Stocks: Mergers Big and Small Push Banking Stocks Even Higher

Bank stocks rallied sharply on Monday's deluge of merger announcements.

Shares of Chemical Banking Corp. and Chase Manhattan Corp. jumped about 10% apiece as trading opened, on word that the New York money-centers had hammered out a $10 billion agreement over the weekend that could result in $1.5 billion in annual cost savings. Chase closed at $59.625, up $6.625 for the day. Chemical shares rose $5.625 to $60.

The market also embraced Integra Corp. (up $5.50 to $57.375), Fourth Financial Corp. (up $1.25 to $35.125), and SFFed Corp. (up $3.625 to $29.875) on their merger agreements with National City Corp., Boatmen's Bancshares, and First Nationwide Bank.

The glut of merger news pushed the S&P bank index up 2.80%, on a day when the broader S&P 500 index fell 0.16%.

Analysts said the relatively cheap pricing indicated that more deals could be closed soon. "This is not the last time we will have a busy Monday morning," said Michael K. Diana, an analyst at Bear, Stearns & Co., New York.

"Historically, deals have been done at about 15 times trailing earnings," he said. "We're now seeing about a multiple lower at 14 times trailing earnings. The lower the pricing stays, the more deals we will see happening. It's less dilutive to the buyers. They can do a deal and not see their stock get whacked in the market."

Attracting the most attention on Monday was the Chase-Chemical merger, a deal that had been rumored for months. "It's a good deal for both sides, even though the premium Chase is receiving only works out to about $3.50 a share in stock," said Raphael Soifer, who follows money-center banks at Brown Brothers Harriman & Co.

The attraction, analysts said, was the cost saving. Diane B. Glossman of Salomon Brothers Inc., who maintained "hold" ratings on both stocks, said the $1.5 billion in savings on an annual expense base of $9.5 billion is achievable. But she noted that shares in both companies have been run up in anticipation of the deal and that the big jump in share prices had wiped out much of the potential price gain. She set the 1996 target price for the merged company at $63.

Sanford C. Bernstein analyst Ronald I. Mandle, whose report in July outlined the case for the merger, said the exchange ratio was less beneficial to Chase shareholders than he expected. Under the agreement, Chase holders are due to receive 1.04 shares in the new company while Chemical shareholders get a 1-to-1 exchange. Mr. Mandle had predicted a 1.219 exchange ratio.

Mr. Mandle added, however, that "overall, Chase shareholders end up in a similar position because of the additional cost cutting." His estimate for cost savings had been $1.1 billion.

The deal also received kudos from the credit rating agencies.

"Rating agencies are focusing on diversity, capital strength, cost cutting, and a more efficient industry," said Ann Robinson, a bank bond analyst at Bear Stearns. "They are regarding this very positively."

Moody's Investors Service Inc. placed the ratings on the long-term debt of Chemical and Chase Manhattan under review for possible upgrade, citing the leading retail and middle-market position the new entity will have in New York and its strength in domestic credit cards, mortgage banking, and consumer finance.

About $20 billion of debt securities were affected.

Similarly, Thomson Bankwatch, an affiliate of the American Banker, and Duff & Phelps showed a positive inclination toward the merger, with D&P placing Chase on ratings watch and affirming Chemical's ratings.

The yields on bonds of both Chemical and Chase fell 3 to 4 basis points compared with Treasury securities of similar maturities, indicating strong investor confidence.

Standard & Poor's placed the ratings of Fourth Financial on watch with positive implications.

Because of the rating agencies' positive response to bank mergers, analysts have continued to recommend banks that carry BBB ratings, expecting takeovers by A-rated banks to result in upgrades.

Chase and Chemical indicated it will be several years before the combined banks could absorb another acquisition, but that didn't stop analysts from looking ahead for potential deals.

"What I am fascinated by is that you have potentially created another gigantic buyer of good regional banks," said John Mason, banking analyst at Interstate Johnson Lane in Atlanta. "Now there is someone besides a Citicorp or BankAmerica to buy a Barnett."

Barnett shares closed at $57.25, up $1.50.

Daniel Dunaief contributed to this report.

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