Shareholders of banks being acquired get better deals when bank stock prices are high, right?
Wrong, according to an industry consultant who has made a careful study of prices paid for banks in acquisitions compared to changes in bank stock price values during the recent bull market.
"Bank stock prices have increased on a relative basis nearly 75% since 1994, while deal pricing has increased only 15-20%," said Richard F. Maroney, executive vice president and a principal of Austin Associates, Toledo.
Forget today's "eye-popping multiples," he advised. Shareholders of selling banks "get more economic value in times when the overall bank stock market is down."
His calculations reveal that a powerful buyer's market is now under way and suggest that banks mulling whether to sell out in the near future may want to weigh the possibility of biding their time.
Austin Associates primarily counsels community banks in the Midwest and Southeast, including Florida, about mergers and acquisitions, strategic planning, and financial management.
On the surface, bank takeover premiums currently look rich, Mr. Maroney conceded. Overall, deal prices last year spiraled to 195% of the selling bank's book value and to 16.6 times earnings from just 171% of book and 14.7 times earnings in 1993.
Recent quarterly trends are even more impressive. "Merger pricing in the last quarter of 1996 reached 209% of book value for (selling) banks and 163% for thrift institutions," he said.
Notably, despite some big prices paid for selected thrift institutions last year, banks continue to command prices 25% to 30% higher than thrifts.
"Perhaps most striking of the statistics is the break in deal pricing in 1995 and 1996 outside of an historically tight range of 14 to 15 times earnings," Mr. Maroney said. In last year's fourth quarter, deal prices for both banks and thrifts were in the range of 17 times earnings.
But the statistics are both alluring and highly misleading, Mr. Maroney cautioned.
The industry consultant used the stock price multiples of the nation's 50 largest banks since 1994 as a proxy of the stock values of acquiring companies. He compared those to deal prices to measure the relative year- to-year level of merger pricing.
His sobering conclusion: Shareholders of selling banks last year were actually paid 20-25% less than those whose banks sold out in 1994, when bank stock prices were lower.
Here is why. Based on 1994 stock price-to-earnings levels, the ratio of takeover prices paid shareholders of selling banks to the stock prices of buying banks was 1.47.
"In other words," he said, "acquirers were paying a 47% premium on an earnings basis above their own stocks' price-to-earnings level. By 1996, this ratio had declined to 1.10, or a 10% premium.
Mr. Maroney stressed that roughly 75% of all bank merger deals comprise some form of stock exchange and that shareholders of the target bank are not really "selling out." On the contrary, they are making a major investment in the acquiring bank.
But because bank stock prices have risen so much more than takeover prices during recent years, buying banks are able to pay for target banks with fewer actual shares.
The bottom line is that, despite higher takeover prices (in dollars), seller-bank shareholders are receiving a relatively smaller ownership stake in the surviving company. That means sellers are collecting dividends on fewer shares.
The impact is significant in light of the fact that most sellers hold their stock for a minimum of two years after a transaction, he pointed out.
"The concept of getting these high values looks good on the surface," Mr. Maroney acknowledged during an interview last week. "But what people holding onto the stock should truly be looking for is the amount of value they are getting in the shares they are receiving, their ownership position in the resulting company."
Mr. Maroney, who has been a banking industry consultant since 1984, put his concerns in a wider context.
"Bank earnings are at all-time highs," he noted. "To say, 'This can continue for two or three more years,' may be shortsighted."
If bank stocks retreat from their current high levels to more normal valuations in reaction to a changed earnings outlook, holders of smaller stakes will feel the impact.
"Some analysts are touting bank stocks as a new growth sector warranting price multiples reflective of high-growth industries," he said. "It's easy to get caught up in such frenzy when viewing income levels of the banking industry over the past few years."
But while nontraditional revenue sources are becoming more prevalent, he said, "earnings growth levels may not be sufficient to support current price multiples in the range of 15 times earnings and 240% of book value."
Mr. Maroney said he did not mean to be pessimistic about the industry's future but only intended "to alert chief executive officers, board members, and shareholders to not lose sight of the fundamental factors when seeing astronomical deal values."
