Chemical Bank Suffers As Mergermania Cools

It looks like the bloom is off the rose for some of the merger deals struck this summer.

Stock prices of Chemical Banking Corp., BankAmerica Corp., and NCNB Corp. have dropped nearly 20% since August. And Chemical, whose merger plans are furthest along, is losing steam the fastest.

Even a solid third-quarter earnings report did not rescue Chemical's shares from the doldrums as investors cool on the bank's upcoming merger with Manufacturers Hanover Corp.

Woes Began in Mid-August

Its stock decline began in August and gained momentum in mid-October, when the bank's choices for top executives and managers had become clear. Since Oct. 18, Chemical's shares have fallen 10.5%, to $22.375 on Friday.

That drop is greater than that of the American Banker stock index, which has dipped about 2% in the comparable period. Still, the plunge in value has not shaken Chemical's management.

"I'm not pleased to see the stock price going down," said Joseph G. Sponholz, chief financial officer of Chemical. "When the market understands what we are doing, it will resolve itself.

"We are convinced our stock is undervalued, particularly in terms of this merger," he added.

The stock market has treated other merger partners even worse. Share prices of BankAmerica and NCNB are each down about 20% over the past four months, compared with 17% for Chemical.

A sharp price decline is the penalty, analysts said, for banks that enjoyed a runup on the strength of merger-related expectations.

Investors enthusiastically greeted the wave of merger announcements over the summer by Chemical, BankAmerica, and NCNB. The news sparkled a rally in bank stocks overall, and sent those companies' shares soaring.

Investors have since taken a harsher look.

In the case of Chemical, investors have criticized the bank for not moving quickly enough to cut costs. The bank has apparently avoided making tough personnel decisions about its top managers. Rather than a single department head, many have co-chiefs, one from each bank. In other business areas, particularly retail, the bank is creating several layers of senior management.

"There are indications that the cost savings will come more slowly than people hoped for," said Charles Peabody, an analyst at Kidder, Peabody & Co.

Chemical plans to hold a conference for stock analysts on Tuesday to discuss its progress on cost-cutting.

Mr. Sponholz said Chemical has done well so far on cutting costs, but the message is not reaching investors. For example, attrition has reduced the head count of the two banks by 950 people. The bank plans to cut 6,000 employees.

Dilution Feared

But investors have another concern related to cost-cutting. The new Chemical Banking Corp. plans to raise $1.25 billion in equity in January. The new shares will dilute the stock price until the cost savings kick in and improve earnings. If the banking company falls behind in its planned expense reduction of $650 million, the additional equity will dampen the per-share price.

"We aren't going to see the benefits from the merger until the third quarter of 1992," said Mr. Peabody, whose firm told clients to sell the stock in August.

Whether the stocks of NCNB of BankAmerica are suffering for the same reasons is not clear. NCNB has said it may raise $250 million as part of its merger with C&S/Sovran Corp.

BankAmerica has not made public any plans to raise money for Security Pacific Corp.

Analysts still believe Chemical's merger has promise. Alison A. Deans of Smith Barney, Harris Upham & Co. bumped her hold recommendation for the stock to a buy on Friday.

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