Chemical, Hanover Shares Lose Pizzazz After Surge
Three weeks after plans were unwrapped for the biggest banking merger in American history, shares of Chemical Banking Corp. and Manufacturers Hanover Corp. have slipped into a midsummer torpor.
"Merging is what these two banks needed to do and what everybody told them to do. Then after they say they're doing it, nearly everybody falls asleep," Observed Mark Lynch, a bank analyst for Bear, Stearns & Co.
In a Rut
Hanover's stock was unchanged for three straight days last week at $28.50 a share. Monday afternoon, the shares were off 50 cents, to $28.
Chemical stock moved only slightly in the same period, slipping from $25.62 a share to $25.50. In Monday's session, it was off 25 cents, to $25.25.
Combined trading volume for the two issues has been light o moderate. That is a far cry from the nearly 9 million shares exchanged July 15, when the deal was announced.
The two venerable New York money-center institutions have agreed to a $2.3 billion exchange of shares that would create the nation's second-largest bank, behind Citicorp. The deal calls for Hanover shareholders to get 1.14 share of Chemical stock for each of their shares.
Market watchers offer several reasons for the malaise: naging doubts that projected savings can be achieved by the merged banks, fresh evidence of a depressed local economy, and the long time lag in completing the deal, which offers investors plenty of time to buy the stock.
"They are at a slight discount to where we thought they would be," said Mr. Lynch. "Some people are skeptical they are going to do what they've said they will and that underlying business activity won't offset the improvement."
Judah S. Kraushaar, money-center bank analyst at Merrill Lynch Capital Markets, calculated that 75% of the projected savings for the combined banks are achievable. "Some people are saying that $650 million of annual savings are a lay-up, but I think that is a reasonably aggressive target," he said.
As for the time lag, he said "it will be the middle of next year" before the investment community can assess how well this merger is going.
Mr. Kraushaar also expressed uncertainty about the amount of new capital that will ultimately be raised, an important issue for stockholders. He feels "they may try to raise more" than has been announced.
But the Merrill analyst said he likes the New York combination on a long-term basis.
$40 Book Value?
Within three years, he sees a possible book value of $40 per share for the stock, with the company "potentially in a position where it can accelerate a lot of problem-loan recognition."
By 1993-94, he said, he thinks there should be a "noticeable pickup" in return on equity, with a normalized return in the 15% to 16% range.
Given that foundation, the stock should trade modestly over book value - meaning it could potentially double from its present level in three years.