The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
NOVEM BER 1954 iness view FEDERAL RESERVE BANK OF PHILADELPHIA rRY CHARTS THE FUTURE on our latest survey o f — al expen d itu res p la n n ed fo r 1955 ry sp en din g fo r the next fe w months ent p rosp ects through next M arch THE BRANCH AND MERGER MOVEMENT IN THE THIRD FEDERAL RESERVE DISTRICT This a rticle, third in a se rie s, d iscusses the question “ H o w ?" including legal a sp ects and terms o f m ergers. CAPITAL EXPENDITURE PLANS the range is still greater. Not shown in the chart is the 173 per cent increase for instruments and Manufacturers in the Philadelphia metropolitan miscellaneous durables, which would have run area tell us they are planning to spend $257 mil right up through the roof of the chart and off the lion for new equipment and construction during page. A mere 1 per cent increase projected by 1955. In the year ended September 1, 1954, out the producers of non-electrical machinery just lays amounted to $323 million. The 20 per cent barely got into the plus category. With these ex cutback seems to indicate that the huge post-war ceptions, the list turns definitely downward. program of expansion and modernization is over For the benefit of readers interested in dollars the hill in this region, which is the heart of the as well as percentages, we include the accompany highly industrialized Third Federal Reserve Dis ing table of details. The petroleum industry, with trict. its big refineries along the local rivers, is planning This report, based upon a special survey, shows to spend the largest chunk of capital for new plant that practically all industries will be making and equipment— as it did during the past year. smaller capital outlays in 1955 than in the fiscal In touring a modern refinery, it is readily apparent year ended last September. Producers of durable why it takes so much capital to squeeze so many goods, as a class, plan reductions of 10 per cent kinds of marketable molecules out of crude petro for next year, and producers of nondurables leum. You don’t see many people around the plant expect to reduce capital outlays 26 per cent. but what a mass of stacks and stills, pipes, pumps, Precisely how much less or more the various gauges, tanks and towers! The heat and high pres industries plan to spend next year in contrast with sure required to digest the crude oil is hard on the capital outlays during the past year is shown, digestive system, so the equipment doesn’t last percentage-wise, in the accompanying chart. The long. Moreover, if wear and tear does not shorten range varies from minus 54 per cent for concerns the life of the equipment, obsolescence will. The that make transportation equipment to plus 20 engineers are always dreaming up new types of per cent for the food and tobacco group. Actually, stills to break up the molecules and rearrange them 2 b usin ess r e v ie w so that the industry can meet changing market requirements CHANGES IN CAPITAL EXPENDITURES 1955 COMPARED WITH 1954 for gasoline, fuel oil, and all the other derivatives. For example, PER CENT the newspapers recently reported that one of the big oil companies is building a $9 million plant next year to produce anhydrous ammonia, a fertilizer and soil conditioner, in ever-increasing demand by farmers. The $64 million being spent by all the refiners of the area next year, however, is 28 per cent below last year’s outlays. Food and tobacco companies rank second in the amount of money they plan to invest next year. The $30 million budgeted represents a 20 per cent increase over last year’s outlays. The chemical industry, which has in vested huge sums of money for plant modernization and expan sion in recent years, rates third in the amount budgeted for next year. Nevertheless, the $29 mil lion represents a 42 per cent decline from last In contrast with the all-industry 45-55 ratio for year’s investment. plant and equipment, respectively, manufacturers Among the industries that are making the small of durables plan to put 30 per cent of their invest est dollar outlays for new plant and equipment ment in plant additions and 70 per cent in new are lumber and furniture, apparel, and rubber equipment— just as they did last year. As for and leather. Outlays planned by each of these in nondurables, however, producers plan to put 55 dustries do not exceed $5 million. per cent in new plant and 45 per cent in new equipment— just as they did last year. The rela P lan t o r equ ip m en t tively greater proportion of new money going into Of the new capital to be invested next year, 45 equipment rather than plant on the part of the per cent is to go into plant and 55 per cent into new machinery and equipment. This is the same manufacturers of durables could easily be ration alized on the grounds of a faster-changing tech pattern that prevailed in last year’s outlays. nology, but the evidence is by no means clear cut. 3 b usiness r e v ie w ESTIMATED CAPITAL EXPENDITURES IN THE PHILADELPHIA METROPOLITAN AREA (Millions of dollars) Industries Total actual expenditures* Anticipated expenditures calendar year 1955 Per cent change manufacturing ............................................................................. Durables ............................................................................................. Lumber and furniture............................................................ Stone, clay, and glass.......................................................... Primary m e ta ls .......................................................................... Fabricated metals .................................................................. Machinery (excluding electrical)................................... Electrical machinery ............................................................ Transportation equipment .............................................. Instruments and miscellaneous......................................... $322.6 1 12.9 5.4 6.1 26.9 19.9 18.9 19.6 1 1.6 4.5 $257.3 101.2 2.9 5.5 25.0 17.5 19.0 13.7 5.3 12.3 — — — — + — + 20% 10 46 10 7 12 1 30 54 173 Nondurables ................................................................................... Food and tobacco .................................................................. Textiles ........................................................................................... Apparel ........................................................................................ Paper .............................................................................................. Printing and publishing....................................................... Chemicals ................................................................................... Petroleum and coal products......................................... Rubber and leather............................................................... 209.7 25.0 13.0 6.5 1 1.8 1 1.0 48.9 89.0 4.5 156.1 29.9 9.1 4.0 6.7 9.8 28.6 63.7 4.3 — + — — — — — — — 26 20 30 38 43 11 42 28 4 ’ Septem ber 1953 - Septem ber 1954 Re-styling of products like automobiles or house September 1, 1954. Our latest survey shows that hold refrigerators takes a lot of money for new actual expenditures turned out to be an increase machine tools, dies, jigs, and fixtures. Similarly, of 12 per cent. Thus manufacturers last year over it takes a lot of money to keep up to date with the estimated the increase by 4 per cent. The year latest equipment in the primary metals, metal fab before they under-estimated by 10 per cent. ricating, transportation equipment, and electrical industries. Going back to earlier surveys when the area of coverage was confined to the city of Philadelphia, excluding the seven-county surrounding area, the Is the fo re ca st s u re ? mark was also missed by similar margins. In 1948 The only way to answer the question, “ Is the fore Philadelphia manufacturers actually spent 6 per cast sure?” is to cite the relation between year- cent less than they had estimated the year before. ahead projections and actual expenditures in our In each of the succeeding three years, they under previous surveys. The revised estimates of the estimated their capital outlays; in 1949 they spent survey taken in September 1953 showed a pro 2 per cent more than they had estimated the year spective increase of 17 per cent for the year ending before; in 1950, 12 per cent more; and in 1951, 4 b usin ess r e v ie w 15 per cent more. In every instance, however, the and that calls for an ever-growing volume of direction of the change was correctly anticipated. replacements. Although we seem to be heading It remains to be seen how the estimated 20 per downward from the peak of last year, there will cent decline for 1955 will turn out. be plenty of inducement for continued capital in Expenditures in 1955 may very well turn out to vestment, particularly for equipment, if not be greater than the amount indicated. In past plant. Chief among these inducements are con surveys, manufacturers have usually over-esti tinuing high levels of income, rising labor costs, mated the declines and under-estimated the in technological developments, and an abundance of creases. Another reason why next year’s decline money available on favorable terms that facilitates may turn out to be an over-estimate is that the financing of new-equipment purchases. in the latest survey we are really extending the forecasts four months further into the future. Actual expenditures are compared for the year ending September 1, 1954 with contemplated out lays for the calendar year of 1955. An in terp reta tio n of the fo recast One thing that should be kept in mind in determin ing the prospective decline for next year is that it is based upon the peak 1953-54 capital outlay. Capital outlays by Philadelphia-area manufac turers rose successively during the past three years. Capital expenditures, like other business phenom ena, come in surges and it would not be realistic to expect every year to establish a new record. For all manufacturing industries of the United States, the peak of capital expenditures on a sea CAPITAL OUTLAYS OF UTILITIES AND RAILW AYS Prospective expenditures on equipment by the util ities and railroads in the Philadelphia metropoli tan area show virtually no change. In the year ending September 1954, they spent $122 million on their properties in the Philadelphia eightcounty area, and in 1955 they plan to spend $ 12 I million. These industries, supplying power, gas, transportation, and communication services, by the very nature of their business, must look ahead and plan ahead for five years at least. The monies they spend are a good index of what they think about the future of the area they serve. sonally adjusted annual basis occurred in the first quarter of 1953. by the huge amounts of money invested in capital INVENTORIES — MORE OF THE SAME? goods each year throughout the whole post-war No major part of spending changes direction Many people have been amazed and confounded period. As new records were established year after faster or oftener than inventory investment. Since year, some observers felt all the more certain that the Korean outbreak, inventory investment has something in the nature of a collapse was inevi varied from plus $16 billion to minus $4 billion table. The need for modernization and replace at an annual rate. The very violence of these ment of productive facilities, however, is always changes focuses attention on inventory policies. with us. Many of our post-war installations of Recently, inventory liquidation has occupied the equipment are already growing old or obsolete; center of the statistical stage. The working off of the stock of capital goods is constantly growing stocks has accounted for about two-thirds of the 5 b usin ess re v ie w net decline in gross national product that has taken jecting no change were actually adopting a “ wait- place in the past year. For about six months now and-see” policy. the mere fact that inventory liquidation has not actually changed their inventory positions in the increased removes a brake from business activity. fourth quarter of 1953 as forecast they would. About twice as many firms The question now is, when will business begin to Secondly, three out of four manufacturers who rebuild its stocks? Or, to put it another way, when predict a movement in their stocks this year say it will inventory spending act as a positive force in will be downward. recovery? To secure information on this subject, the Bank asked manufacturers in the Philadelphia metro politan area about their inventory plans for the M any la rg e d u rab le goods firm s a re liquidating stocks next three months. The principal conclusions from Large manufacturers producing durable goods our survey are summarized below: make up the bulk of the firms who intend to con 1. By far the largest number of firms expect tinue to draw down stocks. About 23 per cent of no change in inventory spending over the the durable goods makers who hold 49 per cent next few months, seasonal considerations of the value of current inventories of hard goods aside. But about three times as many firms are going to cut down. This compares with 6 per that expect a change intend to decrease their cent of the manufacturers of durables holding 9 inventories as intend to increase them. per cent of current inventories who are going to 2. Larger firms, particularly among durable goods producers, show a greater tendency to step up their buying. In nondurables, the picture is a little different. Only 11 per cent of the firms are predicting reduc forecast decreases. 