Banking Built in Buffalo

7 Oct

When Buffalo was the eighth largest city in the country, full of captains of manufacturing and industry, it occupied a position of attention for the world. Do you wish you knew what that felt like, current resident of the echo? Well, you do, today, as the spotlight is now on Buffalo’s banks. And if you are anxious and confused, I don’t blame you.

For different reasons and with different motivations, HSBC, M&T and First Niagara are all currently in the national and international headlines (of the financial industry publications, at least). All three are on the cusp of growth and the revival of Buffalo . . . or a spectacular crash and hollowing out of one of our city’s few thriving business sectors. Let’s take them one at a time.

M&T Bank’s murmurs of acquisition and take over have been the most cryptic, but also now the least threatening. Most reporting of the on-again, off-again talks between M&T and Spanish banking giant Banco Santander involved M&T’s acquisition of Sovereign Bank, creating the 15th largest bank in the US, or a Top 10 bank, depending on how you count. The talks broke down because Santander, while dumping its under-performing subsidiary Sovereign, was really interested in acquiring M&T. How could this happen? Because for M&T, the talks were never about Sovereign or expansion, but how to best find a home for 22.5% of the company’s stock currently owned by Allied Irish Bank.

Confused? When M&T acquired Allfirst Bank and moved into the mid-Atlantic in 2002, it did so by purchasing the bank with M&T stock. The major stake holder in Allfirst at that time was Allied Irish Bank, and during Ireland’s Celtic Tiger phase, Allied Irish probably seemed like a safe place for one fourth of the company’s stock. M&T and Allied Irish took seats on each other’s boards, and M&T’s international profile grew. Unfortunately Ireland’s economy has fallen hard, and Allied Irish has been mandated by the Irish government, as a condition of its bailout which will give the government near total ownership and control of the bank, to dispose of its entire stake in M&T by the end of 2010.  

This causes problems for M&T. Fortunately, Wilmers and crew have control issues, and have built in agreements as to the disposition of their shares. They could arrange a sale to one single entity, but not everyone has a couple billion lying around they don’t know what to do with. They could let Allied Irish do a fire sale, but flooding the market with M&T stock would severely depress the price. Or, they could mix the purchase into another deal – i.e. the Sovereign acquisition. M&T would buy Sovereign with M&T stock, while simultaneously, Santander would buy the 22.5% stake. This would give Santander over a 51% stake in M&T, and thus control. Buffalo can be thankful Wilmers has the chutzpah to demand continued control of a company that he and his crew would no longer own – on that issue, talks broke down.

M&T fears of a diluted stock price were well founded. Allied Irish has just announced they are selling off their stake in several big chunks to investors hand picked by M&T. Still, M&T’s stock is down 10% since the news of Allied Irish’s stock disposal plan was announced, and nearly 20% since merger talks ceased. In the end, however, M&T will be left the same as it was, and well capitalized enough to continue to make small acquisitions in the future, if it desires.

Moving on to HSBC, Chris Smith does an excellent analysis of the internal pressures and politics there, involving power centers in Chicago and New York. Buffalo is so far out of its league in this competition, it is merely the pawn in a larger game. Any local tradition or loyalty to Marine Midland is nearly extinct, and few even call the hockey arena by the wrong name (a la Pilot Field). When HSBC moves 4000 jobs to suburban Chicago, it will be a surprise ambush on the front page of the paper, with no foresight of the bomb possible. Buffalo is at HSBC’s mercy to either consolidate Upstate New York functions in downtown Buffalo (big win for WNY and the New York HSBC office) or move the functions to the data center in Chicago. All of the sound and fury of the Mayor and Common Council, Erie Canal Development and the Webster Block, may in the end signify nothing. Buffalo’s white knight and champion in this proceeding: Chuck Schumer – watch for the press releases of his frequent calls to Niall Booker, HSBC-North America CEO.

First Niagara’s position may look strong to the casual observer, but it is actually the most tenuous. If M&T’s position is driven by the Irish and EU banking collapse, and HSBC is subject to internal politics, First Niagara is susceptible to the most common and old-fashioned of publicly traded company ailments: low stock price. Initially expanding as good opportunities arose (it was only 3 years ago little First Niagara bought smaller Great Lakes), First Niagara is now in a vicious buy-or-be-bought cycle.

CEO John Koelmel is under tremendous pressure to get the stock price up from the $11-$14 range, where it has been languishing for years. As he told the Buffalo News in August: “If we can’t get the stock price to $16, $18, $20, I won’t be in this job much longer.”

