SunTrust Banks Inc. of Atlanta is once again the subject of takeover talk, and most of the focus has been on likely buyers. But what if SunTrust pursued a merger of equals?
The potential partners mentioned most often are Capital One Financial Corp., BB&T Corp., and PNC Financial Services Group Inc.
Capital One, of McLean, Va., has aggressively entered retail banking with its acquisitions of Hibernia Corp. and North Fork Bancorp., and its market capitalization is just 1.2% larger than SunTrust's.
A SunTrust-Capital One pairing would bring the partners several benefits.
SunTrust's 1,700 branches from Maryland to Florida would fill an obvious hole between Capital One's branch networks along the Gulf Coast and the Northeast, and there might be a way to fuse the companies' sizable mortgage operations. Also, Capital One could find ways to market its credit cards and auto loans to SunTrust's customers.
"This one is a good idea, because Capital One is clearly moving in that direction," said Richard Bove, an analyst at Punk, Ziegel & Co. "All the pieces fit, but given the outlook for mortgage and credit cards, I'm not sure if SunTrust sees the upside in such a merger."
Capital One is busy integrating North Fork, of Melville, N.Y., and under pressure to improve the performance of the GreenPoint mortgage business it obtained from North Fork.
Capital One chief financial officer Gary Perlin alluded to those issues as an impediment to any near-term acquisitions.
"We don't spend a lot of time thinking about that right now, because the challenges we have with the businesses we acquired really require our full-time attention," he said during a conference last week in New York hosted by UBS AG. "Our belief is that one needs to be operating at the right scale, and we believe that in our lending businesses we are there."
On paper, the $121.7 billion-asset BB&T, of Winston-Salem, N.C., is the most logical merger-of-equals candidate because of the significant cost savings it and SunTrust could extract by eliminating overlapping branches and personnel.
John A. Allison, BB&T's chairman and chief executive, has repeatedly shown an interest in doing a merger of equals, but has insisted that his company's culture would have to survive. But control issues could be complicated considering that SunTrust's $32 billion market cap bests BB&T's by 37%.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said the cultures of SunTrust and BB&T are "like oil and water."
The research team at Friedman, Billings, Ramsey wrote in a recent note to clients that SunTrust "is unlikely to cede control" to BB&T. The analysts also estimated that the companies would need to divest $600 million of deposits to gain regulatory approval.
But Mr. Bove said he believes BB&T remains the most viable MOE partner for SunTrust. "I think John Allison and BB&T could still work out a succession plan with SunTrust," he said.
The $122.6 billion-asset PNC, of Pittsburgh, is another possibility, though SunTrust's market cap is 24% larger than PNC's.
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said a SunTrust-PNC pairing has "interesting potential." The two could boost revenue in areas such as wealth management, and PNC's Middle Atlantic operations would complement SunTrust's network, he said.
Analysts at Friedman Billings were less convinced that such a deal would work, despite the potential for 20% cost savings in the Washington market. As with BB&T, they wrote that SunTrust would be hard-pressed pitching a no-premium deal to investors, and PNC "is unlikely to execute such a transformational and … dilutive transaction."
Analysts named three other contenders — Fifth Third Bancorp in Cincinnati; National City Corp. in Cleveland; and Regions Financial Corp. in Birmingham, Ala. — but said SunTrust may not be interested in any of them, because they have considerable operations in slower-growth markets.
Investors have bid up SunTrust shares nearly 10% since the $186 billion-asset company reported underwhelming first-quarter results on April 17. Last Tuesday, SunTrust tried to quiet critics by announcing it would sell 9% of its stake in Coca-Cola Co. stock and use the proceeds to buy back its own shares. Mr. Wells also said SunTrust would accelerate cost cuts, trimming $530 million a year by the end of 2009.
Christopher Mutascio, an analyst at Stifel, Nicolaus & Co. Inc., said "the misperception in the market right now is that people would line up to bid on SunTrust. But when you start to scratch people off the list, there really aren't that many candidates."
Only six domestic banks are larger than SunTrust.
Analysts rule out Bank of America Corp. because of the massive amount of deposits it would need to shed for regulatory approval. They also said a sale to Wachovia Corp. would be unlikely because of the bad blood that remains after First Union Corp. held off a hostile effort in 2001 by SunTrust to buy the old Wachovia.
That leaves Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co., and U.S. Bancorp. Of these, JPMorgan Chase is seen as the likeliest acquirer, given Citi's international focus and the conservative acquisition strategies at U.S. Bancorp and Wells Fargo.
JPMorgan Chase chairman and chief executive James Dimon has also been more vocal than executives at the other companies about wanting to buy a large regional bank that operates in high-growth markets.
Among foreign banks, Royal Bank of Canada might make sense because it owns the $23.1 billion-asset RBC Centura Banks Inc. in Raleigh and could benefit from the managerial experience at SunTrust, particularly in Georgia where it lost some executives after last year's purchase of Flag Financial Corp.
Mr. Fitzsimmons of Sandler O'Neill said SunTrust's board would have a challenge justifying any merger of equals to shareholders. "Investors are telling SunTrust that they want it to sell out," he said. "An MOE would leave a lot of disappointed shareholders who are anticipating that this company is going to be sold at a premium."
Another factor fueling deal speculation is the fact that SunTrust's new chief executive, at 60 years of age, is not expected to run the company for a long period of time. James M. Wells 3rd took the reins from L. Phillip Humann on Jan. 1.
Countering this perception, however, is the way SunTrust announced the change last November, calling it the "next generation of leadership," which included expanded responsibilities for the 42-year-old Mark A. Chancy as chief financial officer.
Still, continued subpar performance and a lack of interest from the handful of large banks capable of buying could lead SunTrust to a merger of equals.
Mr. Mutascio at Stifel Nicolaus said: "They wouldn't be on the selling end of an MOE, but I don't think it's absurd for them to be the buyer in a low-premium deal. That should gain more traction than people give them credit for."
Spokesmen for Capital One, BB&T, and PNC declined to comment. SunTrust has said it would not comment on merger speculation.