3. The most frequent comment made by firms tion of inventories and these hold just 5 per cent cutting stocks has to do with lower sales of the value of current stocks of soft goods. Four volume. per cent of the nondurables manufacturers who \ hold 7 per cent of the inventory, say they are going M ore dow ns than ups to add to stocks. Of the firms surveyed, a large majority— about Roughly one-third of the firms who said they 79 per cent— said that they were planning to main were going to increase or decrease their inventory tain inventories at present levels. Nearly 5 per cent buying said the change would be substantial. In of the manufacturers foresaw an increase in their the main, these were small firms. Very few large stocks and about 16 per cent said that they would manufacturers indicated a major change in their reduce inventories over the next few months. Sea inventory plans. sonal influences have been removed from the pro jections. Although nearly four out of five manufacturers forecast no change in inventories, this does not Plans v a ry w id e ly am ong industries As the table shows, not all the industrial classifi necessarily mean inventory levels will stay the cations plan to behave in the same or even in a same. In the first place, our experience with this similar manner. Three classifications in the non survey last year indicated that many of those pro durables group have no firms in our survey that 6 b usin ess r e v ie w PERCENTAGE DISTRIBUTION OF MANUFACTURERS’ SHORT-RUN INVENTORY PLANS Industries AH m anufacturing .................... Durables ..................................... Lum ber and fu rn itu re . . Stone, clay, and glass. Prim ary m etals ................. Fa b ricate d m etals . . . . M achin ery (excluding e le c tric a l) ....................... E le c tric a l m achinery . . Transportation e q u ip m e n t....................... Instrum ents and m iscellaneous .............. Nondurables ............................ Food and to b a c c o ........... T e x t ile s ..................................... A p p are l .................................. Paoer ........................................ Printing and publishing. C h e m ic als ............................ Petroleum and coal products .......................... Rubber and le a th e r. . . . No change reason. It is somewhat paradoxical that their ac tions will help to determine business levels as well as reflect their estimates of these levels. When the Increase D ecrease rate of inventory investment rises it gives the econ omy a boost, as does investment in plant and 79 71 84 91 65 74 5 6 8 9 12 2 23 24 75 54 5 8 20 38 61 8 31 If this article has a familiar ring to it, there is good 71 85 95 78 84 79 96 80 4 4 5 3 25 11 reason. The consensus this year is remarkably 4 16 16 23 8 equipment. The level of business activity tends to be drawn down when inventory investment de clines or there is liquidation. Conclusion similar to our findings last year, yet somewhat 19 16 21 position this year, and the ratio of downs and ups 4 is three to one as compared with four to one a 7 projections were made was strikingly different. more optimistic. More firms indicate a neutral year ago. The business environment in which these 100 93 plan a cutback in inventory investment. On the Last year’s survey was conducted before the vari ous indexes of business activity had recorded much other hand, in four classifications no firms plan a downward movement. rise in stocks. had been the order of the day for about three Inventory accumulation Two industries, classified under durables, have years. The latest survey comes after a year during more than 30 per cent of firms planning to draw which business activity inched downward, partly down inventories. Electrical machinery and trans because of liquidation of inventory. Among the portation equipment are the industries in which firms surveyed, for example, total inventory on the largest proportion of firms plan some decrease hand was down 4 per cent from the level a year in inventories. Most pessimistic among nondur ago. ables are those firms making paper products and textiles and apparel. This change in environment could cause some to put a different interpretation on the similar re sults. Some might reason, for instance, that the projected decline in inventories this year has less Pro jected future sa le s d eterm in e policies significance than it did a year ago. They would Inventory policy usually reflects manufacturers’ say that since we are all influenced by our environ appraisal of future sales. If firms foresee a larger ment it is only natural to find more downs than ups market for their product, they stock up. If demand this year; whereas in 1953 it was unnatural. Others seems to be shrinking, they draw on inventories. might reason, as we do, that inventory liquidation Nine out of ten firms that plan to decrease or in in this area will probably persist through the crease inventories give future sales volume as a fourth quarter of 1954. 7 b usin ess r e v ie w EMPLOYMENT PROSPECTS ARE APPRAISED Manufacturers in the Philadelphia industrial area substantial declines also occurred in the machinery and metal-working trades. In the case of non durables, the textile and apparel lines accounted for the greatest number of jobs lost. expect only small changes in their manpower re quirements during the six months ending March 1955. Thus, insofar as employment is concerned, . . . but th ere has been som e re co v e ry they appear to feel that the period of readjustment is about over. Total factory employment is ex since June pected to decrease fractionally, with the reduction The downward trend in total manufacturing em coming during the current quarter. Durable goods ployment persisted through June, but in succeed ing months of the third quarter, manufacturers producers expect to be affected very little more in both heavy and light industry lines made small than those making nondurables. Employers in additions to their working forces. The September both major divisions of manufacturing believe increase was the most pronounced and accounted their manpower needs will at least stabilize in the for nearly half of the persons added to factory first quarter of next year— a little below the Sep payrolls in this latest three-month period. The re tember 1954 level of 551,900. This outlook for local employment is based on estimates