The average price of buying a bank exceeded twice book value during October, a threshold that typically has signaled that deals are becoming too expensive.
During the month, an extraordinary seven transactions were unveiled at prices equal to more than two times the book value of the purchase target. That included the largest deal, the planned purchase of Mark Twain Bancshares by Mercantile Bancorp. at 2.8 times book.
In October, the average price tag of a bank merger was 204.1% of book value, according to data provided by SNL Securities. That is up from 199.1 in the third quarter and significantly above the 187.2 level during the fourth quarter a year ago.
Viewed as a multiple of the seller's earnings, merger prices are also up, to 17 times the selling bank's earnings in October versus only 15.9 times those profits in the busy fourth quarter last year.
Are deals becoming too pricey?
Few Wall Street watchers of the industry are willing to say so, including George M. Salem of Gerard Klauer Mattison & Co., who has previously suggested that deal prices will slide as independent banks become less valuable to bigger banks.
"Bank stocks have been running very strongly, up about 30% this year," he noted. "With the water level up by that much, it's not hard to expect the high tides to be higher" when it comes to mergers.
"A lot of what we've seen recently are in-market deals with big cost savings that should make those deals pay off," the analyst said. Besides the Mercantile-Mark Twain transaction in the St. Louis market, he referred to last week's announcement that Southern National Corp. will acquire United Carolina Bancshares for 2.85 times book.
Some analysts also think the NationsBank Corp. deal to buy Boatmen's Bancshares, announced Aug. 30, upped the ante by showing that a target bank's excess capital can help the buyer handle a deal price that once would have been regarded as too large.
If this banking industry version of the leveraged buyout becomes more common, along with mergers of equals, the number of deals seems likely to increase.
Mr. Salem also expects dealmaking to remain strong, but at the same time he continues to anticipate that deal values will decline, once the industry's revenues and related fundamentals flatten out.
"It is still my opinion that most of the larger banks either have full bellies or simply just no appetite" for acquisitions right now, he said last week.
"Wells Fargo, Chase Manhattan, First Chicago NBD, Citicorp and BankAmerica are all in that category," he noted. "NationsBank was the obvious exception all year, because it hadn't done that much before Boatmen's."
He said in a recent report that he believes that in the longer run the advantages of bigness will place smaller franchises at an increasing disadvantage. "As organizations become larger, their ability to grow increases, especially as smaller players succumb to the necessity of selling out, due to squeezed profits," he said.
"In short, the price of playing the game is rising and fewer bank holding companies can afford to keep pace," Mr. Salem said.
Several other analysts have offered similar views, notably J. Richard Fredericks of Montgomery Securities, San Francisco. He offered customers a roster of "Darwinian banks" likely to survive the evolution of the industry.
But the advantages of bigness in banking are now more apparent than ever, Mr. Salem noted. He especially cited three ways that scale provides a clear edge:
*Greater market capitalization affords larger banks the advantage in merger bidding because they can afford to pay more. And, other things being equal, size lessens or prevents dilution.
*As top managers are increasingly compensated with stock, large banks with attractive equity gain an edge in retaining talent and luring away first-rate managers from competitors.
*Large corporate customers prefer to do business with banks that have a large equity capital base, which demonstrates strength and lets the bank commit more capital to lending and underwriting.