Have Acquirers Been Paying Too Much for New Customers?

When one bank buys another, one of the first things investors want to know is how big a premium over the market price of its stock the target is receiving.

A big premium means an instant bonanza for many shareholders. The chance to take part in this payday is big reason so many have flocked to bank stocks.

But if premiums benefit shareholders of the target bank, what does the acquirer get?

Premiums essentially mean the buyer is paying big for access to households it didn't reach before, observes John B. Moore, a bank analyst at Morgan Keegan & Co., a Memphis brokerage. And viewed through this prism, premiums that banks are paying per household these days have reached eye- popping levels.

According to a study of six recent major southeastern bank mergers co- authored by Mr. Moore, Christopher T. Kelley, and Letitia M. Thompson, the median premium per customer household at the target companies was $9,549.

"The results are, frankly, somewhat surprising," the analysts wrote, "and lead one to wonder how long current premiums can continue to be justified."

Of course, a median means that half agreed to pay less and half more- some a lot more.

Mr. Moore calculated the premiums using the agreed upon stock-swap terms and the stock prices the day before the deals were announced.

On that basis NationsBank Corp., for example, agreed to a premium of $11,047 for every household that has an account at Barnett Banks Inc.

Mr. Moore said that could be justified because Florida, Barnett's home, is an affluent state. He estimates that the income of the average Barnett household is $33,735.

By comparison, the $29,547 average household income of customers served by Deposit Guaranty Corp. makes that much-maligned merger with First American Corp. look even more overpriced. First American, which has agreed to buy Deposit Guaranty, would pay a $10,442 premium for every customer served by the Jackson, Miss., bank.

Morgan Keegan's calculations are based on statistics provided by the Bureau of Labor Statistics and SNL Securities. From the government's data on household income and SNL Securities' on bank market share, the analysts were able to calculate the number of households the banks serve, and the wealth of these households.

Though it obviously helps to buy banks from regions with high levels of household income, disciplined acquirers can still find value buying in areas where people aren't so affluent.

Union Planters Corp., Memphis, for example, bought Magna Bancorp, a Hattiesburg, Miss.-based thrift whose households have an estimated income of $28,241-less than that of Deposit Guaranty.

Yet Union Planters agreed to pay a premium per household of only $5,909- about half as much as First American in its Mississippi merger.

"It shows that Union Planters is disciplined," Mr. Moore said in a telephone interview.

But the best deal of all recent bank mergers may be Wachovia Corp.'s acquisition last year of Central Fidelity Banks Inc. of Richmond, Va.

Wachovia agreed to a modest premium of just $5,336 for every Central Fidelity household. But the $40,613 average income of those households is the highest of the mergers and acquisitions that Mr. Moore studied.

To Mr. Moore, the numbers are further evidence of how size is not nearly as important as profitability.

"When I read an annual report and the first thing the company says is what a profitable year they had, I keep reading," the veteran bank analyst said. "When they talk about how much they grew in the past year, I start wondering."

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