What is a mortgage bank worth?
That question - central to the expansion plans of many commercial banks - moved into the limelight this week as Fleet Financial Group hit a snag in buying back the publicly held shares of its mortgage unit.
Two independent directors of Fleet Mortgage Group balked at the plan, saying the offer of $20 per share was too low. They said the company is worth a much as $26 a share, based on an evaluation they commissioned from Morgan Stanley & Co.
The sharply differing evaluations underscore the difficulty of putting a price on a company that specializes in an inherently boom-or-bust business. Many banks have been grappling with this pricing issue as they consider whether to join the trend of acquiring mortgage banking companies.
In Fleet's case, the Providence, R.I., company wants to buy back the 19% of Fleet Mortgage's stock that it does not already own.
It based its bid partly on an evaluation by Salomon Brothers Inc. that held the mortgage unit to be worth between $16.50 and $19.50 a share. Montgomery Securities also weighed in with a fairness opinion that supported the offer.
One central area of dispute is the value of Fleet Mortgage's originations network. While Salomon used the most recent three months as a measure of originations, Morgan maintained that the industry is at a cyclical low and that the most recent three months of production are thus not a fair indication of value.
Home lending by mortgage banks has been sinking since the first quarter of 1994, driven down by rising rates and stiff competition from portfolio lenders.
"Right now there is a problem between buyers and sellers. Sellers are saying, price us on a normal level of originations, but buyers want prices to be based on the current depressed originations market," said Tom O'Donnell, an analyst at Smith Barney.
Mr. O'Donnell also noted that Fleet Financial took Fleet Mortgage public in 1992 for $23 a share, "and the company is arguably in better shape now."
Michael Corasaniti, an analyst with Alex. Brown & Sons, characterized the $20 figure as "manna from heaven."
The six other directors of Fleet Mortgage, all affiliated with Fleet Financial, recommended that shareholders accept the offer.
Investors apparently took the disagreement as an indication that the offer might be sweetened. Shares were changing hands at $20.25 at midday Tuesday.
Salomon and Morgan Stanley disagreed on several fronts, including tax and accounting issues.
Fleet Financial has commenced the tender offer and will buy back shares through Feb. 27. Fleet needs the public to tender 51% of the outstanding shares of the mortgage unit in order to gain control of 90% of the company and force the remaining holders to accept the $20 offer.
If Fleet does not get the needed shares, it could withdraw the offer.
However, two large institutional shareholders of Fleet Mortgage - Keefe Management and Boston Provident Partners - have both come out in support of the offer, making its success likely.
