Era of Big Premiums To Market Value Appears to Be Fading

Once upon a time, shareholders in small and midsize banks could look forward to the day when a bigger bank would buy their institutions for significantly more than market price.

The planned sale of First Michigan Bank Corp. to Huntington Bancshares, announced Monday, illustrates how those days are coming to an end.

First Michigan stock fetched only a 2.4% buyout premium over its share price at the start of trading on Monday. After the merger was unveiled its shares dropped $1, possibly a sign of investor dissatisfaction with the deal, analysts said.

But analysts caution that as the banking industry continues to consolidate, investors had better get adjust to shrinking premiums.

"Several companies have been bought lately at premiums that didn't excite us," said Bradley S. vander Ploeg, bank analyst at Everen Securities in Chicago. "It's largely a function of banks trading at such high multiples."

As a result, "the days of owning a basket of midcap bank stocks and expecting 20% of them would be bought at 30% premium are gone," he said.

According to industry sources, average premiums for small banks have plummeted from around 50% over their market prices last fall to less than 20% this spring.

But at the same time, people who advise on bank mergers note that merger prices are constant or rising when compared with bank earnings or book value. (The price for First of Michigan is 3 times book and 18.8 times 1997 earnings.)

The key reasons for the apparent shrinkage in premiums are the shrinking number of banks (which means there are fewer bidding) and the near- universal jump in bank share prices.

Christopher Quackenbush, principal at Sandler O'Neill & Partners, New York, says premiums have dropped because small and midsize banks today are better run than those that sold before, and hence better at providing a payoff to shareholders without a merger.

"There's less premium to squeeze out, less 'pop' from a merger," he said. "That should be the goal of every bank: Get the 'pop' yourself."

However much better banks may be, takeover speculation still plays a role in bank stock prices.

First of Michigan's share price had risen 9.5% since April 1, while the Standard & Poor's bank index rose only 5.9%.

But because nearly every bank is a takeover target these days, speculative activity has become spread out, observers have noted.

This year takeover speculation picked up in January, said Joseph Roberto, analyst at Keefe, Bruyette & Woods Inc.

With investors positioning themselves over longer time frames for a takeover bonanza, failure to get a kick from the actual news of a deal isn't so strange.

Such phenomena "are becoming less unusual nowadays," said Michael T. Mayes, head of the financial institutions group at Advest Inc. "A merger announcement is almost academic now."

Investors who follow banks closely say it's a sign that the bank investing world is changing.

"People who invest for takeover reasons are going to be disappointed," said Daniel R. Perla, managing director at Harbor Capital Management, who invests in small banks and thrifts. "Expectations get ahead of reality."

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