The seller's market isn't what it used to be.
National Commerce Bancorp. this week pulled the plug on its plans to sell, after nearly two months of looking for a suitor willing to pay its asking price.
Though National Commerce is considered an especially valuable company-it trades at a high 24.2 times next year's projected earnings-only three companies decided they could afford to make bids, and two of the three chose other deals.
It wasn't so long ago that strong banks in attractive markets could announce they were for sale and attract six or seven bidders. National Commerce's failed auction is a sign that consolidation is slowing, said Gerard Cassidy, bank analyst at Tucker Anthony.
"The pace of deals is slowing, because buyers don't want to pay big prices while they work on their computer systems" to prepare for 2000, he said. "Combine that with the falling market for bank stocks, and I think banks that don't have to sell because of earnings problems are going to wait until prices get better."
One investment banker, who asked to remain anonymous, put it this way: "If you're a regional bank and your stock trades at 23 times earnings, you're not going to get a 30% premium in this market."
Though few banks trade at National Commerce's level-especially after this summer's market slump-regional banks considered ripe takeover targets continue to trade at significantly higher multiples than companies considered potential buyers.
Furthermore, companies that have paid 30% premiums over market price for acquisitions, such NationsBank Corp., First Union Corp., and Banc One Corp., are all occupied with other mergers these days.
Investment bankers familiar with National Commerce's auction say it was clear early on that the Memphis banking company would be unable to fetch much of a premium in a sale.
The company traded at 27 times estimated earnings and about six times book value just before it was reported that the company was considering a sale.
At these levels, only three companies-Fifth Third Bancorp., Star Banc Corp., and SunTrust Banks Inc.-could afford National Commerce without seriously hurting their earnings per share.
SunTrust, for example, would have had to issue $2 billion worth of stock, according to a person familiar with the situation. Considering that buying National Commerce could have cost up to $3 billion, SunTrust executives decided the deal would prove an accounting headache they didn't need.
SunTrust and Star Banc cut more favorable deals with Crestar Financial Corp. and Firstar Corp., respectively, leaving only Fifth Third in the bidding.
Knowing it was the only buyer left, Fifth Third refused to pay market value for National Commerce, said people familiar with the situations. "There's a reason Fifth Third trades at 30 times earnings," said another investment banker. "They're very careful about getting into huge-premium deals."
This shortage of buyers not only thwarted National Commerce's plans, it has quieted the merger front since February, April's blockbuster mergers- of-equals notwithstanding.
Investment bankers, who make their livings arranging deals, say one deal is all it would take to trigger another wave. They suggest that a deal could have been cut if there was any urgency to do so on National Commerce's part.
Christopher T. Kelley, bank analyst at Morgan Keegan & Co., Memphis, said National Commerce's earnings "haven't disappointed in more than a decade." The company's executives and directors own 21.1% of its stock, according to a regulatory filing, and Mr. Kelley estimated that another one-third is owned by Memphis-area residents who seldom sell it.
The National Commerce experience may also remind merger-manic investors that the art of the deal is a delicate one.
"Although it remains true that sellers determine the timing of a sale," said Gerard L. Smith, managing director at Donaldson, Lufkin & Jenrette, "it remains equally true that prices are determined by the buyer."
