As Deal Rumors Swirl, the Key Question Is: Who Says?
Investors beware! Press reports of impending bank mergers or acquisitions - reports that often provoke big changes in stock prices - are often unfounded, especially when those reports rely on anonymous sources.
Several weeks ago, for example, shares of Shawmut National Corp. jumped 5.9% on trading of 1.2 million shares in a single day (the average was 238,000). The jump came within 24 hours of a cable news report that BankAmerica Corp. was "reviewing Shawmut National's financial condition and the two banking companies could be in talks about a possible transaction."
Reporter Dan Dorfman later said that he "picked up reports" that BankAmerica may be doing "analysis."
At the time, a representative of Hartford, Conn.-based Shawmut said there had been "no material events that require disclosure."
A BankAmerica representative was more forthcoming, saying, "There are too many speculative reports in the media about deals, and so we have decided as a matter of company policy not to comment on any rumors unless an actual deal is done."
Of course, no deal was done, and it appears now that the story was erroneous. Speculation now centers on a possible Shawmut deal with the Bank of Boston.
The Southeast Saga
Also last month, the stock of Southeast Banking Corp. plunged 42% in six days after the press reported that the company was negotiating for a government-assisted takeover.
On June 3 the CEO of Miami-based Southeast, Douglas Ebert, responded, "I will categorically say we have not had any discussions with the Federal Deposit Insurance Corp. about open-bank assistance." He expressed concern about the stock plunge, which he said "was heavily driven by silence on our part and [by] some unfair and inaccurate reporting."
At the time, it was no secret that Southeast was in trouble and a government-assisted takeover was a possibility, and that NCNB might be interested sometime in the future. But in May and early June there were no material events to drive the press reports - just speculation by anonymous sources.
In late June the expected event did occur. Southeast announced July 3 that "recently" - two or three weeks after Ebert's statement - it had "engaged in preliminary, exploratory discussion with the regulators concerning their involvement in an assisted transaction involving a merger or the sale of a significant amount of new equity."
Southeast also said it was continuing discussions "with certain third parties, including non-banking institutions, concerning possible business combinations."
Our survey shows that accurate information about impending mergers reaches the press and the marketplace only slightly more often than inaccurate information.
Shares of South Carolina National Corp. started rising two weeks before the June 24 announcement of its acquisition by Wachovia Corp., based in Winston-Salem, N.C.
Four days before the announcement, Wachovia acknowledged "in response to numerous inquiries" that negotiations were in progress, and speculation accelerated.
The announcements of the mergers of Chemical Banking Corp. with Manufacturers Hanover Corp. and of NCNB Corp. with C&S/Sovran Corp. pose interesting counterpoints, as does the announcement of negotiations between two Cleveland-based banking companies, National City Corp. and Ameritrust Corp.
The stock price and volume for Chemical and Hanover remained relatively normal during the 45 days of secret negotiations.
The price of Hanover shares actually declined in the 30 days before the announcement. But just before the announcement, the price of options for Hanover rose dramatically, from 50 cents to $1.0625.
There are reports of a formal Securities and Exchange Commission investigation of insider trading. However, there had been plenty of public clues to an impending merger.
NCNB and C&S/Sovran
Not long before the announcement, for example, Hanover's president, Thomas Johnson, made the case - mostly for operational efficiencies - for a within-the-city merger to meet the "bestial competition." Reports suggested that some Hanover managers wanted a deal with Chemical.
The price and volume of trading in NCNB and C&S/Sovran shares also remained relatively constant during the companies' secret talks. However, once the negotiations were made public, speculation drove the price up 35.29%.
At the other extreme, the prices of low-profile targets - such as Banks of Iowa, Des Moines; Landmark Bancshares Corp., St. Louis; and HeartFed Financial Corp., Auburn, Calif. - actually declined immediately before an announcement and rallied afterward.
The success that many of these companies had keeping negotiations out of the media before their announcement suggests a common-sense principle: The more serious the interest, the more interest the parties have in keeping negotiations confidential.
In fact, in a random survey of 20 recently completed mergers, only three received any pre-agreement publicity other than authorized statements.
An equally small percentage of unsourced rumors materialized as fact.
According to some journalism luminaries, including Walter Cronkite, the misuse of anonymous sources is the bane of the news business today. Financial reporting is especially sensitive, since so much money changes hands.
Some reporters advocate abolishing or at least sharply restricting the use of anonymous sources. But as Richard Harwood, ombudsman at the Washington Post, noted in a June 30 editorial, there is no general agreement:
"All but the mentally infirm are aware that we have no common standards in the news business," he wrote. "What is fit to print in one newspaper is taboo in another. To lie, cheat, or steal in pursuit of a story is acceptable in some locals and verboten in others. Inventing fictional |sources' may be permissible at the Daily Jupiter but cause for dismissal at the Daily Bugle. Whether we produce counterfeit pictures and quotations depends on whim and where we work."
Investors who want information more reliable than whim are well-advised to follow Mr. Harwood's advice on anonymously sourced rumors: "Plug your ears."
Mr. McRae is a contributing editor of Bank Mergers and Acquisitions, a newsletter published by SNL Securities. The data base and publishing firm, based in Charlottesville, Va., specializes in the banking and thrift industries. [Tabular Data Omitted]