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October 11, 2006

A Sale from Hell

Kevin E. Dayhoff

In the wee early morning hours of Monday, PNC, a $94.9 billion bank based in Pittsburgh announced that an agreement had been reached to purchase Maryland's largest independent bank, Mercantile Bankshares Corporation, in a $6 billion deal.

Although the "experts" have been predicting that the venerable Maryland institution was sure to be bought up by a larger bank at some point, most average Marylanders greeted the announcement with a big "Say it ain't so."

It has not been a good year for business in Maryland and with much of the state in limbo and biting their nails over the upcoming gubernatorial election, the announcement came as the icing on the cake to a horrible year.

Several questions immediately come to mind. Why is it that in recent years, as each and every acquisition announcement is made; it is the Maryland business that is being purchased by an out-of-state entity?

Often it is a blue-chip local business, such as Baltimore Gas and Electric, or MBNA, that we are losing in the purchase. Is this proof-positive of Maryland's reputation for a being a "business, regulatory and tax hell." All of which can be laid at the feet of a liberal anti-business Democrat dominated Maryland General Assembly.

Remember USF&G, once considered the "Cadillac of the insurance industry?" It was purchased by The St. Paul Companies in 1997. The 2000 St. Paul annual report boasts that it trimmed "about $260 million of expenses, reflecting the realization of merger-related efficiencies." In plain-speak that means the Maryland economy lost $260 million in economy in the loss of jobs and economic base.

The PNC press release states: "The transaction is expected to result in the reduction of more than $100 million of operating expenses through the elimination of operational and administrative redundancies."

That is Orwellian double-talk which means that $100 million in jobs and economic base will disappear from Maryland when the PNS-Mercantile merger is completed.

What is it about doing business in Maryland that puts Maryland-based businesses at a competitive disadvantage?

Some insight can be found in a Washington Times article by S. A. Miller in June 2006, which led off with the following paragraph: "Maryland officials are scaring off investment in the state with such anti-business moves as the court-ordered scrutiny of Baltimore Gas and Electric Co.'s energy rates and the law that forces Wal-Mart to pay employee health benefits, business leaders say."

A Jamie Smith Hopkins article in Baltimore's Sun, also in June, quoted William Burns, a spokesman for the Maryland Chamber of Commerce as saying the "General Assembly continues to pass initiatives that shine a negative light on the state, and such actions make the job of economic development harder than it should be."

She also reminded readers that the Wall Street Journal editorialized last April, that the "message being sent to job creators (by the Maryland General Assembly) is clear: Lights out."

"Local business leaders are raising the specter of credit-card giant MBNA Corp., which was once a subsidiary of a Baltimore-based bank. It left for Delaware in 1982 after the General Assembly refused to lift caps on the interest rates lenders could charge - comparatively low at a time of raging inflation," relates Ms. Hopkins.

Published accounts have been quick to cheerily but mindlessly mime verbatim the PNC press release that based "on PNC's closing NYSE stock price of $73.60 on October 6, 2006, the transaction values each share of Mercantile's common stock at $47.24." And that this is almost 30 percent higher than last week's close. To further sweeten the pot, the transaction will give Mercantile shareholders "0.4184 shares of PNC common stock and $16.45 in cash for each share of Mercantile." Local publications have been effusive that Mercantile shareholders have reaped a wonderful bargain in the proposed sale. No mention has been made so far as to what business model will be employed by PNC, so it is unclear as to how many of Mercantile's 3,600 employees will lose their jobs.

One thing for sure, forget about local community-oriented decision making. A $92 billion bank that will end-up the 11th largest in the nation isn't going to achieve operating efficiency or capital efficacy by allowing Mercantile's 11 bank subsidiaries and 240 branches to be independent, locally adaptive and innovative.

Perhaps the silver lining will be the increased business for banks such as Provident, First Mariner or Frederick County Bank. In 2001 when BB&T purchased FCNB, thirty-two employees, of the many who lost their jobs, found employment with the then, newly formed Frederick County Bank and more often than not, they took many of their customers with them.

There are many PNC business models we hope to avoid. Which leads us to the next $6 billion dollar question: as a Mercantile shareholder who takes great pride in Mercantile's sterling reputation for integrity and excellent management - why PNC?

Starting slowly, last July 19, PNC "announced financial results for its second quarter, reporting that profit rose 35% helped by a big improvement in fee-related revenue."

"Fee-related income" is a bank euphemism for service charges. In other words, PNC was making more money because it has increased its customer service charges.

Another business practice we could do without was reported in the Pittsburgh Post-Gazette on Sept. 27: "The U.S. Equal Employment Opportunity Commission is alleging that PNC Financial Services Group - cited this week as one of the nation's top 100 places to work by Working Mother Magazine - refused employment to a job applicant because she was pregnant."

Oops! Oh dear.

Or how about the July 15 Pittsburgh Tribune-Review article that reported a "federal judge in Pittsburgh approved the $36.6 million balance of a $193 million settlement of a shareholder class-action lawsuit against PNC Financial Services Group over its corporate-loan accounting scandal in 2001."

On July 17, the Cincinnati Post wrote, "The suit stemmed from PNC's efforts to unload $762 million in bad corporate loans five years ago. PNC sold those loans to three partnerships it created with insurance giant American International Group, Inc., in effect removing them from its balance sheet."

It gets worse, the paper elaborated, "PNC has contributed $90 million to the settlement fund."

And finally, "PNC paid $25 million to the U.S. Justice Department to settle charges of conspiracy to commit securities fraud filed in June 2003, and several key executives left the bank."


Last spring published accounts reported that PNC had to reissue hundreds of debit cards after personal account information was found to have been compromised.

Just days before the announced merger, published accounts report that PNC "says it will sell $2 billion in mortgages and will take a $50 million charge in the third quarter." The Boston Globe said, "The loss represents the decline in the value of the loans, which is largely due to increased interest rates."

Think carefully; when was the last time you read something like any of the above about Mercantile?

The bargain that Mercantile customers, shareholders and Marylanders are getting in this deal is a Faustian bargain from hell. If Mercantile had to sell us out, they sure could've done better than PNC.

It looks like the ships were sailing the wrong way on Columbus Day and until the culture and climate is changed in the Maryland General Assembly, there'll be a fleet of ships following soon.

Kevin Dayhoff writes from Westminster. E-mail him at:

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