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The Armchair Economist
The Mating Game
Rush to judgment: Why the Fleet-Shawmut merger deserves a closer look than it's getting
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Business New Haven
9/11/1995
By: Mitchell Young
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“Those numbers would be staggering and very likely violate antitrust laws if encountered in other industries.”
So says Connecticut's attorney general, Richard Blumenthal, in reference to the merger of Fleet and Shawmut banks. Among the state's visible business and government leaders, Blumenthal has been one of the few vocal critics in opposition to the merger.
But even Blumenthal seems to be pursuing what is in fact negotiating strategy over the final shape of what may be largely a fait accompli. The result, at this point mainly agreed to by Blumenthal, and likely as well by the U.S. Department of Justice, is Fleet's divestiture plan, unveiled late last month. Fleet will sell 28 branches (mostly Shawmut locations), primarily in greater Hartford (with one branch in Westbrook), with assets of about $1.7 billion. The consensus is that the branches should be sold to a single competitor with the goal (supposedly) to increase competition.
The initial joint announcement by Fleet and Shawmut was sharply criticized by then-newly elected Gov. John G. Rowland for its plan to cut more than 1,200 Hartford-area jobs. Rowland's reaction - and the firestorm surrounding the celebratory picture of Fleet and Shawmut CEOs Terrance Murray and Joel Alvord, respectively - raised questions about the merger's prospects of success. The governor, however, quickly caved in when he received perfunctory assurances from Fleet about maintaining jobs in Connecticut.
The media in general, and the state's two largest newspapers, the Hartford Courant and the New Haven Register, in particular, have treated readers to a banana-republic kind of journalism, avoiding any real scrutiny of the merger and quickly falling in line with the inevitable scenario. Those pitching the inevitability that size was all that mattered certainly got a boost when giants Chase and Chemical announced that even they couldn't quite see a future where they could succeed in a competitive marketplace even with assets of over $100 billion - economies of scale, and all.
After all, Fleet and First Union were closing in on megabank status, and the frogs had to go a-courtin' to ensure that the industry's pecking order didn't change much.
Local bankers have postured about their banks' opportunities created by the Fleet-Shawmut merger - branches for sale, customers up for grabs, etc. It now appears most of them will simply be left on the sidelines. Stock prices for Centerbank, Webster Financial, Bank of Boston and other area instituions are all doing quite nicely, thank you. For us, however - armchair economist, struggling small-business person types - we can't but wonder why our elected officials and business-advocacy groups have failed to seriously question this merger and force it to be proven on its merits.
In the New Haven area, Fleet Bank will have more than 50 percent of the commercial banking market - and two-thirds of Connecticut's $36 billion trust business).
Where we come from, that is not good. And we're still waiting to hear why it is necessary. Thankfully, greater New Haven has - for now, at least - several very healthy and vibrant banking institutions: Centerbank, First Federal (soon to be renamed Webster), the feisty Lafayette-American Bank (ironically, at $600 million in assets, Connecticut's largest home-based commercial bank), the now-profitable Bank of New Haven and the stalwart New Haven Savings Bank which, at $1.7 billion in assets, maintains enough capital to nearly double its size. Of course, Bank of Boston and Union Trust - I mean First Fidelity,...er, First Union - are also major players.
Initially First Fidelity, under mercurial head Tony Terracciano, embarked on a strategy to buy banks weakened by the regional depression and assemble them together under one massive umbrella. For a while it looked like a plan - a potential banking behemoth stretching from Baltimore to Boston. It turned out, however, that the strength of the plan lay more in bargain-buying and alliteration (Baltimore to Boston) than in actual business-building. Bargains became hard to find soon after the recession defeated Union Trust, which was devoured by First Fidelity.
First Fidelity's strategy of tight credit and tighter cost controls couldn't produce consistent profits where other banks had healthy balance sheets. The Newark boys decided to head south and awoke in the arms of First Union.
Credit initiatives, export financing and a host of other innovative approaches doesn't seem to be enough to keep our friends at Bank of Boston independent, either. After all, as a highly profitable and diversified $25 billion financial institution, they have, up to now, found it difficult to declare their intentions and are yet to consummate a merger - as a buyer or seller. For the moment, at least, the bank's management is also heading south, buying bank branches from a failed Argentine bank (is there any other kind?). This deal, and another rumored one (that the bank is interested in acquiring a $78 billion mortgage portfolio from Prudential insurance), demonstrates that former president Ira Stepanian might have lost the battle, but prolonged the war, for independence.
Stepanian took all sorts of heat because he wouldn't turn in his keys. The tough-minded Armenian insisted that he wanted a merger of equals, and that the bank's headquarters remain in Boston. He was rewarded for his loyalty to his employees and the community by being brutalized by Wall Street's thirtysomethings for his obstinate approach. The result? The bank's board asked him to retire early.
The financial press and the Boston media were happy to play the story as one of corporate winners and losers, citing Stepanian's failure to obtain a merger on his terms as the root cause of his ouster. Of course, none of them asked why a bank making a quarter of a billion dollars a year had to feel compelled to rush into a merger.
Reacting to a Blumenthal interview in a the August BNH, a recent caller reminded us that, in the end, the market would take care of everything, and everyone worthy of credit would indeed be cared for. We're sure many of you believe this also. Frankly, we do too.
Banks have returned to profitability, and some consolidation clearly makes sense. The question, though, remains simple: Does that mean that a merger that ensures no more than two or three real competitors are left in the market is good for the state? If this deal doesn't happen, another one equally exciting and profitable would surface for both banks.
Consolidation may be inevitable, but what makes it so urgent? Bank reform is on the agenda, and we can expect to see banks, securities firms and insurance companies tossing their keys into a circle before long. And it's anybody's guess what will be left of financial - never mind family - values when it's all over.
Consolidation may be inevitable, but what makes it so urgent?
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