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Comerica Bank to be Bought Out?


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I hope this does not happen. It would have devastating effects on Downtown Detroit, further hurting an already weak office demand in the city.

Banking buzz has Comerica as target

Detroit's leaders hope to retain hometown giant and headquarters

October 31, 2003



Short of a terrorist attack, cities probably fear nothing so much as the loss of a major corporate headquarters and the jobs and prestige that go with it.

So when the name of Detroit-based Comerica Inc. turned up this week in the financial media as a possible or even likely takeover target, city leaders cringed.

Comerica is the last surviving large local bank still headquartered in Michigan. All other big banks of Michigan's past -- NBD, Manufacturers, Standard Federal and others -- have disappeared into other corporate folds or operate as subsidiaries of out-of-state owners.

"Wouldn't it be awful to lose our last bank?" one civic and business leader asked this week, preferring not to be named because of the sensitivity of the subject. "It'd be pretty terrible."

Comerica's name came up Monday after Charlotte, N.C.-based Bank of America agreed to purchase Boston-based FleetBoston Financial Corp., like Comerica a large and respected regional bank. The financial media immediately began to tout Comerica among the next likely targets.

A spokesman for Ralph Babb, Comerica's chairman, president and chief executive, said the bank would not comment on "rumors and speculation."

But there's no secret that Comerica has been a potential merger or takeover possibility for years. "We're always in the cross-hairs," David Littmann, Comerica's chief economist, said this week.

Comerica makes an attractive takeover candidate for two reasons, one positive, one negative.

On the upside, the bank occupies a solid niche, lending to big and midsize manufacturers and small businesses in Michigan, and it has substantial operations in California, Texas and Florida. With total assets of $54 billion, it employs more than 11,000 workers and operates more than 300 branches and more than 500 ATM machines.

To a bigger bank that doesn't do much business in the Great Lakes, snapping up Comerica could translate into buying instant market share.

Now the negative: The bank also is vulnerable because its core customer base, those auto manufacturers and small businesses that Comerica knows so well, are struggling near the bottom of their business cycles.

The rest of the economy might be heating up, as evidenced by the blistering third-quarter gross domestic product numbers released Thursday. But automotive firms and other Comerica customers are still cutting costs and hoping for orders to pick up.

The pain suffered by its customers has spread to Comerica's own income statement. While the bank is still making money, those profits are growing more slowly than the bank wishes.

FleetBoston efficiency

In a key statistic, the bank's efficiency ratio, the measure of how many dollars Comerica must spend to earn $1 profit, stands at about 55. The lower the ratio, the less the bank has to spend per dollar of profit, and, therefore, the healthier it is. Comerica's efficiency rating is almost exactly where FleetBoston's was when Bank of America came calling.

By comparison, Comerica's efficiency rating was 48.59 on Sept. 30, 2000. Today's higher ratio signals the bank is struggling. That, in turn, worries Detroit civic and corporate leaders.

Look no further than the local United Way charity to judge the bank's importance. In addition to running Comerica, Babb is chairman of the local United Way board. Richard Collister, another Comerica executive, is on loan to manage United Way operations.

In 2002, Comerica and its employees gave more than $2.1 million to United Way's annual campaign. Ford Motor Co., General Motors Corp. and DaimlerChrysler AG were the only companies to give more.

By contrast, Bank One, the Columbus, Ohio-based bank that in 1998 took over First Chicago NBD, successor to Detroit-based NBD, gave $730,791 last year, or about one-third the amount Comerica and its employees did.

"Comerica is one of those corporate citizens that every community needs and loves to have because of what it can do for you," United Way spokeswoman Linda Remington said this week.

Downtown ripple effects

A takeover of Comerica also could devastate Detroit's downtown office market. Comerica occupies 15 floors of the Comerica Tower at Detroit Center skyscraper at Woodward and Congress. The bank employs 2,210 downtown.

Because most takeovers result in a consolidation of space and functions at the acquiring company's headquarters, Detroit could lose a good portion of those Comerica workers and see a lot of office space dumped on the market downtown, where demand for such space is weak.

One local real estate expert, asking not to be named because he does business with all downtown building owners, said, "It would be a disaster for the downtown office market."

And if Comerica's corporate name disappeared, the name of the Comerica Park baseball stadium probably would change, too.

With takeover talk buzzing, some Wall Street analysts who follow the banking industry predict that Comerica would put up a spirited fight rather than acquiesce to a takeover.

"They ain't selling," said johnson Bove, an analyst who follows Comerica for Pinellas Park, Fla.-based Hoefer & Arnett.

One reason, Bove said, is that to agree to sell now would be to admit that Comerica's business model is flawed and that its profits won't rise when its manufacturing clients recover. "I don't think they're willing to make that statement," Bove said.

"I think they still believe there will be a recovery in the commercial sector and their customer base is solid and their earnings will come back."

For psychological reasons as well, Comerica's Babb might not agree to a takeover. Babb has held the top job at Comerica only since 2002, taking over from former chairman and CEO Eugene Miller in the midst of the bank's downturn in fortunes.

"Ralph Babb takes over the bank and nothing but bad things happen," Bove said. "It was not his fault. And now, after he's been ground into the dust, he sells the bank and walks away a rich but defeated man? I don't think he's going to do that."

But a suitor who offers the right price might be hard for Comerica's board to turn down. That's why the bank leaders hope Comerica's stock keeps rising, as it did this week on speculation of a takeover bid after Bank of America bought FleetBoston. The bank's stock was trading near $51 a share this week after closing Oct. 24 at $46.92.

Yet even at the higher price, Comerica's stock sells only at about 12 times its annual earnings, a multiple considered cheap in the world of mergers and acquisitions. To be safer, that price-earnings multiple should be at least 14; and for the bank to be takeover-proof, the multiple should be nearer 18 to 20, or a stock price of around $65 per share.

That sort of price is unlikely to happen before Comerica's lending business heats up.

"Every day is an eternity, believe me," Littmann said this week. A recovery "better happen soon," he added, "because there's a lot of sharks out there swimming."

Contact JOHN GALLAGHER at 313-222-5173 or [email protected].

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Interesting article.

It makes me wonder how strong Cincinnati based banks are. Fifth Third and Provident Bank are both headquartered out of Cincy and I wonder if they are on the side that is buying other banks or on the side of banks that get bought.

I hope these bank mergers stop. They are not good. Of all cities - Comerica needs to stay right in Detroit.

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