Salomon, Inc. Sticker-shock standards gave way, however, in August 2000 when Credit Suisse Group announced plans to purchase Donaldson, Lufkin & Jenrette Inc. in a transaction valued at $13.6 billion. A month earlier, UBS AG said it planned to buy PaineWebber Group Inc. in a deal valued at $12.2 billion.
Transaction activity was back to being higher among finance companies (79 deals) than mortgage banks (66 deals) a trend that began in 1996 but was interrupted in 1999 when mortgage bank deals outnumbered finance company deals 107 to 103.
As the number of transactions declined since its height of 240 in 1998, so has the median price/book ratio. The median price/book for specialty finance deals in 2000 came in at 118.26% compared to 186.22% in 1999 and 351.63% in 1998. The three-year downward trend in the median price/book ratio found in merger and acquisition activity in the specialty lending sector is reflective of the downward trend of the median price/book ratio found in the specialty lending stock market. The median end-of-period price/book ratio for publicly traded specialty lenders has fallen from 173.52% in 1998 to 125.42% in 1999 to less than 120% in periods ending towards the end of 2000.
Banks and thrifts Banks
M&A activity among banks experienced a resurgence in the final months of 2000, putting an end to a yearlong dry spell that extended from the third quarter of 1999 to the second quarter this year. Together, the mega-merger between Chase Manhattan Corp. and J.P. Morgan & Co. - announced late in the third quarter - and a string of $5 billion-plus deals in the fourth quarter represented $71.7 billion in deal value based on pricing at announcement, or roughly fourfifths of the year's aggregate $89.9 billion. Deal value from the third quarter of 1999 to the second quarter of 2000 amounted to a lackluster $22.5 billion.
The full-year tally of $89.9 billion compared with $68.8 billion for 1999, a record $265.3 million in 1998 - a high water mark for M&A activity, stock valuations and optimism in the sector generally - and $75.4 billion in 1997. On a calendar-year basis, then, 2000 saw the second highest level of aggregate deal value in the history of bank consolidation, a movement that developed in the 1980s as states edged toward a capstone dismantling of interstate branch restrictions under the Riegle-Neal legislation of the mid-1990s.
The year-end thicket of activity, though posting eye-popping numbers, was a far cry from the comparable period in 1998. Between April and June that year, mergers of equals between Travelers Group Inc. and Citicorp, NationsBank Corp. and BankAmerica Corp., and Norwest Corp. and Wells Fargo & Co. together made up $183.8 billion in aggregate deal value, and stand as the three largest deals in the history of the sector. This year's combination of Chase and J.P. Morgan - valued at $34.4 billion at announcement ranks fourth.
Nevertheless, the year's deals were emblematic of the continuing force of consolidation in the industry. Perhaps more than Chase's pact with J.P. Morgan - a deal driven by strategic objectives for mass and leverage in the capital markets business - Firstar Corp.'s Oct. 4 agreement to acquire U.S. Bancorp followed more conventional lineaments of franchise extension. The year's second largest deal at an announcement value of $21.2 billion (and the sixth largest of all time), the combination represented the joining of two of the industry's most voracious consolidators. For Firstar - the product of a 1998 merger of equals with Star Banc Corp. and a 1999 acquisition of Mercantile Bancorporation Inc. - the deal was the third straight doubling of its franchise in as many years. U.S. Bancorp, created when First Bank System Inc. acquired the old U.S. Bancorp in 1997, had meanwhile been sidelined from major deals by integration problems and a weak currency. As such, the deal was driven largely by each company's recent experience as an acquirer, and the sharp differential in the valuations of each company's shares.
So too with FleetBoston Financial Corp., which in its Oct. 2 agreement to acquire Summit Bancorp - valued at $7.0 billion at announcement - turned away from a growing concentration in brokerage and investment banking businesses to make a land grab in New Jersey. Fleet said it viewed the deal as a way to reduce its exposure to the cyclical nature of capital markets and as an expansion platform for its retail investment offerings.
Fifth Third Bancorp made a similar move in the fourth quarter. The highly respected and efficient acquirer took advantage of its strong currency to make its largest buy todate, a $5.0 billion stock deal for Michigan platform Old Kent Financial Corp.
There were 191 deals announced in 2000. Overall, the count represents a downward trend from earlier in the decade as consolidation reduced the number of market participants. There were 283 announcements in 1999, 411 in 1998 and 349 in 1997.
During 2000, bank deals were priced at an average price to book of 211.46% and a median price to earnings of 18.95x. Overall, acquisition pricing, along with multiples on bank shares, has dropped heavily from levels seen during the market's high point two years ago. In 1998, deals averaged 266.15% of book and 22.25x earnings. In 1999, deals averaged 230.80% of book and 21.62x earnings.
Thrifts
Despite strong gains in share prices - concentrated within the large-cap sector - M&A among thrifts did not show comparable life in 2000. Headlines in the sector, in fact, were often filled with stories of restive investors pushing underperforming thrifts to the block, putting the year's events under a decidedly pale filter. Sixty-six deals were announced in the year, representing $4.3 billion in aggregate deal value. In 1999, there were 74 announcements and $7.5 billion in deal value. In 1998, the market reached an apogee with 93 announcements and $23.9 billion in deal value. In 1997, there were 113 announcements and $21.5 billion in deal value.
The year's only announcement valued in excess of $200 million was Washington Mutual Inc:s $1.5 billion stock agreement with Houstonbased Bank United Corp. Washington Mutual, which makes up roughly one-quarter of the thrift sector by market cap and heavily powered gains in thrift indexes, was simply not positioned to ignite the field single-handedly.
Pricing for thrift deals fell in 2000. Deals for the year averaged 142.49% of book and 19.98x earnings, compared with 184.25% and 24.01x in 1999, 209.77%lo and 27.35x in 1998, and 184.32% and 26.15x In 1997.
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