A Down Market Could Hamper Stock Offering by New Chemical

The weak market for bank stocks is raising questions about whether Chemical Banking Corp. will have to scale back its plans to issue $1.25 billion in stock next month to help finance its acquisition of Manufacturers Hanover Corp.

Just two days ago, Bank of New York Co. was forced to withdraw its planned $150 million equity offering, underscoring how the market has turned against banks.

Chemical has committed to raise at least $550 million immediately after the merger, which is expected to close Dec. 31, but hopes to fetch more than twice as much.

But the prospects for a larger offering may be in doubt because Chemical's shares, which were trading at $22.625 late Tuesday, have taken a beating lately.

The price is off 12.6% since early November and 25% since August. The banks announced the merger on July 15.

"At [current prices] I'd be surprised to see them issue the whole amount," said Bruce Herring, a portfolio manager for Fidelity Investments, which currently owns about two million shares of the two companies.

Dilution Problem

Mr. Herring said the additional shares that would have to be issued at current prices for the bank to raise $1.25 billion would cause too much dilution in shareholder earnings.

If forced to curtail the offering, the merged company's drive to win at least a single-A credit rating could suffer a setback, analysts said.

The banks said Tuesday they have no plans to change the size of the offering, even though managers are clearly not happy with the performance of Chemical's shares. They said last week that there indeed was a price at which the full $1.25 billion would not be raised.

"We are convinced our stock is undervalued," Joseph Sponholz said last week. Mr. Sponholz is Chemical's chief financial officer and merger coordinator for the two institutions.

The banks held a joint analyst meeting last week in hopes of convincing investors that they are actually ahead of their cost cutting plans, not behind as they think the market believes.

They said projected cost savings of $650 million from the merger are "in the bag."

However, while some analysts reiterated their buy ratings on the stock, it has not rebounded.

Analysts emphasized that market conditions could improve as quickly as they deteriorated. "You have to remember that eight weeks ago [Chemical's] stock was at $28 a share," said James McDermott Jr., president of Keefe Bruyette & Woods Inc. "It could easily be back in that range eight weeks from now," about when the company is expected to issue.

Even at current levels, he said he believed the new Chemical would issue the full amount, adding that the price would likely rise when Chemical began marketing the issue in early January.

Deal Depends on Market

Still, unless overall market conditions improve, Chemical is likely to face an uphill battle.

The Dow Jones industrial average is off more than 100 points, or about 3%, since mid-November when the Senate passed a bill capping credit card interest rates. Although no law emerged, the action shook the markets, and they have not fully recovered. Bank stocks are off 6.8% in the period.

Meanwhile, there are increasing signs that the economic recovery is sputtering.

Goldman, Sachs & Co., Lehman Brothers, Merrill Lynch & Co., and Morgan Stanley & Co. are the lead managers. They have committed to raise at least $550 million, enough to cover the restructuring charge the new Chemical plans to take when the merger is signed.

Analysts said NCNB Corp. should have less of a problem with its planned $ 250 million stock offering, also expected early next year, because the bank is trying to raise much less.

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