The PNC purchase of Mercantile – a Faustian bargain from hell
October 9, 2006 by Kevin Dayhoff
Note - - This post is an iteration of my Tentacle column, “A Sale from Hell,” which will come out Wednesday, October 11, 2006. But the Tentacle column will dwell more upon the issues of Maryland businesses having a competitive disadvantage because of the regulatory and anti-business climate fostered by the Maryland General Assembly.
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Last Monday, Columbus Day, PNC, a $94.9 billion bank based in Pittsburgh, PA announced that an agreement had been reached to purchase Maryland’s largest independent bank, Mercantile Bankshares Corporation, in a $6 billion deal..
Although the “experts” have been predicting that the venerable and staid Maryland institution, with Baltimore roots that go back to 1864, was sure to be bought up by a larger bank at some point, most average Marylanders greeted the announcement with a big “Say it ain’t so.”
My shriveled but nevertheless functional sense of decency required that the purchase of Mercantile not be described more colorfully.
Moving on.
Why is it that in recent years, as each and every acquisition announcement is made, it is the Maryland business that is being purchased by an out-of-state entity?
What is it about doing business in Maryland that puts Maryland-based businesses at a competitive disadvantage?
Often it is a blue-chip local business, such as Baltimore Gas and Electric or MBNA that we are losing in the purchase. Is this proof-positive of Maryland’s reputation for a being a “business, regulatory and tax hell.” All of which can be laid at the feet of a liberal anti-business Democrat dominated Maryland General Assembly.
Remember USF&G, once considered the “Cadillac of the insurance industry?” It was purchased by The St. Paul Companies in 1997. The 2000 annual report of St. Paul boasts that it trimmed “about $260 million of expenses, reflecting the realization of merger-related efficiencies.” In plain-speak that means the Maryland economy lost $260 million in economy in the loss of jobs and economic base.
The PNC press release states, “The transaction is expected to result in the reduction of more than $100 million of operating expenses through the elimination of operational and administrative redundancies.”
That is Orwellian double-talk which means that $100 million in jobs and economic base will disappear from Maryland when the PNS-Mercantile merger is completed.
Of course, the larger picture is what is it about doing business in Maryland that puts Maryland-based businesses at a competitive disadvantage? We have some of the brightest minds, a well educated labor pool and hard-working workers.
And where is the discussion about supporting existing Maryland businesses in this mud-slinging orgy of a gubernatorial contest – where inside baseball and trivialities trumping substance is the rule of the day?
Maryland’s number one industry is agriculture and it is treated like a red-haired step-child; for the most part malignantly ignored unless it can be trotted out as the whipping-boy for an environmental issue de jour.
Published accounts have been quick to cheerily but mindlessly mime verbatim the PNC press release that based “on PNC's closing NYSE stock price of $73.60 on October 6, 2006, the transaction values each share of Mercantile's common stock at $47.24.” And that this is almost 30 percent higher than last week’s close.
To further sweeten the pot, the transaction will give Mercantile shareholders “0.4184 shares of PNC common stock and $16.45 in cash for each share of Mercantile.” Local publications have been effusive that Mercantile shareholders (like me) have reaped a wonderful bargain in the proposed sale.
I’d rather have a locally-owned community oriented bank than a one-time gain.
I’m very happy with the stock and anyone who isn’t should sell it and buy something with which they can be more happier. As an article in Forbes pointed out, this deal “should make PNC a top-10 U.S. bank holding company in terms of market capitalization and the 11th biggest U.S. bank in terms of deposits;” whatever that means – as if that should make us all feel better.
Monday, of course, was Columbus Day, a holiday observed by the local banking industry. Published accounts report that the employees were e-mailed about the transaction, which is sure to mean the loss of many jobs in the Baltimore region.
It was unclear where Mercantile’s 3600 employees received the holiday e-mails and chances are that many learned of the sale from an early morning article posted on the Baltimore Sun’s web site. Bad news travels fast.
