Takeover is hard to swallow for proud city

October 10, 2006|By Jay Hancock | Jay Hancock,Sun Columnist

As somebody who often preaches the virtues of free capital, surely I would be churlish to complain that Baltimore's biggest remaining bank is being bought by out-of-towners.

Pittsburgh's PNC Financial is buying Mercantile Bankshares for what the market valued yesterday as about $45 per share - the highest price ever commanded by the stock. The efficiencies from the combination will contribute to the kind of productivity growth that is essential if the U.S. economy is going to pay its debts and finance Social Security in coming decades.

But for Baltimore, it's hard to swallow.

As much as PNC promises otherwise, the deal removes influence and prestige from this town. It makes us even more of a branch-office burg. And it ends another, especially long, chapter in the city's history.

By my count Mercantile will be the sixth major Baltimore-based bank to be acquired by outsiders in two decades. (Loyola, Bank of Baltimore, Maryland National, First Maryland/Allfirst and Union Trust are others.) The city's financial industry is now mainly asset management, not banking or insurance.

Mercantile isn't the biggest. The assets of MNC Financial, Maryland National's parent, were 40 percent greater, adjusted for inflation, and even bigger as a portion of Maryland's economy.

But Mercantile holds a unique place in Baltimore lore. Wonderfully powerful and discreet, its size has historically exceeded its visibility, and its influence has exceeded its size.

Mercantile is the blueblood bank of Baltimore. Founded during the Civil War to protect local valuables from the Union Army, it long exuded a Southern, wainscoted exclusivity.

Great railroad, tobacco and shipping fortunes came under its custody. Starched-shirt rectitude and a habit of deploying capital locally made up for the snootiness. For most of its history Mercantile probably wasn't helping Baltimore's poorer classes much directly, but its loans financed projects with jobs that were.

Few in Baltimore know it, but Mercantile is famous on Wall Street for being one of the most successful publicly traded banking companies. Under the leadership of H. Furlong Baldwin and then Ned Kelly, $1,000 sunk into Mercantile stock in 1990 is worth something like $8,000 today, counting reinvested dividends.

Take that, Bank of America and First Union. Mercantile avoided the serial-merger fad as exemplified by those two institutions and was better off for it.

Until now.

In an interview yesterday, Kelly said the bank needs to merge with PNC "in order to take the firm to the next level." But that's what bankers always say in these deals. Whether Mercantile's shareholders and customers will thrive under the PNC label is open to question.

Since he became Mercantile's CEO in 2001, Kelly, a former investment banker, has been extraordinarily sensitive to a perception that he came here to sell the bank, denying it more than once. The presumption grew after a rift opened between Kelly and Baldwin, who had been adamant about staying independent and who stayed as Mercantile's chairman for a while after giving up the CEO slot. Baldwin did not return my calls yesterday.

Now Kelly's selling the bank.

"I've been here 5 1/2 years. How long would I have to be here to rebut that presumption?" he said yesterday, suggesting that he could have sold it years ago if that had been his sole aim. "The bank doesn't belong to me; it belongs to the shareholders. It was awfully difficult to conclude that we would be better off on our own rather than in partnership" with PNC.

Kelly will make money on the deal, but as a shareholder, not with a cash golden parachute. In March he took the unusual and admirable step of forgoing the kind of "change of control" severance agreement that is standard for top executives. Mercantile says it was worth $6 million.

Although he will join PNC as vice chairman, Kelly has no prospective employment agreement with the merged organization. That, too, is highly unusual.

When Constellation Energy was negotiating a merger with FPL Group in December, Constellation executives seemed to spend as much time haggling over their own future emoluments as doing the transaction. Kelly was on Constellation's board at the time but quit a month after the deal was announced.

So the conflict of interest between the CEO and shareholders is lower here than in other mergers. But that doesn't guarantee a good deal for shareholders going forward; numerous banking mergers have disappointed.

And whatever the motive, the deal isn't good for Baltimore. If this be churlishness, make the most of it.


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