Sunday, July 08, 2007

Takeovers Set BMO's US Bank Into Play

The Globe and Mail, tara Perkins, 8 July 2007

As investors and analysts debate the fate of Bank of Montreal's U.S. bank, Harris Bankcorp Inc., its executives have been working on plans to take advantage of the uncertainty at a major competitor.

On the week of July 4, the financial districts of most U.S. cities look like ghost towns. But Harris's head office is a hive of activity. BMO CEO Bill Downe is making his weekly visit. A Milwaukee newspaper has reported that Harris has its sights on Ozaukee Bank's six branches. And everyone is eagerly awaiting a ruling from the Dutch Supreme Court this week that could determine the fate of Harris's major competitor, LaSalle Bank.

A series of takeovers is changing Chicago's banking scene, which could be dramatically transformed by a $20-billion (U.S.) takeover of LaSalle.

While banks gobble one another up, observers aren't quite sure whether Harris is going to eat or be eaten.

Around the corner and a few hundred feet away from Harris's head office sits the headquarters of LaSalle Bank, the Chicago-based U.S. operations of Dutch banking giant ABN Amro.

LaSalle's headquarters are aptly perched on LaSalle Street – Chicago's equivalent of Bay Street or Wall Street. Towards the end of this week, a Dutch court is expected to decide whether ABN Amro can sell LaSalle to Bank of America, which wants a Chicago presence to fill in one of its last remaining gaps in the United States.

The planned sale of LaSalle has been a sideshow to what looks set to become the biggest banking takeover ever, the sale of ABN Amro, which is in the midst of a tug-of-war between Barclays PLC and a consortium led by the Royal Bank of Scotland Group PLC.

RBS tossed a wrench in Bank of America's bid for LaSalle by shoving the deal into the Dutch court's hands in an attempt to win LaSalle for itself.

Although it's a sideshow, the battle for LaSalle has shoved banks in the greater Chicago area – known as Chicagoland – into the spotlight. And some observers think Harris risks being relegated to a supporting role.

“Harris Bank's retail and mid-market operations [have] faced difficult market conditions in Chicagoland during the past 24 months and delivered soft financial results,” Credit Suisse analyst James Bantis wrote in a note to clients after the battle erupted. “The operating environment continues to be challenging,” with compressed margins and intense competition in a slowing lending and deposit market, he wrote. A new owner would reinvigorate LaSalle, and “an improved LaSalle franchise only worsens an already difficult operating environment” for Harris.

With more than 400 branches around Chicago and Michigan, LaSalle – the area's No. 2 bank - held 14.2 per cent of the total $261-billion of deposits in Chicago banks last year, according to Oppenheimer research. Harris Bank trailed next in line with 9.8 per cent. JPMorgan Chase is the top bank in the region.

If executives opted to put the firm up for sale, Mr. Bantis estimated a takeover could garner about $4.5-billion for BMO.

More recently, CIBC World Markets analyst Darko Mihelic estimated a deal could fetch at least $6-billion. “As the trials and tribulations surrounding LaSalle's sale continue, we believe BMO has an opportunity to step up, invite a consortium of large U.S. banks into a data room and set off an auction process for Harris Bank,” he wrote.

“The result could be a very high premium for an asset that is dragging down BMO's overall results.”

Not to be outdone, Citigroup analyst Shannon Cowherd pegged the value of a Harris sale at more than $9-billion. “The recent spate of M&A bank deals in the Midwest, specifically Chicago's metropolitan statistical area, lead us to believe BMO will succumb to pressure to either take out a local competitor or divest Harris,” she wrote.

Peter McNitt, vice-chair and head of business banking at Harris, summarized his response in two sentences: “We are a consolidator,” he said, stressing the last syllable. “Our focus is on what we're doing to get bigger.”

Mr. McNitt thinks Harris has done a fine job of setting itself up in Chicagoland, where more than 300 banks compete.

Now it's setting its sights on expanding in places such as Indianapolis, Milwaukee, and Phoenix. “You take a look at something like Indianapolis and it's the second-fastest growing city in the Midwest,” he said, adding there are close to 55,000 business client in the city.

Harris is also doing all it can to take advantage of the window of uncertainty at LaSalle.

“It's not as if we haven't been competing anyway, this just adds another dimension that that institution has to deal with that we don't have to deal with, and that kind of uncertainty and that kind of lack of consistency is not a good thing when you're dealing with commercial clients.”