WHEN a mega acquisition has been made, it is always tempting to join in the euphoria that surrounds such a major deal. The Irish stock market had its own little tizzy last week when pundits gave a resounding thumbs up to the AIB agreed offer for Dauphin Deposit Corporation, for $1.36 billion (£840 million).
More rational investors, however, looked on the deal with relief that AIB had, at last, organised the big acquisition. And importantly, it is with a soundly based Pennsylvanian bank group which is unlikely to throw up any skeletons similar to those which haunted the Bank of Ireland for so many years. Indeed, that sad memory lingers on. A legal action with some of its depositors over an investment product has been ongoing for some time, but AIB is adamant it will have a minimal impact on Dauphin.
AIB is not getting Dauphin on the cheap. Indeed, it is paying quite a high price. By European standards, the 19.1 p/e multiple on 1996's results is very expensive. Banks, of course, are sold on higher multiples in the US. Nevertheless, even in that market AIB has paid on the high side. The Crestar/Citizens deal, for example, was on a 20.6 multiple, which might put a favourable hue to it, but the Wells Fargo/First Interstate deal was much lower at 13.5.
However, AIB is under no illusions that there will be an immediate bonanza from the deal. It has made it clear that the deal will be earnings neutral before restructuring charges of $60 million in 1997 (that implies a dilution after these charges), moderately enhancing in 1998 and "significantly" enhancing in 1999. But, as Dauphin appears to be doing better than expectations, these projections could turn out to be on the conservative side.
There should be significant synergies between First Maryland Bankcorp (FMB), AIB's wholly owned subsidiary in Maryland, and Dauphin. Combined, it will be the largest banking group in the Harrisburg Baltimore area with 132 branches. FMB is almost twice as big - it has book assets of $10.8 billion compared with Dauphin's $6.0 billion, and 4,700 employees compare with 2,700 at Dauphin.
However, do not expect anything radical, like the closure of Dauphin's head office. AIB has always been keen to retain the local identity of the group it acquires. The takeover of TSB in Northern Ireland must have been one of the most sensitive, yet it handled that one very adeptly. In the US, its York Bank still had its own headquarters, albeit a watered down version.
The benefits should come from increasing revenue and reducing costs. Dauphin only manages to get a 13.04 per cent return on equity, compared with 20 per cent in AIB, so there will be a squeeze to push this up. Also, Dauphin appears to have been losing market share. A priority must be to halt this trend.
Management changes at FMB led to a revitalisation of the retail banking side and these skills can now be transported to Dauphin.
AIB reckons it can reduce costs by $48 million per annum in the second year. That is the equivalent to 8 per cent of the combined FMB/Dauphin expenses, reflecting the logic of putting the two banks together. That would push the prospective pie at about 10, which puts the consideration in a different light, but it should be remembered that is two years down the line.
The takeover will have implications for the balance sheets of both FMB and AIB. As the bid consists of cash and/or shares, the exact implications cannot be worked out without knowing the exact split. However, it is clear that FMB will have to raise extra funds to do the deal, and AIB's capital ratios will be reduced substantially.
The acquisition is being made by FMB. If there is a 50/50 split, then the cost to FMB will be $670 million. It will not have to raise all that because FMB raised $150 million last December and it probably has around $300 million in surplus liquidity. That means that it may have to raise $200 million to keep its capital adequacy ratios in line.
AIB would like a 70/30 split between equity and cash and intends to buy back 50 million out of the 140 million new shares. Pre deal, it has a Tier 1 capital adequacy ratio of 8.1 per cent and a total ratio of 10.5 per cent. These will be reduced to 6.2 per cent and 9.6 per cent respectively. While still comfortably above the Central Bank guidelines, they are on the low side compared with European banks.
That begs the question - why buy back shares when that exercise reduces the gearing? It appears that AIB is afraid that there could be a scenario which would see a flood of the new AIB shares coming on to the market which would unsettle and depress the share price. As the new shares would be denominated in dollars, such a stampede could be entirely currency related.
Its strategy appears to have some validity but, if there were genuine reasons for selling the shares, then the mopping up of 50 million is certainly not going to stop market forces.
AIB has taken a courageous and necessary step to expand further outside the domestic market. The US market, prone to excessive swings in the economic cycles, has its own risks, but Dauphin is a rather conservative bank, which should stand to it in any down cycle.