Profits are rising at First Niagara, but so are the number of company shares as they use proceeds from stock issuances to buy into Upstate New York, Pennsylvania, and now, New England. Despite endorsements from Kramer on CNBC based upon the size of First Niagara’s dividend, Wall Street is skeptical, and the share price has continued to slide since the announced NewAlliance deal. No matter how fast First Niagara buys smaller banks, it can’t seem to grow into increased per capita profitability. Can First Niagara get ahead of the curve, and finally drive up profits internally, and thus its share price, to stay viable? Or will TD ( a potential Top 10 bank suitor with new manned kiosks in the Buffalo Airport and a swath of branches up and down the East Coast, but none inland in New York and Pennsylvania) step in and offer $17 a share? Once that happens, First Niagara will finally “maximize shareholder value” and achieve its price goals by being bought itself.

Of the three, M&T’s position is the most solid and definitive. Buffalonians can thank Wilmer’s for his stubborn streak; it is currently the deciding factor in M&T’s continued local presence and independence. HSBC’s actions will be decided by the Fates, and beyond any local control. For me, the most worrying of the three is First Niagara: the precedent (Empire, Gold Dome) exists locally (not to mention nationally) for a quick flame out, and its roots are least deep. When Wall Street stock price pressures are finally too much, there is little to anchor First Niagara to its new Larkin digs, or the city it has called home for less than two years.

6 Responses to “Banking Built in Buffalo”

  1. Tom Dolina October 7, 2010 at 2:03 pm #

    Credit unions are looking pretty good about now!

  2. Lefty October 7, 2010 at 2:34 pm #

    How much overlap does M&T have with First Niagara? I think there was a good amt of overlap between First Union and Wachovia when they merged in 2001. Why not M&T and First Niagara?

    M&T brings New York, Maryland, Pennsylvania, Virginia, Washington, D.C., West Virginia, Delaware and New Jersey. First Niagara would bring overlap in New York, Pennsylvania but add Connecticut and Massachusetts.

    Could Koelmel play #2 to Wilmers? Wilmers is 75 compared to 57 for Koelmel. One has to wonder how many more years Wilmers has in the game. Hugh McColl is the same age as Wilmers and he stepped down 9 years ago.

  3. Gabe October 7, 2010 at 2:51 pm #

    Brian, thanks for this very informative analysis.

    On the topic of HSBC and other huge banks, I believe this Thomas Jefferson quote sums it up best:

    “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.”

  4. Brian Castner October 7, 2010 at 3:20 pm #

    @ lefty: I think there is considerable overlap, though I don’t know enough about the First Union/Wachovia deal to compare and comment. To me, the hold up of merging M&T and First Niagara is that there is little advantage to either. M&T is cheap, and probably wouldn’t make a lucrative offer. And First Niagara presents little new territory – if M&T wants to expand into New England, it can buy a smaller cheaper bank right there. Banks seem to trust their ability to grow organically in the regions they already are, but seek new virgin territory when in acquisition mode (small buyouts to help the FDIC not withstanding). And anyway, for Buffalo, M&T buying First Niagara would be terrible – 90% loss of First Niagara’s HQ staff as a start. Oh, last thing – I wonder the same about Wilmers. You’d think be golfing full time by now.

    @ Gabe: I like the Jefferson quote – I may need to use that in the future.

  5. Lefty October 7, 2010 at 4:02 pm #

    @ Brian –

    My thinking was First Niagara would be able to find couple Billion needed to pick up what Allied is about to dump of M&T and then fold into each other. I _think_ FN has that much as cash on hand with the recent deals.

    As for the benefit…if a deal could be made to raise the value of FN and keep control with M&T, that would be the benefit I was thinking about. Not sure if either would happen.

    As for the loss of jobs, for a deal that is not going to happen, doesn’t FN follow a different model than M&T. FN like regional offices while M&T follows a more traditional setup. Wouldn’t it be possible for M&T to pull in jobs from Pittsburgh, Philly and New Haven? Even if this did not happen, wouldn’t it be better to keep the 4k+ jobs for M&T in Buffalo, even if it cost 90% of the less than 1000 jobs at FN?

    Sadly, the doom and gloom is more realistic.

  6. STEEL October 7, 2010 at 11:38 pm #

    Don’t worry about HSBC. I have it on good authority.

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