received by the Federal Reserve Bank sults of the survey we have just completed provide additional evidence that manufacturing employ ment in this area may be stabilizing. of Philadelphia from nearly 500 firms that par ticipated in our current survey of capital spending plans, inventory policies, and manpower require ments. These concerns employ slightly more than half the personnel engaged in manufacturing ac Forecasts indicate the chang es w ill be sm all Nearly 45 per cent of the reporting firms estimate tivity in the eight-county industrial area of which that manpower requirements by next March will Philadelphia is the nucleus. be about what they were in September 1954. Ap proximately one-third expect increases. For in dividual lines, gains range from a fraction to The p ast y e a r ’s declin e w as sh a rp e r than predicted From September 1953 to September 1954, factory just under 3 per cent. The proportion anticipating such a rise over the six-month period is somewhat greater among firms producing durable goods than employment in this area showed a net decline of those making nondurables. The remaining 23 per 62,000 or about 10 per cent. Most of the reduction cent of our sample look for small declines in work came in the six months ended last March. And it ing forces. The most pronounced for any line does was much more pronounced than had been pre not exceed 4 per cent. This trend is forecast by dicted by the manufacturers responding to our about one-fifth of the durable goods manufac previous annual survey. Over the twelve months, turers and one-fourth of those producing non just about twice as many workers lost their jobs durables. in durable goods industries as in nondurables. anticipated changes in manpower needs are quite Transportation equipment was hardest hit, but narrow over the whole period to March 1955. 8 Thus, even among individual lines, b usin ess r e v ie w . . . in d u rab le goods Heavy industry lines like primary and fabricated ESTIMATED EMPLOYMENT— PHILADELPHIA METROPOLITAN AREA ( In Thousands) metals, electrical machinery, and lumber and furniture expect to be employing a few more work Industries ers by next March than they were in September. In fabricated metals and lumber and furniture, anticipated gains— timed for the first quarter of 1955— will more than offset such reductions as appear likely during the current three months. Primary metal and electrical machinery producers plan small employment increases this quarter and slightly larger ones after the turn of the year. Other durable goods producers such as those making transportation equipment, non-electrical machinery, and miscellaneous goods look for some reductions in their manpower needs in both quar ters. On the basis of the number of employees involved, the most significant decrease may be in transportation equipment. Largely because of this, employment in heavy industry as a whole may show a net decline of around 1,200 workers by March 1955. A ll m anufacturing .................... Durable goods .................... Lum ber and fu rn itu re . Stone, clay and g lass. . Prim ary metals .............. Fa b ricated m etals . . . M achinery (excep t e le c tric a l) .................... E le ctrical m achinery . . Transportation equipm ent .................... Instruments and m iscellaneous .............. N ondurable goods ........... Food and t o b a c c o .. . . Textiles .................................. A p p are l ................................ Paper ..................................... Printing and publishing C h em icals .......................... Petroleum and coal products ....................... Rubber and le a th e r. . . Septem b er 1954 (a c tu a l) Decem ber M arch 1954 1955 551.9 267.8 9.8 12.4 34.3 39.9 548.9 266.0 9.6 12.4 34.5 39.5 549.4 266.6 10.0 12.4 34.8 40.7 44.3 54.4 44.0 54.5 43.9 54.9 46.0 45.1 44.3 26.7 284.1 54.8 47.7 56.4 21.9 33.8 31.2 26.4 282.9 54.3 48.7 55.9 21.7 33.7 30.5 25.6 282,8 54.0 49.0 55.2 21.7 32.5 31.8 22.2 16.1 22.3 15.8 22.3 16.3 Apparel, printing and publishing, and food and tobacco are nondurable lines in which employ ment decreases are anticipated this quarter and . . . an d in n o n du rables next. Paper manufacturers, too, look for a slightly Expected employment changes in nondurable lower level of employment in March than prevailed goods lines also are small. Textile manufacturers in September 1954, but here the adjustment is not are the most optimistic. They expect increases in expected to carry over into 1955. As was the case both the December and March quarters. In petro in durables, the declines forecast exceed the in leum and coal products, small additions to work creases by a narrow margin, so nondurable goods ing forces may be completed by the year-end but manufacturers as a whole may have about 1,300 employment is expected to hold steady thereafter fewer workers next March than were on the pay through March. Producers of chemicals and those rolls when they reported to us in September. making rubber and leather products see their ex The accompanying table compares actual em pected fourth-quarter losses more than made up ployment in September 1954 with the projections by the higher labor requirements in prospect after for two subsequent quarters based on replies re the turn of the year. ceived in our current survey. 9 THE BRANCH AND MERGER MOVEMENT in the Third Federal Reserve District This is the third in a series of articles analyzing W h a t the la w sa y s . . . changes in the hanking structure in the Third Fed The table on pages 12 and 13 summarizes the eral Reserve District from the end of 1946 to the major provisions of law applying to mergers and middle of this year. The first article, published in branches. As the footnote is careful to point out, our August sketched the general the table attempts to give only the essence of these background. The second, published in September, provisions. Anyone interested in exact terminology described some basic facts about the branch and should look up the statutes. B u s in e s s R e v i e w , merger movement in an attempt to answer four questions: How much? When? W here? W ho? This article deals with the single question: How? . . . a b o u t m e r g e r s . But before going into specific provisions, we should define more care fully the terms we have been using. At the outset PART III: THE “ H O W ” O F BRANCHES of the first article in this series we decided to use AND MERGERS the term “ merger” to cover any combination of Any banker who has gone through a merger or banks coming under the heading of merger, con has established a branch knows how much time solidation, purchase, or absorption. The reason and