Bull Market Raised Prices to Forbidding Heights

An 18-month bull market in bank stocks created an impasse between would-be buyers and sellers of banks and thrifts.

Since January of last year, the American Banker index has soared from 730 to 1,030, a 54% increase mirroring the rise in the broader stock market.

Oddly, the increase, driven in part by merger mania, has helped cool off the M&A frenzy. Through July 24, $17.4 billion in bank deals have been announced this year, versus $25.7 billion in the same period last year, according to SNL Securities. SNL tallies only 162 deals through July 24 of this year, compared with 187 last year in the same period.

Analysts say the problem is that bank executives hoping to sell their companies remember the premiums paid in 1995 and are applying them to today's stock prices - which remain relatively high despite the recent selloff.

While the sellers now have high price expectations, buyers are suddenly wary of spending too much, because of credit quality concerns and new regulations, analysts say.

"Investment bankers and acquiring bank executives themselves are saying selling expectations are too high," said James Marks, of Hancock Institutional Equity Service. "And some of these same banks were willing to make these same transactions in the not too distant past."

Some recent deals have been only slightly below the expected price, encouraging sellers to stand firm on premiums, Mr. Marks added.

Analysts said buyers' attitudes have changed, however.

Mr. Marks pointed out that the most widely watched deal of the year - Wells Fargo Corp.'s purchase of First Interstate Bancorp. - "hasn't lived up to investors immediate expectations.

"I think banks are really starting to wonder or to question what the benefits of added size are," Mr. Marks said.

Analyst Raphael Soifer of Brown Brothers Harriman & Co. said there are several factors encouraging acquirers to look more carefully at price, particularly as the bull market continues.

He said the Securities and Exchange Commission's recent guidance on accounting for deals have diminished the appetite of some potential acquirers.

The SEC has imposed some restrictions on buying back stock by those that have used pooling-of-interest accounting, Mr. Soifer said, but "investors want banks to do share repurchases."

H. Rodgin Cohen, a partner at the law firm of Sullivan and Cromwell in New York, noted another reason the long bull market has slowed deals. Banks, he said, are "doing so well that there is little inclination to sell.

"There isn't a eagerness to buy or sell, so this is a weak market," he said. "There is an inevitable trend toward consolidation that will continue, but I don't think we will see it in the next several years."

But others said the impasse between buyers and sellers will probably be more short-lived than that.

"Historically, when expectations get out whack or stop coinciding with each other, it takes a few months to readjust for both sides," Mr. Soifer said.

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