Compass Bancshares' strong first-quarter earnings, unveiled last week, will probably not dispel the merger talk surrounding it.
Though the Birmingham, Ala., banking company's shares were little changed after Thursday's report of a 15% rise in profits from a year earlier, its stock has been on a strong run recently.
Last Monday, the share price rose to $29.25 as reports leaked out that the company had rejected a rich offer from rival Amsouth Corp. last December. A week and a half ago, a bout of merger fever had driven up the price more than 6% in a day.
Merger talk about Compass is subdued for the moment, but some analysts expect it to revive as investors ponder the company's continued ability to post superior returns as an independent.
"Compass' stock did not move that much on the company's quality earnings because it already has had a strong run," said Christopher Mustacio, a bank analyst at Legg Mason Inc. in Baltimore. "Amsouth is said to have made an offer of four times book," he said. Such a premium would rival or exceed those paid in "the heyday of bank mergers last year" and would stir the industry pot for more super-premium deals, he said.
Indeed, a number of analysts appear to be taking a stronger "they-need- to-merge" stance when discussing Compass. A merger between Amsouth and Compass is a compelling combination, said Harold Schroeder, a bank analyst at Keefe, Bruyette & Woods Inc. in New York.
"Compass has had consistent returns, year-in and year-out, without having a down year," said Mr. Schroeder. "And they should get credit for their earnings growth. But if one were to answer the question: Would it be better if the two banks merged? The answer would have to be yes."
The fiercely independent $17 billion-asset Compass has always maintained that it can achieve superior returns without the help of a partner. In 1995, it rejected a $1.14 billion offer from First Union Corp. and defeated an effort by shareholder dissident Harry Brock Jr. to force a sale.
Compass helped persuade board members and investors that it could stay independent and still produce shareholder value by issuing a favorable three-year financial plan.
The plan, in a March 3, 1995, proxy statement, projected asset growth of 9% to 10% a year, net income growth of 15% a year, earnings per share growth of 15% annually, and average return on assets of 1.30% and average return on equity of 18%.
"I remember that document," said Mr. Brock, a co-founder of and investor in Compass, in an interview last week. "That's how they won the proxy fight. I'll tell you, I think they didn't meet" the goals.Several market experts, who declined to be identified, agreed with Mr. Brock.
In fact they pointed out that Compass had backed away from those 1995 financial goals during a May 4, 1998, analysts meeting in Birmingham.
According to documents from that meeting, Compass said it would generate during 1998 a minimum of 10% growth in earnings per share, consistent return on shareholders equity of at least 17%, and consistent returns on assets of at least 1.20%.
Even some of these more modest ratios were not met.
According to Compass' 1998 annual report, earnings per share growth was 8%, ROA was 1.17%, and ROE was 16.12%.
Chairman and chief executive D. Paul Jones Jr. and chief financial officer Garrett R. Hegel were not available to comment. A company spokeswoman, Ellen Laden, asserted that both the 1995 proxy and the 1998 presentations are outdated. "The 1995 proxy is also a three-year plan, while the 1998 presentation was for one year," she said. "You are comparing apples to oranges."
Some people continue to believe that Compass can create strong enough shareholder value on its own.
"Last year's numbers were slightly down because Compass broke out its merger expenses for the first time," said Marguerite Baudoin, a bank analyst at Wachovia Securities. "But I think they'll still remain independent. First-quarter earnings were solid. The quarter was better than I expected."