The board at People's State Bank in East Berlin, Pa., was scheduled to vote on selling the bank Monday and the directors were concerned, a person familiar with the situation said.
That day, stock prices had plunged everywhere and although the shares of the bank's prospective partner were barely affected, the People's board wanted to be sure its decision to accept another bank's stock was the right one.
The board deliberated after the market closed and late into Monday night. On Tuesday morning, the bank announced it had agreed to sell to Community Banks Inc. of Millersburg, Pa., in an all-stock transaction valued at $55.9 million.
"I wouldn't overplay it because the deal had been in the works for a long time," said Community president Thomas Miller, "but the market was a concern."
The concerns of the People's board are expected to become more prevalent, at least in the short-term, as the recent volatility in bank stock prices causes some bank boards to reconsider their appetite for mergers that involve taking another company's shares, merger experts say.
Uncertainty about the market's direction could lead some smaller banks to start asking for cash instead of stock when they agree to sell, industry observers say.
But big bank deals are expected to remain stock swaps and, over the long haul, the reasons for any bank to take another company's stock remain compelling, despite the recent swings in shares prices, say people who advise banks on mergers.
"I think it might get slightly harder to do stock deals because of the volatility," said Lee Myerson, partner at the law firm of Simpson, Thacher & Bartlett, New York. "It make might it a harder decision emotionally."
A return to all-cash deals is unlikely except in perhaps the smallest mergers, advisers say. Investment bankers point out that banks still trade at a discount to the S&P 500, so there is room for their shares to continue to rise in price, which makes taking their stock attractive.
Small banks will still accept another bank's stock so long as prices don't fall to levels seen in the early 1990s, said David P. Lazar, managing director at Berwind Financial L.P., a Philadelphia investment bank. And the asset quality problems that caused bank stocks to suffer several years ago are not a concern now, he observed.
And, of course, the multibillion-dollar deals that bankers dream about nowadays are nearly impossible to pay for in cash without causing capital problems for the institution, advisers say.
"The big banks are in an end game," Mr. Myerson observed, "there are dreams to be fulfilled."
In addition to business strategy, accounting is expected to play a big role in the enduring popularity of all-stock mergers.
For one thing, stock swaps are tax-free.
And cash deals cannot be accounted for as poolings of interest, arguably the most pain-free way for banks to account for mergers.
Although accounting for mergers as poolings restricts banks from buying back their stock from shareholders, it enables banks to make acquisitions without incurring enormous amounts of goodwill, observed Lee Einbinder, a Lehman Brothers managing director.
Goodwill refers to the price paid above a target's book value. This intangible, noncash asset must be amortized over time.
And while that is happening, it detracts from reported earnings.
Although such banks as Wells Fargo & Co., NationsBank Corp., and several smaller banks and thrifts have lobbied Wall Street hard to accept their mergers that involved billions worth of goodwill, bankers seem to be voting with their feet toward transactions that don't involve so much.
According to SNL Securities, 77% of all mergers of $100 million or more through Oct. 3 have been accounted for as poolings.
That's an increase from 57% a year earlier, and a reversal of a downward trend that began in 1991.
While the specter of falling stock prices may have alarmed the board of Peoples State Bank, it probably wasn't unwelcome for executives and the board at First Southeast Financial Corp., a thrift company based in Anderson, S.C.
The thrift is considering terminating its agreement to sell to Carolina First Corp. because the buyer's stock price is too high. The companies agreed in July to a one-for-one stock swap, when Carolina's stock was valued at $14.75.
But the exchange ratio drops to 0.76 Carlina shares if the bank's share price rises to $19.0156, and First Southeast may terminate the agreement if Carolina's shares average above that price in the 10 days preceding a vote on the merger.
Carolina's share price fell Monday to $19.875, but on Wednesday rose to $21. Currently, the deal is worth $15.96 per share to First Southeast shareholders, who are scheduled to vote on the deal Nov. 18. First Southeast shares traded Wednesday at $16.875.
If shareholders approve the merger, First Southeast chief executive and president David C. Wakefield 3d said the board may overrule shareholders if they decide the merger price is not right. "We're keeping our options open," Mr. Wakefield said.
