Banks are again selling for twice book value, thanks to a surge in bank stock prices this year.
Analysts expect the increase in the value of acquirer's shares - the currency banks often use to buy other banks - to spark an increase in merger activity.
This would represent a reversal after a period of about six months in which acquisition prices had dropped to only 1.7 times book value, and merger volume has slipped accordingly as sellers waited for higher prices.
The rally has made twice-book value deals nondilutive again for many large banks, the analysts said. What's more, they said, twice-book represents an important psychological benchmark for sellers.
"A lot of boards of directors want twice book and remain steadfast to that number," said David Berry, director of research at Keefe, Bruyette & Woods Inc.
And Keefe is predicting a surge of deals in the third and fourth quarters of this year.
To be sure, by some measures the prices of target stocks have risen just as fast at the price of buyers', meaning that the selling shareholders are only slightly better compensated at the higher multiple.
In fact, on average, the median stock price rise for a group of acquisition candidates tracked by Keefe rose 15%, while the acquirers' median rose 14%, resulting in premiums that are only 4% more than in November.
And so far, there has been little impact due to higher prices. Last year there were on average 9.41 deals a month in which a bank with at least $200 million of assets was bought. This year only 6.2 sales of that size have occurred each month, according to Keefe.
Nonetheless, Keefe is telling clients that a resurgence in mergers and acquisitions may be imminent.
"With stock prices up, we could easily see more deal activity in the third and fourth quarters of this year," the firm said in a recent report titled "Say Hello Again to Twice Book Value."
"Sellers often have set numbers in mind, whether it be a set dollar amount or a multiple of book, and we think the twice-book- value threshold could very well be significant," the report added.
One of the biggest deals of the year could not have taken place without the stock rise, Mr. Berry said. U.S. Bancorp's $1.6 billion deal for West One Bancorp was worth 1.94 times book value at the time of the deal last month, but would have been worth only 1.71 times book value in November.
U.S. Bancorp's stock rose 18% in that time period, while West One barely rose at all until the days preceding the merger announcement.
Anthony Davis of Dean Witter Reynolds Inc. agrees that mergers will increase. Among banks he follows, buyers' stock has risen more than that of sellers. Superregionals are up 25% this year, and smaller regionals are up only 20%, he said.
Using 1996 earnings and no cost savings from a merger at twice book value, he said, earnings dilution right now is 2.5%. Under that scenario, at the peak of the bank stock selloff in October, dilution would have been 6%.
Given the advent of interstate banking in September, and the squeeze on smaller banks' earnings expected next year, Mr. Davis said he was confident that merger activity will rise.
