What is Bank One Worth in a Takeover?
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Just one too many takeovers.
That, in a nutshell has been Bank One?s (NYSE: ONE - Quotes, News, Boards) downfall.
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Throughout the 1990?s, Bank One was a Wall Street darling, the acquisitive bank that supposedly figured out how to buy, buy, buy without being hurt by the rapid expansion.
Enter First USA.
You know, the nation?s largest credit card issuer.
It has been nothing but trouble for Bank One ever since it bought the company two years ago.
Last month, Bank One issued its second earnings warning in three months because of First USA.
No surprise, its stock closed Wednesday at $32.63, way off from its high of $63.56.
As a result, Wall Streeters have been speculating that Bank One would be taken over.
In fact, in a recent report Diane Glossman, veteran bank analyst for Lehman Brothers, predicted that if management has trouble proving that it has stabilized the company, ? sale discussions three to six months hence would be no surprise.?
Who would buy Bank One and what would they pay?
In her report, Glossman suggested the price tag could range from as low as $39 to as high as $65, depending upon the buyer and the conditions under which they make their offer.
William Miller III, president of Legg Mason Fund Advisers and the manager of the legendary Legg Mason Value Trust who counts Bank One as his seventh largest holding, says simply: The stock rising ?50% from here on a takeover is not an outrageous assumption.?
At the very least, he adds, takeover speculation puts a floor under the stock. ?We?ll do well either way,? he adds matter-of-factly, stressing that he doesn?t own the stock because of the takeover possibility.
Why does he like the stock in general?
For one thing he believes the worst is behind First USA. Miller notes that First USA stumbled for two major reasons: It tried to grow too fast and it focused more on acquiring new customers than retaining the existing ones.
?They have changed that,? he insists confidently. He says the company is now mostly concentrating on retaining customers, which would stop growth but put a floor under earnings. ?They realize how competitive the credit card business has gotten,? he adds.
The catalyst right now is recovering earnings. Miller thinks it will earn around $3.50 a share in 2000. But if the bank can get earnings above $4, the stock might run up to the $60?s because he thinks its p/e multiple would recover as well.
And what would the company be worth in a takeover? Well, it all depends.
Glossman argues that a potential bidder would want around 10% accretion in the first full year of the merger.
So, under her self-styled ?merger modeler? methodology, which assumes 10% cost savings, she thinks Bank of America (NYSE: BAC - Quotes, News, Boards) and First Union (NYSE: FYU - Quotes, News, Boards) can each afford to shell out $39 a share.
However, Chase Manhattan (NYSE: CMB - Quotes, News, Boards) would be in a position to pay $50 a pop, Citigroup (NYSE: C - Quotes, News, Boards) $51, U.S. Bancorp (NYSE: USB - Quotes, News, Boards) $55, and Wells Fargo (NYSE: WFC - Quotes, News, Boards) $65.
What a difference, huh?
Now, keep in mind that Glossman is using these numbers more as a guideline for what potential companies can afford to pay if there are multiple bidders.
The reason Wells could pay more is because it has a higher p/e multiple than many other banks.
Miller, though doubts there would be a bidding war.
However, for his money, the two likely buyers are Citigroup and Wells.
He says Wells has more of its business on the West coast where Bank One is less exposed.
However, he thinks Citigroup would be the more likely buyer. ?From a strategic standpoint, it would be the best buyer,? he argues.
Why?
It would garner about 30% of the credit card business. And even though it might be forced to divest some of these customers, Miller says a Bank One purchase would cement its dominance in credit cards. ?Credit card customers become bank customers,? Miller explains. ?And in banking (especially) scale helps globally.?
Stay tuned!
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