Activist Investor: "I'm Not Anti-Merger," Says Torn Brown. but the Outspoken Fund Manager Believes Most Bank Deals Don't Work. He Explains Why, and Also Predicts Some Surprises Ahead for Retail Deposits

Anyone who hoped Tom Brown would shut up and go away after leaving Donaldson, Lufkin & Jenrette six years ago, was disappointed. After a short stint with Julian Robertson s Tiger Management hedge fund, he literally put his (and a few other people's) money where his mouth was by forming his own financial services hedge fund, Second Curve Capital, in 2000. to the point, however, he and his staff also launched bankstocks.com, a combination soapbox, promotion tool, and public forum on pretty much anything to do with financial services and business generally. While various Second Curve staffers and outsiders contribute to the site, Brown's presence-and opinions-are very much in evidence. And unlike Alan Greenspan, Brown's opinions are front-and-center clear. To those who admire him, his candor is refreshing in a business world where so little of what is said is clear or even meant. importantly, he's got a sharp analytical mind, and an eye for seeing the forest for the trees. In early February ABA Banking Journal visited with Brown in his midtown Manhattan office and discussed a variety of issues relating to banking, with a heavy emphasis on mergers and acquisitions. The results of that session are distilled here in print. You can find more of the interview than would fit here on our website, ababj.com, under the heading, More of Tom Brown. By the way, we asked Brown how his fund has performed. Since early 2000, it's up 130%. Over that same period, he noted, the average financial stock was up 22% and the market overall down 18%. Says Brown, For years I just pontificated, and now I back up what I say with my investments. So far it's proving pretty good. The fund is invested mainly long term. The few shorts that aren't index related tend to be companies where Brown thinks the business model is broken and thus has upside potential. On the long side he tries to identify and invest in just a few companies that are big winners. The results speak for themselves. With those credentials in mind, here are some of Tom Brown's pontifications. Whether you agree with them or not, they won't fail to stimulate your thinking. ANOTHER MERGER WAVE Bank consolidation seems to feed on itself. Why is that? The main reason it feeds on itself is really not valid. And that is the natural human tendency to want to be with the group. If somebody else is making an acquisition and trying to grow that way, managements become instantly reflective on, 'shouldn't we be doing the same thing?' It's unfortunate, but I think that's the main reason why M&A comes in waves. So how does a board and management not get caught up in that? Wells Fargo probably is the best at it. They have a set plan-they grow internally and through acquisitions. If an acquisition can't meet their financial criteria they don't do it. They don't go hot and cold. Like a disciplined investor, a good CEO and a good board have to maintain their discipline in thinking about M&A as opposed to turning the faucet on and off. Which is not to say there are not opportunistic moves that come up, correct? Yes, I so often criticize mergers and acquisitions that I'm viewed as being anti-merger. It's not that I think mergers and acquisitions can't add value to the acquiring company's shareholders, it's just that they haven't in the majority of cases. Before you go into a deal, recognize that two-thirds to three-quarters of them destroy value. And then ask, why is this transaction going to work when the majority don't? You've said many times that size is not a determinant in banking success. If that's true, then what is the logical rationale for consolidation? Both Jamie Dimon [CEO of Bank One] and Ken Lewis [CEO of Bank of America] believe there are true economies of scale in banking. They both talk about the pressure they can put on their suppliers. …