The prevailing view of bank mergers is that they are good for shareholder value, but Donaldson Lufkin & Jenrette analyst Thomas K. Brown disputed that at a recent banking conference, saying most of the deals hurt shareholders.
Speaking at a Bank Administration Institute conference last week, Mr. Brown, noted for his strong opinions on bank mergers, singled out six banks that have been frequent dealmakers whose stock prices have lagged the industry.
The six banks - PNC Bank Corp, Fleet Financial Group, First Union Corp., Amsouth Bancorp., First of America Bancorp, and National City Corp. - have frequently diluted their shareholder value, he said.
Among the 40 banks he covers, Mr. Brown calculated an average 302% stock price increase from yearend 1987 through yearend 1995. In contrast, the average price gain for the six banks he singled out was only 146%.
Mr. Brown, who plans to publish his results later this year as a critical study of mergers, also calculated the average monthly percentage price change of each bank.
First Union, which Mr. Brown has criticized recently for its First Fidelity acquisition, had a total 1987-1995 stock return of 209%. Investors "did 50% better owning the nondilutive acquirers than (they) did owning First Union stock," he said.
Mr. Brown also said that he didn't "think Fleet was going to be around five years from now because they have not provided their shareholders with an adequate rate of return on their investment."
Based on his calculations, Fleet was one of the worst performers, with a seven-year price gain of 67.7%
The gain over the same period for PNC stock was 55.7%; First of America, 116.2%; Amsouth, 141.6% and National City, 142.1%.
James Mahoney, senior vice president of communications for Fleet, said he has not seen Mr. Brown's analysis, but added "the strategy that Fleet has pursued over the last several years, in our view, will provide the greatest shareholder value over the next several years."
Kohlberg, Kravis & Roberts, Fleet's largest shareholder with 7% ownership, declined to comment on the merger strategy.
Analyst Livia Asher of Merrill Lynch & Co., also defended the company. Ms. Asher, who reiterated her "buy" recommendation on May 21, said that Fleet's recent National Westminster acquisition "definitely was not dilutive." The Shawmut National Corp. merger last year was a "neutral transaction," she said.
Ms. Asher conceded that Fleet's share performance has lagged in the last couple of years, but she said the company is poised to do better.
"Fleet will earn 19% on equity and they have a good shot at buying back some of their shares. There is a lot of catching up to do, but that is why we're recommending it."
Ms. Asher added that during a Merrill Lynch-sponsored "road show" for investors, Fleet chairman Terrence Murray assured investors that he would not pursue a large bank deal between 1996 and 1997.
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On Friday, Alex. Brown & Sons Inc. initiated coverage of Wells Fargo & Co. with a "strong buy," based on the bank's "prospect for superior earnings growth over the next several years." Analyst Joseph Morford said the 12-month target price is $315 on a 11.5 multiple; his cash earnings estimate is $27.25 per share for 1997. Well Fargo & Co. shares closed at tk, up tktk.
Bear Stearns & Co. upgraded Hubco Inc. also on Friday to "attractive" from "neutral." Hubco shares surged on heavy volume, closing tk, up tktktk.
