New merger activity may have cooled off this year, but mergers appear to have been a factor in the big boost some bank stocks got this week.
Many analysts have attributed the stock rally early this week to favorable economic news, but eight of the 10 biggest gainers among banks Monday and Tuesday had merger news to report.
"The initial reaction to an acquisition is one of great questioning, until an investor reaches a comfort level," said Frank J. Barkocy of Josephthal, Lyon & Ross Inc. "In these situations, investors' mindset became positive as these acquisitions were completed and neared completion."
Among the 225 largest banks in market capitalization, Texas Regional Bancshares was the biggest gainer Monday and Tuesday. It rose on the strength of a recent stock issue, as well as anticipation of its buyouts of First State Bank and Trust and Border Bank, which closed Wednesday morning. It gained another 50 cents Wednesday, to close at $24.75.
Other banks that saw substantial rises Monday and Tuesday included Bank of Boston Corp., up 4.1% as its acquisition of BayBanks Inc. draws near; Fleet Financial Group, up 3.8% after the smooth completion of its purchase of National Westminster Bancorp. Shares of CoreStates Financial, which acquired Meridian Bancorp this year, were up 3.5%
In trading Wednesday, shares of Fleet Financial, which also completed its Shawmut National Corp. acquisition on May 1, closed at $44.625, up 62.5 cents. CoreStates shares closed at $40.75, up 12.5 cents.
City National Corp., Beverly Hills, Calif., which completed an acquisition and is considered a likely takeover candidate, also saw its stock climb in heavy trading. Shares in the "bank of the stars" rose 5% Monday and Tuesday. On Wednesday, however, the stock closed at $15.50, down 12.5 cents.
BayBanks saw its shares rise 3.5% Monday and Tuesday. The stock closed Wednesday at $108.75, down 75 cents.
The acquisitions that these companies are involved in appear positive to investors because they strengthen the business mix and bolster earnings streams, Mr. Barkocy said.
Mr. Barkocy added that some stocks had been depressed because of the specter of inflation but that, because of the "change in mindset, these stocks have been able to rebound strongly."
Fleet's acquisition of Shawmut has been particularly positive for its stock, said analyst Dennis F. Shea of Morgan Stanley & Co., who saw "significant earnings momentum."
Mr. Shea also said that a unique balance sheet reconfiguration related to Fleet's acquisition of National Westminster would yield considerable cost savings.
Mr. Shea's 1996 earnings estimate for Fleet was $4.10 a share, with $5.20 for 1997. "The cash return on the bank is very high," he said, "and that is also pushing the stock."
To be sure, mergers were not the only factor.
Sally Pope Davis of Goldman, Sachs & Co. noted that the banks with large gains also had low price-earnings ratios. "They were the least expensive in the industry. A lot of investors are looking at that, and when the market started to move," investors "made their move."
But merger potential was a consideration in Lehman Brothers Inc.'s initial "buy" ratings Wednesday on Boatmen's Bancshares and Crestar Financial Corp.
Boatmen's shares closed at $39.875, up 12.5 cents; and Crestar shares closed at $56, up 25 cents.
Analyst Michael L. Mayo said the banks had moved into the top 10 on Lehman's bank valuation model.
"Both of the banks are vulnerable for takeover," he said, "and our thesis is that the threat of acquisition should help to encourage action in shareholders' interest, such as generating improved efficiencies."