effort go into negotiating with the other was to avoid confusion. When we come to ques bank and complying with legal and administra tions of procedure, however, differences among tive requirements. these terms have more significance. The main purpose of this article is to show how legal provisions and pat In corporation finance generally, a consolida terns of procedure have shaped the branch and tion is not the same as a merger. When corpora merger movement and at the same time reflect tions A and B get together, decide to retire the basic forces underlying it. stock they both have outstanding, issue new stock, 10 b usin ess re v ie w and operate under a new charter— we have a con combine, we have simply considered the absorb solidation. When they decide to retire the stock ing bank, for purposes of this study, to be the of corporation B, issue stock of corporation A to bank under whose charter the combined bank is shareholders of B, and continue to do business to operate. If you So much for terminology. It all boils down to look through the banking laws,, however— at least the conclusion that while no significant distinc the laws applying to banks in the Third District— tion exists between a consolidation and merger under A ’s charter— we have a merger. you will not find a clear distinction made. For in practice, the law regards a merger and a pur practical purposes, bank mergers and consolida chase as different things. tions are the same thing. Moreover, the distinc This legal difference has affected the pattern of tion is not important so far as this study is con bank combinations. Nowadays, as the table in cerned because there have been no “ consolida dicates, merger procedure is basically the same tions” in the sense used in corporation finance. regardless of which statutes a bank must follow. But, technically speaking, we should not use the This was not always so. Until 1950, a national term “ merger” to mean a purchase. Under the bank could be merged into another national bank law, they are different things. Usually when bank but could not be merged into a state bank; it had A purchases bank B it assumes B’s deposit liabili to sell its assets and go into liquidation. Congress ties and takes over an equivalent amount of B’s changed this in 1950 by passing a bill known assets. The cash and proceeds from the sale of popularly as the “ two-way street” law which, any remaining assets are distributed among B’s stockholders. In a merger, the corporate existence among other things, has made possible mergers between state and national banks under the charter of the absorbed bank is merged into and continues of either. in the combined bank, and all rights, property, and From the beginning of 1946 to mid: 1954 there obligations of the separate banks become those of were 66 instances in the Third District in which the surviving institution. In a purchase, Bank B banks combined. Twenty-eight or about two-fifths as a corporate entity becomes extinct; B’s share of these were purchases. Looking back, there has holders then pass out of the picture. Because of been a definite trend over the seven and a half these legal differences, our table on the laws years away from purchases and toward mergers. applies only to mergers and consolidations. But in Three-fourths of the cases before the “ two-way the rest of this study, unless we are specifically street” law were purchases. The only mergers referring to points of law, we are still likely to were of national banks into national banks and include purchases under the term “ merger.” state banks into state banks. Since the law was Many people use the term absorption— as we passed, however, only a little more than one-third have used it here— rather loosely to mean simply of the combinations have been by purchase. Not one bank taking over another, whether by con only did the change in law make possible a number solidation,, merger, or purchase. It is not generally of mergers between state and national banks, but found in the laws on bank combinations. When national and state banks in combining with other banks are of substantially different size there is national and state banks have both used mergers seldom much question about who is absorbing more frequently (and purchases less frequently). whom; when two banks of about the same size Over the seven-and-a-half-year period as a whole, 11 WHAT THE LAW SAYS ABOUT MERGERS AND BRANCHES Pennsylvania New Jersey Delaware National banks (7 P. S. §819) ( I 7 N . J . S . A. §9A) (5 Del. Code 1953) (I2 U .S .C .A .) M ERG ERS (S e e below for provi sions when branches are in vo lved .) 1. G e n e ra l m erger procedure Boards of d irectors of each oank must ap prove jo in t plan of m erger. Plan is subm itted o supervisory authorities for ap p ro val. If authorities app rove, plan is subm itted to st ockholders, giving appropriate n o tice. Stockholders must approve ag reem ent. (§ 750, 751, 781 to 791) (§33; 34; 34a, b & c) (§ 1401 to 1412) (§ 132 to 148) 2. Supervisory approval required D epartm ent of Banking (A lso , Banking Board if branch is in vo lved .) Board of Bank Incorporation and Bank Com m issioner Banking Co m m issioner (§ 750, 784) (§ 133 et seq.) (§ 1401 et seq.) C o m p tro lle r o f C u rre n cy . (§ 33, 34a, 34b) Board o f G overno rs o f the Federal Reserve System reviews proposed m erger if surviving bank is a state m em ber bank, and in some cases its ap proval may be required. Fed eral Deposit Insurance C o rp o ratio n has sim ilar power with respect to insured non m em ber state banks. B R A N C H ES 1. Procedure in estab lishing branch 2. Supervisory approval required A p p ly to supervisory a u th o rity ; must amend ch arte r (§ 204, 303) A p p ly to supervisory au th o rity; need not amend ch arter (§ 3, 20) A p p ly to supervisory au tho rity; need not amend ch arter D ept, of Banking and Banking Board ; decision of Board is binding on the Departm ent Banking Co m m issioner Board of Bank Incorporation and Bank Com m issioner (§ 204) Board of G overno rs of the Fed eral m em ber banks. (§ 20) Reserve System Federal Deposit Insurance C o rp o ratio n insured banks. must ap prove (§ 770) (§ 770) must approve branches of state branches of state non-member A p p ly to supervisory au th o rity ; need not amend ch arte r (§ 36) C o m p tro lle r of C u rre n cy . If branch is acq uired by m erger and was established before Feb. 25, 1927, no ap proval necessary; if established a fte r th at d ate, must be approved the same as a new branch. (§ 36(b), 36(c)) 3. G e o g rap h ical lim itations (a ) W ith in headoffice c ity Perm itted (§ 204D) (b ) O u tsid e headoffice city, but in same county Perm