Fifth Third Bancorp on Tuesday abandoned its quest to buy Star Banc Corp. after its cross-town Cincinnati rival rejected a sweetened buyout offer valued at $42 a share, or roughly 2.2 times book value.
The sudden turn of events sparked a selloff of Star Banc common shares, which fell by $5.50, or 14.7%, to close at $32. The stock was trading at $28.50 when Fifth Third made an unsolicited offer of $38 to $40 a share in mid-May.
Oliver Waddell, Star Banc's chairman and chief executive, said he and the board of directors firmly believe "that Fifth Third's offer doesn't reflect the values inherent in Star, or the future prospects of the company."
Analysts and investors were harshly critical of Mr. Waddell's decision, saying there is no way the executive can reward his own shareholders at the level Fifth Third had proposed. "A couple of our clients are absolutely livid," said Vere Gaynor, president of Bahl & Gaynor, a Cincinnati investment firm that controls 1% of Star Banc's stock.
George A. Schaefer Jr., chairman and chief executive of Fifth Third, said in an interview that the financial terms of the offer were not the main obstacle in the merger talks. "They wanted to stay independent, and we just couldn't get around that," he said.
Mr. Schaefer said Fifth Third, with $8.8 billion in assets, would set its sights on other acquisitions in Ohio, Kentucky and Indiana, the three states where the bank currently operates. "There still is plenty of room to grow," he said.
Although there has been talk that some investor were prepared to sue Star Banc if it did not accept the offer, legal experts said there may not be sufficient grounds to do so.
James Brennan, a financial institutions lawyer at Chicago-based Barack, Ferrazzano, Kirschbaum & Perelman, declined to comment specifically on Star Banc but said courts generally do not take the view that a company has to sell just because an offer has been made.
Mr. Brennan said the whole issue turns on management's independent plans to enhance shareholder values.
"A couple of our
clients are
absolutely livid."
Though refraining from saying how he would raise shareholder returns, Star Banc's Mr. Waddell held out a Value Line survey predicting his banking company' stock would "show gains of from 20% to 90% over the next three to five years."
Needed Appreciation
However, a far greater amount of appreciation may be necessary if Mr. Waddell is to match the $42-a-share offer Fifth Third was forced to withdraw. Assuming a 10% annual cost of capital, Star Banc shares would need to reach $68 a share at the end of five years just to match on a discounted basis Fifth Third's proposal.
McDonald & Co. analyst Fred Cummings was one of several analysts who said Tuesday that Star Banc's stock currently is worth no more than $29 a share exclusive of any buyout premium.
If the stock falls to that level, Mr. Waddell would need to engineer a 133% improvement in Star Banc's common stock trading value over the next five years if he is merely to pull even with Fifth Third's offer.
Star Banc spokesman Steven Dale declined to comment on the appreciation potential of the company's stock, but said, "companies are worth more than just the price of their stock."
The fact that Mr. Waddell seems eager to tackle the task sends a powerful message that mergers ultimately represent "a union of people, not of banks," said Anthony Polini, a banking analyst with A.G. Edwards & Sons, St. Louis.
Mr. Waddell has raised the issue of whether Fifth Third's stock stands to appreciate as much as Star Banc's shares in coming years.
With Fifth Third shares trading at whopping 2.7 times book value, "the issue is overvalued by objective measures for bank shares," Mr. Waddell said in a letter to shareholders.
But even that view was disputed by analysts, who said Fifth Third has outperformed every banking company in the nation in terms of share appreciation in recent years. Indeed, Fifth Third this spring captured first place in an American Banker survey of financial fitness to make acquisitions.
Mr. Waddell said the $6.6 billion-asset Star Banc would pursue its own expansion plans, noting that the company recently acquired 28 branches in Cleveland and $1 billion of deposits from Society Corp.
Star Banc is a healthy banking company that during the first quarter posted annualized returns of 1.08% on assets and 12.62% on equity. But the company is not in the same league as Fifth Third, which posted annualized returns of 1.65% on assets and 16.2% on equity.
Because of the potential for cost savings stemming from in-market consolidations and the high trading multiple of Fifth Third's stock, it was widely thought that no other banking company could match Fifth Third's offer for Star Banc.
Robert B. Cox in Chicago contributed to this article.
