Hedge Fund Hotshot Banks on M&A Wave

The frothy bank M&A market has got one hedge fund manager, Cutler Capital Management, rooting for more deals in the sector.

The Worcester, Mass.-based investment firm, which has $250 million in assets under management between two hedge funds and individual accounts, has scooped up positions in what it sees as the most likely of acquisition targets -- community banks.

Like many observers, Cutler Capital is predicting that intense competition, deteriorating credit quality and pressure on interest income will force many banks to consider selling in the coming months.

U.S. bank acquisitions, including commercial and investment banks, thrifts and credit card firms, are on the rise already. Four months into 2007, there have been 106 deals worth $70.7 billion. That puts the sector's M&A pace on track to beat last year's full-year tally of $119.2 billion, according to Dealogic data.

"The volume of deals will increase in 2007," says Dave Grenier, president of Cutler Capital and a former banker at Fleet Financial. "Smaller institutions are coming to the realization that it's very difficult to compete and they're choosing to make a deal."

Cutler Capital is certainly not the only observer expecting more M&A among banks.

"We heard for months now that M&A chatter amongst CEOs is picking up," says Peter Winter, a bank analyst at BMO Capital Markets. "What we're starting to hear is that it is starting to turn more serious because of these earnings headwinds. Right now there doesn't seem to be much light at the end of the tunnel."