Bank merger premiums jumped last year, driven by a scarcity of banks in attractive markets.
For the 10 largest deals unveiled in 1992, the average price was 1.98 times the book value of the bank being bought. That's up from 1.5 times book in 1991.
The total value of merger deals fell sharply last year, to $14.3 billion from $21.2 billion. But 1991 was dominated by blockbuster deals, such as Bank-America Corp.'s acquisition of Security Pacific Corp.
A Way to Enter Markets
Many of the big mergers nounced last year involved the acquisition of banks that provided the last major means of entry into their markets.
The year's biggest deal, Banc One Corp.'s acquisition of Valley National Corp., Phoenix, for $1.24 billion in stock, is a notable example. As the last major independent bank in Arizona, Valley commanded a premium of 2.2 times book value.
Most observers see that trend accelerating.
"There are really not that many banks in the $5 billion to $15 billion in assets category left around the country to be acquired now," said Frank Suozzo, analyst at S.G. Warburg & Co. "And wherever there are, as in Virginia or Alabama, you are going to see pressure mounting."
The fourth quarter was the most modest of the year in terms of price and volume. The largest deals carried an average premium of 1.6 times book value.
The total value of deals announced in the quarter fell to $2.9 billion, versus $3.6 billion in the comparable period last year.
Biggest Deal in Northwest
The largest deal announced in the fourth quarter was the planned purchase of Pacific First Financial Corp., Tacoma, Wash., by Washington Mutual Savings Bank, Seattle, for $663 million in cash, or 1.75 times book value.
From a premium point of view, the most expensive deal of the quarter was the proposed acquisition of Colorado National Bancshares, Denver, by First Bank System Inc., Minneapolis, for $528 million in stock.
At 2.1 times book value, it was the only transaction of the od whose price represented twice book value.
For 1992 as a whole, however, three of the top five deals and six of the top 10 carried price tags exceeding twice book value, generally viewed as the high watermark for bank mergers.
One Impetus for Mergers
Many on Wall Street think a major ongoing impetus for mergers will come from the need to find a way to increase earning assets.
With the economy and lending activity still sluggish, mergers represent one of the few sure-fire ways to build assets.
"A continued lack of loan demand will force banks to seek other means to post volume gains, and the system has the capital required to pick up the pace of consolidation," said Thomas H. Hanley, an analyst at First Boston Corp.
Prices Deemed Fair
And not everyone views the merger prices being paid today as excessive.
"I don't think prices have increased that much in relation to the stock market," said H. Rodgin Cohen, partner in the New York law firm of Sullivan & Cromwell. "The premiums have grown in terms of book value because acquirers and targets are both trading at higher multiples to book."
Mr. Suozzo of Warburg noted that the superregional banks, which are the main acquirers, are trading at about 1.9 times book on average. That is considerably higher than their valuation in mid-1986, during the initial interstate acquisition binge, he said.
"The improvements in value give the superregionals the ability to pay a higher price with less dilution" for their own share-holders, the analyst said.
But he quickly added that "dilution remains very much an issue" in bank mergers.
He noted that the premium level last year was influenced by the activity of Banc One. The Columbus, Ohio, superregional has one of the most highly valued bank stocks and is thus able to comfortably offer top dollar for other banks.
Besides the Valley National acquisition, the Ohio superregional struck two other deals that ranked among the top 10 last year: its purchase of Team Bancshares, Dallas, for $785 million in stock, or 2.4 times book, and of Key Centurion Bancshares, Charleston, W. Va., for $555 million in stock, or 1.75 times book.