Apparently Wall Street didn’t think too much of the acquisition either. Usually the acquiring entity’s stock falters a bit at such an announcement but PNC’s stock dived close to 4.4% after the announcement.
No mention has been made so far as to what business model will be employed by PNC, so it is unclear as to how many of Mercantile’s 3600 employees lose their jobs.
One thing for sure, forget about local community oriented decision making. A $92 billion bank that will end-up the 11th largest in the nation isn’t going to achieve operating efficiency or capital efficacy by allowing Mercantile’s 11 bank subsidiaries and 240 branches to be independent, locally adaptive and innovative.
Perhaps the silver lining will be the increased business for banks such as Provident, First Mariner or Frederick County Bank. In 2001 when BB&T purchased FCNB, thirty-two employees, of the many who lost their jobs, found employment with the then, newly formed Frederick County Bank and more often than not, they took many of their customers with them.
Deposits increased as many customers wanted to continue a personal and private relationship with a local banker that made local community-based decisions.
After-all, if you’re going to have to change all your bank accounts over to new numbers and adhere to new procedures, you may as well change banks and stay local.
That is, unless you like calling your old bank branch with a little question and being diverted to a call center many states away where they don’t even know where Frederick is, much less care who you are.
There are many PNC business models we hope to not see. Which leads us to the next $6 billion dollar question; as a Mercantile shareholder who takes great pride in Mercantile’s sterling reputation for integrity and excellent management - - why PNC?
Starting slowly - - last July 19, PNC “announced financial results for its second quarter, reporting that profit rose 35% helped by a big improvement in fee-related revenue.”
“Fee-related income” is a bank euphemism for service charges. In other words, PNC was making more money because it has increased its customer service charges.
And many a Baltimore Oriole fan will find it just special that part of those service charges paid to PNC will go to support PNC Park, the corporate-branded home of the Pittsburgh Pirates baseball team. Now there’s a spitball for ya’.
Another business practice we could do without was reported in the Pittsburgh Post-Gazette on Sept. 27: “The U.S. Equal Employment Opportunity Commission is alleging that PNC Financial Services Group -- cited this week as one of the nation's top 100 places to work by Working Mother Magazine -- refused employment to a job applicant because she was pregnant.”
Or how about the July 15 Pittsburgh Tribune-Review article that reported “A federal judge in Pittsburgh approved the $36.6 million balance of a $193 million settlement of a shareholder class-action lawsuit against PNC Financial Services Group over its corporate-loan accounting scandal in 2001.”
On July 17, the Cincinnati Post wrote, “The suit stemmed from PNC's efforts to unload $762 million in bad corporate loans five years ago. PNC sold those loans to three partnerships it created with insurance giant American International Group Inc., in effect removing them from its balance sheet.”
It gets worse; the paper elaborated, “PNC has contributed $90 million to the settlement fund. Most of the rest came from AIG, which paid $44 million, and other insurance companies.”
And finally, “PNC paid $25 million to the U.S. Justice Department to settle charges of conspiracy to commit securities fraud filed in June 2003, and several key executives left the bank.”
Last spring published accounts reported that PNC had to reissue hundreds of debit cards after personal account information was found to have been compromised.
Just days before the announced merger, published accounts report that PNC “says it will sell $2 billion in mortgages and will take a $50 million charge in the third quarter.” The Boston Globe said, “The loss represents the decline in the value of the loans, which is largely due to increased interest rates.”
Think carefully; when was the last time you read something like any of the above about Mercantile?
The bargain that Mercantile customers, shareholders and Marylanders are getting in this deal is a Faustian bargain from hell. If Mercantile had to sell us out, they sure could’ve done better than PNC.
Kevin Dayhoff writes from Westminster Maryland USA. E-mail him at: kdayhoff@carr.org http://www.thetentacle.com/ Westminster Eagle Opinion and Winchester Report http://www.thewestminstereagle.com/ www.kevindayhoff.com has moved to http://kevindayhoff.blogspot.com/
