Peter Raskind, the chief executive of National City Corp., spent most of this year desperately trying to keep his embattled company together — on its own — in the face of mounting mortgage losses.
As recently as Tuesday he announced 4,000 job cuts to save $600 million. That day Mr. Raskind conceded in an interview that a sale might be on the table. "If at some point there was a transaction that makes more sense for the shareholders, the board would consider it and act on it if appropriate," he said.
Three days later, the board acted, agreeing Friday to sell Nat City to PNC Financial Services Group Inc. for $2.23 a share, or about $5.2 billion of stock.
PNC, which posted a third-quarter profit of $248 million, had been long rumored to be one of the few with both the interest and the ability to buy out Nat City.
Observers attributed the timing to two factors: Nat City, despite ample capital, showed few signs that it would return to profitability next year, and PNC got approval Thursday to participate in the Treasury Department's Capital Purchase Program.
PNC plans to issue $7.7 billion of preferred stock and warrants to the federal government, allowing it to boost its Tier 1 capital ratio to 10% after the deal for Nat City closes this year.
The Pittsburgh company would be the first to participate in the government program with the intention of drawing on the capital immediately for a deal.
When asked Oct. 16 whether the capital injections, part of the Troubled Asset Recovery Program, would be likely to spur deals, James Rohr, PNC's chairman and CEO, said, "I am not certain that the capital opportunity will cause a great deal of M&A activity." When asked about the idea of acquiring a competitor with a balance sheet scarred by bad mortgages, he said, "You don't want to catch a falling knife."
By Friday, Mr. Rohr was suggesting that the infusion of government capital would be a key element in closing the Nat City deal, noting that PNC got the Treasury's approval Thursday night.
PNC may have made the deal anyway, but the capital program "created a very financially compelling transaction," he said in an interview Friday.
The Treasury allowed PNC to use pro forma risk-weighted assets, Mr. Rohr said — in other words, PNC is getting the capital for which Nat City could have applied under the program. On its own, PNC could have applied for only about $3.5 billion.
Mr. Rohr said that PNC first talked to Nat City "months ago," and that they had been in talks "off and on ever since." The latest discussions began in earnest Oct. 5, he said, but they did not get finalized until late Thursday night, when PNC had the Treasury's approval in hand.
Analysts say that, after several other government-brokered deals, regulators continue to encourage the strong to take out the weak.
"I do think that's the appropriate way to look at it. You look at PNC and Nat City, and you have the strong getting $7 billion under the Tarp deal and the weak getting nothing," Terry McEvoy, an analyst at Oppenheimer & Co. Inc. said in an interview Friday. "That says a lot."
During a call with analysts Friday, Mr. Rohr would not say whether the government urged the Nat City deal. But in the interview, he said that he never had any formal conversation with government officials beyond the Tarp issue, and that PNC beat out a competing offer Thursday night. He did not name names, but analysts had speculated for weeks that Bank of Nova Scotia was interested in Nat City.
A Bank of Nova Scotia spokesman did not immediately return a call for comment Friday.
Nat City did not respond to an interview request. In a press release, Mr. Raskind, who would become a PNC vice chairman and would help guide the integration of the two companies, did not portray the deal as one necessary for his company to avoid failure.
"This transaction is about two companies that fit well together in terms of geography, products, and services," he said.
In the interview Tuesday, Mr. Raskind emphasized that Nat City remained well capitalized, with a Tier 1 ratio of 11%, which was bolstered in April by a $7 billion investment led by Corsair Capital LLC.
A Corsair spokesman said in an e-mail Friday that it supports the deal. "In light of today's environment surrounding the banking industry, the decision" by Nat City's board "to enter into the proposed transaction with PNC is appropriate."
By acquiring Nat City, PNC would become the fifth-largest banking company by U.S. deposits, with $180 billion.
Mr. Rohr said Friday that he is set on making his company "a powerhouse" built on a strong deposit base. "With the deposits and the branches we gain, this deal takes us to another level," he said.
By acquiring Nat City, PNC would be entering some coveted and growing markets such as Chicago, St. Louis, and Indianapolis — and it would get a strong position in Ohio, where Nat City is the state's largest banking company.
He also said that the Nat City name would go away, and that all its branches would become PNC branches.
"Our initial focus is reducing expenses," according to Mr. Rohr, who set a savings target of $1.2 billion over what he expects to be a 26-month integration. He did not detail how the savings would be realized, but analysts said some of it would likely come from the job cuts Nat City already planned. Other savings would be likely to come from reducing overlap, particularly in Pennsylvania and surrounding states.
Bart Narter, senior vice president of the banking group at Celent, a consulting unit of Marsh & McLennan Cos., said in an e-mail Friday that PNC would have "a whopping" deposit share of 52.6% in the Pittsburgh metropolitan area after buying Nat City, or nearly five times more than the nearest competitor.
"I would expect that PNC would be required to sell some branches to another bank," Mr. Narter said.
The cost savings are clearly necessary, given the soured Nat City loans that PNC would absorb.
Rick Johnson, PNC's chief financial officer, said it plans to report cumulative deal-related writedowns of $19.9 billion, or about 17.5% of Nat City's current loan book.
Mr. McEvoy said those writedowns should be ample, since they were nearly double the amount Nat City had forecast.
Mr. Rohr said that PNC has a reputation for taking on tarnished companies and turning them around.
In 2005, for example, it bought Riggs National Corp., a Washington company plagued by a money-laundering scandal, and PNC has won praise for a successful integration and turnaround of the Riggs business, he said.
"We've got a lot of experience with trouble," Mr. Rohr said. "And we realized a long time ago we're in the risk management business, not in the risk-taking business, and I think that will serve us well with National City."