itted (§ 204D) (c ) O u tsid e county Perm itted (§ 19) Perm itted (§ 770) Branches perm itted only if : (1) acquired by m erger; (2 ) at location o f liq u id at ing banks or b ranches; (3 ) new branch is established in com m unity with no bank or branch (§ I9B) Perm itted N ot perm itted (§ I9B) Perm itted (§ 770) New branches su b ject to same lim itations as ap p ly to state banks (§ 36(c)) Sam e as 3 (a ) (§ 770) Lim ited to contiguous counties (§ 204D) D ep t, of Banking may dis ap prove if a bank in th at county has notified Dept, o f intention to establish a branch in the same com m unity Sam e as 3 (a ) (§ 204 P (2 )) 4. C rite ria for approval C o m m unity must be without ad equate banking fa c ilitie s (e xce p t in c ity of first or second class) (§ 204D, 204F (2)) In case o f new branches o n ly: Interests of the public must be served to ad van ta g e ; lo cality must afford reasonable promise of successful operation (§20) Bank must be authorized by ch arter to establish branches Sam e crite ria as ap p ly to state banks in state con cerned (§ 36(c)) Public convenience must be served ; must be good and sufficient reason fo r establishm ent (§ 770) 5. C a p ita l requirem ents (a ) In head-office c ity (b ) O u tsid e headoffice city N o te : No ad d itio n al required (§ 204E) C a p ita l and surplus must be th a t fo r head office plus am ount required fo r a new bank a t location o f each branch (e xce p t requirem ent is only 50% in com m unity o f 5,000 or less) (§ 204E) Am ount required fo r head office plus the lesser of $100,000 fo r each branch or am ount required fo r a new bank a t location of each branch (§ I9C) Same as 5 (a ) $25,000 cap ital and $25,000 surplus fo r each place of business (§ 770) Sam e as 5 (a ) No ad d itio n al required unless required by state (§ 36(c)) The g re a te r of e ith e r: (1 ) cap ital and surplus required by state, or (2 ) ca p ita l and surplus required to establish a new national bank a t location of each branch (§ 36(c) and (d ) ) This tab le is intended to give the essence, but not necessarily the exact legal term inolog y, of the m ajor provisions affectin g m ergers and branches. A nyone interested in exact term inology should consult th e statu tes; references are cited in parentheses. b usin ess re v ie w as the following table shows, national banks have action by the authorities; but in most instances used purchases decidedly more than have state it simply means higher earnings on the same banks. capital base. Purchase M erger Total A look at the record to see which banks merge 57% 50 29 25 43% 50 71 75 100% 100 100 100 siderations that may reflect such non-economic A ll c o m b in a tio n s ..................................... 1 <N| 1 and which ones purchase suggests some other con National banks absorb national banks .............................................................. National banks absorb state banks. State banks absorb state banks. . . State banks absorb national banks. . 58% 100% of about the same size— whether large or small— Banks give legal aspects less weight than other factors as personal prestige and local pride. The pattern is far from clear-cut, but when two banks considerations in deciding whether to merge with or when two banks in the same town decide to get together, they are more likely to merge. A pur a bank or purchase it. Usually, among the first chase is more likely when one bank takes over a matters to come up is taxes. In a merger, stock considerably smaller bank or when the banks are holders of the absorbed bank do not have to pay in different towns. The major exception is when capital gains taxes on the new shares issued in ex Philadelphia banks are involved. The large Phila change for old; in a purchase, they may have to pay capital gains taxes on cash that they get for delphia banks have used mergers almost exclu sively, even when absorbing small banks. Perhaps their shares. In most cases, stockholders don’t stockholders of banks in and around the city are want cash; they would rather continue as owners more sensitive to tax considerations, and perhaps of the surviving hank, particularly since they management gives more consideration to some of usually get a better return than they have been the non-economic factors suggested above. getting. In short, stockholders of the absorbed bank have tended to favor a merger over a pur . .. a b o u t b r a n c h e s . Compared with mergers, chase. In many cases, of course, this may be over the laws on branches are more complicated and come by making the purchase price sufficiently take up more space in the table. One aspect of attractive. the law which bankers are necessarily interested On the other hand, if capital is relatively large, in is the relationship among the various supervis it may he in the interests of stockholders of the ory authorities. Although this may look compli absorbing bank to favor a purchase because there cated, actually it comes down to one simple prin is no increase in stock outstanding. Management ciple— an attempt to keep national and state banks of the absorbing bank also prefers to purchase on a par competitively. Thus, in general the legal rather than merge because bankers consider a powers given national banks are integrated with purchase a “ cleaner” transaction. Once the deal those granted to state banks. The Federal Reserve goes through it is over and done with. Usually, and Federal Deposit Insurance Corporation follow personnel of the purchased bank are taken on by the same principle in their areas of responsibility. the purchasing bank, but since the stockholders Probably the most interesting provisions— and are paid off in cash they do not become stock certainly the most controversial — are the geo holders of the purchasing bank. When assets are graphical limitations on branch banking. As the acquired without increasing capital, the capital table indicates, Delaware laws are the most liberal cushion becomes thinner, and this may require of the three states; branches can be established 14 b usin ess r e v ie w anywhere in the state. Pennsylvania is more re value, earnings, and dividends of the combined strictive, limiting branch banking to contiguous bank. Then, by using the terms, we computed counties. And New Jersey is most restrictive, lim the amount which stockholders of each bank iting branches to the same county as the head would get from the combined bank. The differ office. ence between amount contributed and amount re The provisions of law in the respective states ceived indicates whether or not a premium was are not so clear-cut as this, however. For ex involved. ample, in Pennsylvania they require the super