Most analysts applauded PNC Financial Services Group Inc.'s $6 billion deal to buy Mercantile Bankshares Corp. of Baltimore by noting that the acquisition would make PNC's balance sheet and earnings stream more banklike.
Buying Mercantile also would help the $95 billion-asset PNC finish something it started 18 months ago with the acquisition of Riggs Financial Corp. of Washington, an acquisition that Gary Townsend, an analyst with Friedman, Billings, Ramsey Group Inc., said showed PNC was serious about retail banking yet lacked a sizable branch network.
In the Mercantile deal, announced Monday and set to close in March, PNC would get $17 billion of assets and 240 branches compared to the $6 billion of assets and 50 branches gained through the Riggs acquisition.
But some on Wall Street were less complimentary. Michael L. Mayo of Prudential Equity Group LLC, warned in a research note Monday that a banking company that is more dependent on interest income is dangerous, and that he has "reservations" about the deal for Mercantile. "The deal, at four times book, seems value destroying" and "makes PNC more plain vanilla."
Buying Mercantile would give PNC a loan portfolio heavily focused on commercial lending but also would boost its retail banking business. The retail bank's contribution to PNC's earnings would increase to 55%, from 47% in the second quarter, Mr. Mayo wrote. At the same time, he wrote, fee income as a percentage of total revenue would fall to 64%, from 68%.
Mr. Mayo downgraded PNC's shares to "underweight," from "neutral weight," but he was the only analyst to cut his rating. Mr. Townsend and others seemed more willing to give PNC the benefit of the doubt.
Mercantile is a well-run company and will benefit PNC now or later, Mr. Townsend said in an interview Tuesday.
"It's not as though we will live forever in an inverted yield curve environment," he said. "So the spread banks will have their day again, and PNC is obviously looking at it more, as they should, in a longer-term frame."
Richard Bove of Punk, Ziegel & Co., wrote that a shift to a more banklike model would be good for the company.
"PNC will be much less a money management and processing company and much more a traditional bank," Mr. Bove wrote in a research note Monday. "There is no doubt in our mind that this company is stronger now than it was before and that its franchise is more valuable."
The deal was announced one week after PNC booked a $1.6 billion gain from a deal between the New York investment management company BlackRock Inc. and Merrill Lynch & Co. Inc. BlackRock bought Merrill's investment management unit Oct. 2, and PNC's stake in BlackRock was cut in half, to 34%.
Nancy A. Bush, the president of NAB Research LLC, wrote in a research note Monday that she was disappointed PNC is using its proceeds from that transaction to help fund the Mercantile deal, after saying it would use some of the proceeds to increase dividends and buy back shares.
A spokesman for PNC said James E. Rohr, its chairman and chief executive, was traveling Tuesday and unavailable for comment, but in a conference call Monday, Mr. Rohr said that his company felt buying Mercantile would be a better use of the capital in the long run than buybacks or dividend increases.
"Our strategy has been focused on investing in wealthier, faster-growing markets, and this transaction will accelerate that strategy," Mr. Rohr said.
The Mercantile deal is PNC's first for a banking company since the acquisition of Riggs, which was dealing with regulatory problems. In September of last year, after deciding it needed to offer more products to consumers, PNC started offering first mortgages again, through a partnership with Wells Fargo & Co.
Mr. Townsend said PNC renewed its retail focus on banking with the Riggs acquisition in an effort to stop customer attrition.
"The decision to acquire Riggs signaled that they had become serious about their retail banking," he said. "The problem with the Riggs acquisition was that it was relatively small."
PNC paid $652 million for Riggs, which had about $6 billion of assets. After buying Riggs, Mr. Townsend said, PNC found itself either having to build branches - which it does not have much experience doing - or buy another banking company.
Mercantile was an obvious choice, according to analysts.
Ms. Bush wrote that rumors of the two companies' striking a deal had been circulating since PNC made its deal for Riggs. and Mr. Townsend said he had been working on pro forma financial figures for PNC after a Mercantile purchase as recently as Friday.
