Shares of T. Rowe Price have soared lately on rumors that Citicorp was trying to buy the Baltimore mutual fund company.
Shares rose as high as $40.25 - from $35.25 as recently as last week - before tumbling with the rest of the market Thursday to 38.75.
Business Week reported a New York money-center offered $2 billion for T. Rowe Price. The offer was rejected, the magazine said, and the money-center came back with a slightly higher offer.
Market sources identified the suitor as Citicorp. Representatives of both companies denied having talks.
Even after Thursday's decline, the mutual fund company's outstanding stock was worth about $2.2 billion, meaning the offer would have to be considerably higher to bring a premium to Price shareholders.
Observers noted Price stock has been trading for more than 20 times next year's projected earnings, and employees and members of the board own significant blocks of stock, making it an expensive target. The going rate for money managers is about 9.75 times pretax earnings, about the price Morgan Stanley paid for VanKampen/American Capital in June.
Still, a deal could be attractive for Citicorp. At the bank's annual meeting in April, Chairman John Reed said Citicorp hoped to buy a money management firm to expand its private banking operation.
Observers said such an acquisition could make sense. "Given Citi's size and leadership in the banking industry, it has certainly lagged on the mutual fund side," said Burton Greenwald, a mutual fund consultant in Philadelphia.
While investors speculated on the merits of this potential deal, they continued to sell off bank shares, as a weak bond market continued to take the wind out of financial stocks.
The S&P bank index fell 3%, while the S&P 500 fell 1.54%. In all, the S&P bank index has fallen more than 8% since its Nov. 29 peak.
Thomas McCandless, bank analyst at Natwest Securities, said the downturn doesn't surprise him. "Clients were telling us prices were getting to nosebleed levels," he said, adding that he wouldn't be shocked if bank stocks fall by another couple of percentage points by Christmas.
Despite the trend, Mr. McCandless remains fairly bullish on most regional banks in the long run. He recently bumped up his 1997 earnings estimate for PNC Bank Corp. to $3.40 per share from $3.35 and reiterated his "accumulate" rating. PNC fell $1, to $37.
The bond market's slump this week has been particularly hard on large banks, because their stocks are considered highly sensitive to changes in interest rates.
"I'm not sure that's fair, because banks don't heavily play the yield curve like they used to. Over the last 10 to 15 years, they've developed lots of techniques for managing risk," said Kenneth Puglisi, director of equity research at Sandler O'Neil & Partners.