compared book value of the absorbed bank In the case of purchases, we simply visory authorities to determine whether banking with the amount of cash which its stockholders facilities are adequate and to give preference to received. And in the case of market value of stock banks in a given county over banks in contiguous (because market price for one bank cannot be counties. This is the law, and recently in Penn added to market price for another to get a com sylvania the law has been reaffirmed by the Su bined value) we adjusted prices by the merger preme Court. terms and compared the stock of the absorbed Some bankers feel that the law should be changed, but are not agreed on how it bank with stock of the absorbing bank. should be changed. This article has to do only with the law as it stands, and what has happened Book value. One measure of the value of a bank is its net worth— what’s left over after sub under that law. tracting liabilities from assets. Unfortunately, Term s of m e rg e rs and purchases this is an inaccurate measure sometimes, pri Banks go through many steps either in mergers and purchases, or in setting up new branches. marily because some banks carry certain assets But in mergers and purchases the situation is Consequently, book value of capital accounts is different from the establishment of branches— only an approximation of the real value of a bank. representatives of two or more banks must get Banks start with book value as a basis for arriv together and negotiate the terms. Where they ing at terms, then make any important adjust come out, of course, is a vital dollars-and-cents ments they think necessary to bring it more in matter to everybody concerned. From a broader line with actual value. point of view, the terms are a very important quent adjustment is in the value of banking house, on their balance sheets below their true worth. Probably the most fre part of the merger movement, for they reflect for many banks carry this asset at a conservatively many of the motives of parties to the transaction. low figure. Another adjustment may be in the We have gotten together, therefore, figures value assigned to investments to agree with cur which help to give some idea of terms of mergers and purchases and have summarized them in the rent market values. While banks take these adjustments into con In order to get as well- sideration in arriving at terms, they do not, for rounded a picture as possible, we have used four the most part, actually make them on their bal different measures: book value of capital ac ance sheets. counts, earnings, dividends, and market value of authorities frown on write-ups, a policy that tends chart on page 16. As a general rule, supervisory stock. What we have done is to compute the to reduce the amount of premium paid. If an amount each bank contributed toward the book absorbing bank wants to acquire another bank at 15 FOUR MEASURES OF MERGER TERMS FOR EVERY $1 O F - BOOK VALUE MARKET VALUE 16 STOCKHOLDERS OF ABSORBED BANKS RECEIVED: $ 1 .0 5 of cash or book value of the combined bank STOCKHOLDERS OF ABSORBING BANKS RECEIVED: $ .9 9 of book value of the combined bank b usin ess re v ie w more than its book value, it can do so only by tially above that shown for book value. In some paying the premium through reduction of its own mergers, stockholders got less than they con surplus or undivided profits rather than capital tributed, but in several they received over twice izing the premium on its books. In the case of a as much. merger, this will dilute the value of stock held by got 99 cents of earnings in the combined bank share holders of the absorbing bank; in a pur for every Stockholders of the absorbing bank SI they were getting before. chase it will result in an actual pay-out of cash. If the practice of paying premiums in purchases D ividends. Dividends, in one sense, are not goes too far, the supervisory authorities may so good a measure as earnings because they may refuse to approve the transaction or require addi be influenced by non-recurring profits and losses tional capital. and the amount of profits paid out. On the other We were not able to get all the adjustments hand, they are what most stockholders are inter banks made in arriving at terms, so the chart ested in. Dividends show the biggest premium shows only a comparison of book values. Never of any of the four measures; typically, stock theless, it indicates clearly that absorbing banks holders of absorbed banks got about $1.51 in divi paid more than book value for the banks they dends of the combined bank for every dollar in acquired. In the typical case, for every Si of their own bank. As we pointed out in the pre book value which stockholders of the absorbed ceding article, absorbing banks not only earn bank gave up, they got about $1.05 in cash or more on their capital but also pay out a relatively book value in the combined bank. The figure was larger proportion of earnings than the absorbed about the same for mergers as for purchases, but in many cases it would be quite different if the banks. special adjustments were taken into account. For Si M a rk et p rice o f sto c k . This measure is by which stockholders of the absorbing bank far the least accurate, but in some ways it is the had, they got about 99 cents in the combined most interesting of the four. It is less accurate bank. Usually one bank was so much larger than because bank stocks, except for stocks of the every the other that the terms had a much greater larger city banks, are usually closely held and effect on stockholders of absorbed banks than on seldom traded. If you try to get an accurate mar stockholders of absorbing banks. ket price of the stock of a small bank, you are likely to end up with the price at which the last Earnings. Perhaps the best measure of what sale was made ( which might be some time a g o ) stockholders are giving up and what they get or the last price bid (which might or might is net current earnings. Our figures on these (as not be a good reflection of market value in view well as dividends and market value of stock) in of the fact that probably no shares were offered clude. of course, only mergers because when for sale). We have tried to get the most accurate stockholders are bought out they no longer get prices available, but add a caution not to inter earnings and dividends or have stock to sell. In pret the figures too closely. the typical merger, stockholders of the absorbed This measure is interesting because it reflects bank gave up SI of earnings for SI.21 of earn another strong reason why stockholders of ab ings in the combined bank-—a premium substan sorbed banks vote for