Bank One Case
1. What are Banc One’s problems and why is share price decreasing?
The problem with Banc One is that their stock price is going down and is hurting their core growth strategy of acquisitions.
Compared with the financial results of the country’s largest 25 bank holding companies, Banc One has been very successful during the decade since 1982. It has the highest and most consistent ROA, ROE and EPS. Its EPS has been consistently growing for the last 24 years which none of the other banks have been able to imitate. The reason behind the success of Banc One has been a three pronged approach: * retail and middle market commercial customer focus * Superior Technology * Rapid growth by acquisition
They acquire retail regional market leader banks which has a solid management team. They centralize the operations with their strength in technology integration and can generate economies of scale which leads to profitability. Since 1969, it had been able to complete 76 acquisitions involving 139 banks which has been the central reason for their growth. The stock market has been able to value this strategy and has consistently rewarded them with better stock prices so that they can complete accretive acquisitions in turn creating shareholder value. This leads to a winning cycle which they have been consistently using.
But they face a problem now! They can’t acquire Liberty Mutual as their stock price has gone down. If they do an acquisition with their low stock price, their acquisition will lead to the destruction of their shareholder’s value which will lead to further reduction in stock price.
The stock price of Banc One is going down because: (1) Since 1983, Banc One has exposed themselves to different forms of derivatives – MBS, CMOs (2/3 of their investment portfolio was CMOs) to gain high yield. They have also started interest rate swaps to hedge their long term risk to generate short term liquidity which has further increased their exposure to
The problem with Banc One is that their stock price is going down and is hurting their core growth strategy of acquisitions.
Compared with the financial results of the country’s largest 25 bank holding companies, Banc One has been very successful during the decade since 1982. It has the highest and most consistent ROA, ROE and EPS. Its EPS has been consistently growing for the last 24 years which none of the other banks have been able to imitate. The reason behind the success of Banc One has been a three pronged approach: * retail and middle market commercial customer focus * Superior Technology * Rapid growth by acquisition
They acquire retail regional market leader banks which has a solid management team. They centralize the operations with their strength in technology integration and can generate economies of scale which leads to profitability. Since 1969, it had been able to complete 76 acquisitions involving 139 banks which has been the central reason for their growth. The stock market has been able to value this strategy and has consistently rewarded them with better stock prices so that they can complete accretive acquisitions in turn creating shareholder value. This leads to a winning cycle which they have been consistently using.
But they face a problem now! They can’t acquire Liberty Mutual as their stock price has gone down. If they do an acquisition with their low stock price, their acquisition will lead to the destruction of their shareholder’s value which will lead to further reduction in stock price.
The stock price of Banc One is going down because: (1) Since 1983, Banc One has exposed themselves to different forms of derivatives – MBS, CMOs (2/3 of their investment portfolio was CMOs) to gain high yield. They have also started interest rate swaps to hedge their long term risk to generate short term liquidity which has further increased their exposure to