The record book was rewritten last year in the consolidation of the nation's banking industry.
Commercial banks and thrift institutions agreed to spend an unprecedented $95 billion in merger deals during 1997 - or 109% more than in 1996.
That figure reflects the startling rise in acquisition premiums seen since last summer. Buyers typically paid more than twice the book value and 18 times the earnings of the company being acquired.
Putting things in perspective, the value of the top five deals announced last year was $55.8 billion. That was over $10 billion more than the $45.5 billion aggregate value of all banking and thrift deals of 1996.
Indeed, the two largest transactions unveiled last year, First Union Corp.'s $17.1 billion deal for CoreStates Financial Corp. and NationsBank Corp.'s $15.5 billion agreement with Barnett Banks Inc., occurred at prices that could not have been imagined a year ago.
"If things continued at that pace we would obviously finish consolidating the industry in about three years," noted James J. McDermott Jr., chairman and chief executive of Keefe, Bruyette & Woods Inc., New York.
In fact, a quieter period is probably in store, he said, if only because several of the largest and most aggressive banking acquirers are in a digestive phase after large deals. But he emphasized that this should be regarded as only an interlude.
"There is nothing out there to suggest, not even the recent interruption in rising bank stock prices, that consolidation of the industry is not going to go forward," he said.
But if there are fewer large deals than last year, the vacuum could well be filled by smaller transactions as regional banks seek to sell out in the face of high technology refitting costs associated with year-2000 computer problems.
Waves of large deals like last year's can also lead to a ripple effect of many smaller deals, analysts have noted.
"Since the Wells Fargo & Co. takeover of First Interstate in early 1996, the California banking sector has seen over $25.6 billion in merger and acquisition activity," analysts at Lehman Brothers pointed out. The action has been almost equally divided between banks and thrifts.
Some, however, think the eye-popping prices paid last year will prove to be a drag on consolidation activity.
First Union agreed to pay 5.3 times book value and 20.2 times expected 1998 earnings for CoreStates, according to data from Keefe Bruyette. NationsBank will pay four times book and 20.6 times projected earnings for Barnett. First Union also agreed to pay about 3.5 times book and 21.4 times expected earnings for Signet Banking Corp.
And after the Barnett and CoreStates deals, First American Corp., Nashville, agreed in December to pay 4.2 times book value and 25.3 times expected earnings for Deposit Guaranty Corp., Jackson, Miss.
"Consolidation in the banking industry has a long way to go, which is good news for shareholders of the acquirees," said analyst Thomas K. Brown of Donaldson Lufkin & Jenrette Securities Corp., New York.
He thinks the industry entered a "long wave" of consolidation in 1985 after the Supreme Court ratified state laws permitting interstate bank mergers. Mergers will be "a dominant theme" for the industry for another 10 to 15 years.
But in the current period, he said, "we worry about a slowdown in the pace of large bank consolidation, due to potential earnings shortfalls at some companies that announced large acquisitions in 1997 at excessive prices."
At the same time, shares of potential acquirees left are already trading at high price-earnings multiples. In addition, he said, the acquirers face the difficulty of carrying out data systems consolidations simultaneously with becoming year-2000 compliant.
Nancy A. Bush, associate research director and regional bank analyst at Brown Brothers, Harriman & Co., New York, expects a flurry of deals related to the year-2000 issue after fourth-quarter earnings announcements are finished.
"We can only hope that pricing and dilution parameters will not expand further from their already astronomical levels and that due diligence, particularly as it relates to credit quality and operational issues, does not get short shrift in the frenzy," she said.
Analysts at Fox-Pitt, Kelton Inc., New York, also expect the year-2000 deadline to cause a pickup in merger activity soon. "The urgency will be to get deals done early enough in 1998 to avoid having merger integration efforts overlap with solving the year-2000 challenge," they said.
"It generally takes nine to 15 months to fully integrate systems technology in a transaction, so we expect few large deals will be announced after yearend 1998," they said. "The more conservative acquirers may opt out of large deals as early as June 1998 to avoid this problem."
As a result, they said, some large acquisitions may be unveiled soon, but then such dealmaking would come to a standstill in 1999, "before resuming in the new millenium."