mergers. As the chart indi 17 b usin ess re v ie w cates, stockholders of absorbed banks typically got about $1.30 in market value of stock in the MARKET BEHAVIOR OF SELECTED BANK STOCKS absorbing bank for every $1 of their own stock. Not only did the merger give them more value in P R IC E a going concern— ownership of greater book value and higher earnings and dividends per share— but it gave them a chance to sell their new stock in the market for a considerably bet ter price than they could have gotten for their old stock. And because their new stock was usu ally in a considerably larger bank, it probably had a much broader market. The behavior of market price is the best sin gle indicator of what investors think of the merger. An illustration is provided by the accompanying chart. This shows how prices of ten bank stocks behaved before and after announcement of mer ger terms. These are stocks of Philadelphia banks whose prices were quoted daily in the financial pages of the newspapers. In order to make them comparable, we have adjusted the prices for the basis of exchange provided by the merger. The top two panels show what happened in mergers between large banks. Before there was any talk of a merger, the price for each bank reflected pretty well what experienced dealers and investors figured the stock to be worth, using such measures as we have been discussing here. The prices for both banks (after adjustment) were nearly the same. When the merger was announced, prices spurted a little as investor in terest picked up, but soon settled down and travelled along closely together. The third panel indicates how market uncer tainty is reflected in price. The stock of the absorbed banks moved up early as news leaked out to the market. It dropped because of doubt as to whether the deal would go through, but rose again when the merger was finally approved. The fourth and fifth charts present a striking 18 MERGER ANNOUNCEMENT b usin ess re v ie w picture of what is typical in many mergers— a marketability. In many cases it may also indi sudden upward adjustment in the stock of a me cate that the stock had been under-priced. dium or small bank being absorbed by a large bank. Stock of the large banks was affected very little. C onclusions. Every merger is different. Terms But as soon as the merger terms were are arrived at through negotiation and reflect the announced, dealers and investors took a hard look particular situation of the banks concerned. In at the price of stock of the absorbed banks in a sense, therefore, it may be misleading to talk the light of what stockholders would get when in the over-all, as we have here. Anyone who the merger went through. They immediately has followed the merger movement knows, for jumped the price up toward parity with the example, that terms agreed upon by two large stock of the absorbing banks. Prices may not city banks are likely to be quite different from always adjust immediately if there is any uncer those in a merger of a large city bank and a tainty about the merger being approved or if a small suburban bank. substantial number of stockholders unload their holdings below the parity price. Yet, bearing these qualifications in mind, the picture seems quite clear. In the typical merger, Prices are not available to make charts similar absorbing banks have paid premiums, in some to these for all banks; if they were, the picture in cases substantial premiums; stockholders of ab a good many cases would look like the bottom sorbed banks have made out well. two panels. The spurt in price is a response to The next logical question is: W hy? What are the fact that stockholders are getting more for the motives underlying the branch and merger their money in the form of book value, earnings, and dividends, and are getting stock with greater movement? This will be the subject of the next article in this series. Additional copies of this issue are available upon request to the Department of Research, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pa. 19 FO R THE R E C O R D . . . BILLIONS * MEMBER B A N K S 3R D ER.D, BANKING DEI ’OSITS A y— *\ K A A / l f A /W1 V V v 1 w A\Ji V ' V \X~ CH iCK PAYMENTS W (20 CITIES) INV ESTM EN TS ..... + LO/ ,NS ^ ♦ r e v is e d s e r ie s 2 YEARS AGO YEAR AGO Factory* Third F ed e ra l Reserve District Un ted States Per cent change SU M M A RY Septem ber 1 9 5 4 from mo. ag o O U TPU T M anufacturing p rod uctio n. . . Construction c o n tracts*............... C o a l m ining.......................................... EM PLO YM EN T A N D IN C O M E Factory employment (T o ta l) . . . T R A D E** Department store s a le s ................ B A N K IN G ( A ll member banks) D eposits................................................... L o a n s .......................................................... Investments............................................. U .S . G o v t, se c u ritie s.................. O t h e r ...................................................... C h e ck paym ents................................ 0 +1 +1 year ago -13 +38 -2 7 9 mos. 1954 from year ag o Per cent change Septem ber 1 9 5 4 from -1 4 +21 -23 mo. ag o +2 +2 +1 ye a r ago - 7 + 6 -18 LO CAL 9 mos. 19 54 from ye a r ago -1 0 -12 - 9 -1 2 +1 - 9 - 8 0 +1 + - - -4 0 + - 1 3 - 3 +1 +1 +1 +1 +2 +1t + 8 + 6 + 5 + 3 +15 + 5t +1 +1 0 0 +2 -1 + 4 + 1 +10 + 9 +11 + 1 3 4 4 4 5 2 0 + 6 + 5t + 4 + 2 + 6 + 6 + 7 + 7 C h e ck Payments Employ ment Payrolls S a le s Stocks Per cent Per cent Per cent Per cent Per cent change change change change chang e Sept. Sept. Sept. Sept. Sept. 1 9 5 4 from 19 5 4 from 1 9 5 4 from 1 9 5 4 from 1 9 5 4 from La n c a ste r. . . . mo. ag o ye a r ag o mo. ago + 1 -12 +3 -1 5 + 8 + 1 0 -1 5 -3 -22 - 1 0 0 - 6 +4 + 4 + 6 + 2 ye a r mo. ag o ag o 1 +13 y e a r "mo. ago ag o -2 + 1 1 y e a r mo. ag o ag o + year ago P h ila d e lp h ia . +1 -1 0 +1 -1 0 + 44 +6 + 10 - 5 0 + 6 R e a d in g ............. +1 - 9 -1 -1 0 + 35 +9 + 10 - 5 - 6 - 1 - 7 1 - 1 S cra n to n . . . . + + + Departm ent Store CH AN G ES - 9 + 12 -1 8 0 +1 SEPT 1954 0 +1 - 7 +27 + 5 +13 + 8 + +2 -1 1 +2 - 8 +28 +1 +21 2 -2 5 W ilk e s - B a rre . - 1 -10 -1 - 8 + 22 +2 + 10 - 1 1 W ilm in g to n . . . + 1 -10 +1 - 5 + 25 +1 + 11 - 1 + 36 + 18 Y o r k ...................... - -3 -10 -5 + 10 - 3 - T ren to n ............... - - + 3 8 -1 1 PRICES Co nsu m er................................................ 01 *Based on 3-month moving a v e ra g e s. **A d ju ste d for seasonal v aria tio n . 20 + 11 + H f2 0 C itie s JP h ila d e lp h ia 0 0 - 1 0 + 0 1 -1 9 - 6 1 - 2 * N o t restricted to corpo rate limits of cities but covers a re a s of one or more counties.
@FedFRASER