NationsBank Corp. stunned the investment community Friday with its $9.6 billion agreement to acquire Boatmen's Bancshares of St. Louis.
Ending the bank megamerger lull with a bang, NationsBank elicited amazement - and a storm of criticism - for a price that was 1.4 times Boatmen's stock, 2.6 times book value, and about 15 times anticipated earnings next year.
"At those levels, NationsBank is pushing the envelope in terms of valuation," said Thomas Theurkauf, a bank analyst at Keefe, Bruyette & Woods.
"The price tag was just enormous," said Thomas Finucane, assistant portfolio manager at John Hancock Regional Bank Fund.
One of many Wall Street second-guessers, Mr. Finucane said Boatmen's would have been a "better fit" with Banc One Corp., which was said to be one of the losing bidders.
Others were quick to observe that NationsBank chairman Hugh L. McColl Jr. had recently disavowed interest in a major merger outside his market area and dismissed the strategy as an "old paradigm."
At a press conference Friday, Mr. McColl described Boatmen's as "an unusual opportunity" and "compelling to our shareholders."
"If someone finds they take a dim view of that, then so be it," said the combative chief executive. "I'd say that my largest individual shareholder who sits on my board, who owns eight million shares of stock, thought it was a heck of a deal and was all for it."
(The shareholder is Meredith R. Spangler, whose 2.9% stake came from her family's ownership of a bank acquired in the early 1980s.)
"We paid a full price," conceded John Mack, treasurer of the Charlotte, N.C., holding company. "We don't deny that. But the deal will be immediately accretive on a cash-earnings-per-share basis."
Analysts said that the presence of a number of bidders, which were rumored also to include Norwest Corp. and First Bank System, drove up the purchase price.
NationsBank's share price fell $7.25 Friday, to $85.125. It's offer of 0.6525 share for each of Boatmen's amounted to $55.54 at Friday's close, when Boatmen's stock was at $53.25, up $10.3125.
Analysts NationsBank's share price climbed 35% in the past year in part because of the perception that the company was less likely to make dilutive acquisitions.
"There must be a concern that everything they've been working for in the past year, with a focus on internal dynamics and an improvement of the public image of the company, has just been blown away," said Nancy Bush, an analyst with Brown Brothers Harriman.
"There is definitely an issue of credibility," said Thomas K. Brown, a bank analyst with Donaldson, Lufkin & Jenrette.
"Hugh McColl recongizes that the future will be different, but he can't stop playing the old game."
NationsBank's leaders said they are onto a new paradigm.
Acknowledging analysts' concerns that NationsBank was trying to be too much "like Chase and Bankers Trust," Mr. McColl said, "After this combination, 80% of our company will be what we call our General Bank - consumer, small business, and middle-size business producing 80% of our revenue.
"We believe that enhances our image and will actually add to our price/earnings multiple over some time frame.
"Secondly," Mr. McColl went on, "there's no question the Midwest is the most stable of all the parts of the U.S. It suffers less in downturns. This will enhance the stability and diversification of the earnings stream of our company."
Mr. McColl also said the West "the most economically attractive part of the country beyond the Southeast" in terms of growth trends over the next 10 years. He alluded to Boatmen's headquarters city as "the gateway to the West" and said it is therefore "very important to us in a long-term, strategic sense.
Responding to a reporter's question, Mr. McColl sounded a familiar "we have no interest in acquisitions in the near term."
Later, answering another question about NationsBank's ambitions, he said, "I always have ambitions. Do I have time? Not much. I'm 61.
"It may well be younger people that lead us further westward. But in any event, I'm sure we will go there someday."
Pointing to a map of the southeastern and midwestern states where the combined companies will have sizable market shares, Mr. Mack described the Boatmen's acquisition as "offensive and defensive."
NationsBank said it will be No. 1, 2, or 3 in 12 of the 16 states where it will have a banking presence, plus the District of Columbia.
The merged bank will serve 13 million customers, have $111 billion of assets under discretionary management, $23 billion in proprietary mutual funds, balance-sheet assets of more than $230 billion, and gross revenues exceeding $13 billion.
Despite concerns about the price, analysts were generally positive about the market impact of the acquisition.
"I love the concept, hate the price," Ms. Bush said. "You can't fault Mr. McColl for his strategy or for his choice of a merger partner."
John Mason, an analyst with Interstate/Johnson Lane, said the pro forma return on assets of 1.44% is well above the bank average.
"This is an attractive, well-managed franchise," Mr. Mason said. He said he particularly liked the unusual 60% stock, 40% cash structure of the purchase, though it will have the effect of increasing the bank's leverage - debt relative to equity.
The deal will also be done under purchase accounting, which allows NationsBank to continue its stock buy-back program but requires the bank to carry goodwill on its books that would be amortized against future earnings.
Mr. Mason said NationsBank estimated an after-tax cost of 5%, compared with 10% in an all-stock transaction.
Dennis Shea, an analyst with Morgan Stanley & Co., said many banks are reluctant to include cash in a transaction because it limits the company's financial flexibility for other big deals.
NationsBank was unlikely to do a large "pooling" transaction as well, Mr. Shea said, because of its commitment to its buyback program, which leaves the bank with little room for further large acquisitions in the near term.
"What might be considered small for them might be big for someone else," he added.
The additional leverage did not give the rating agencies pause. Moody's Investors Service maintained its positive credit watch on NationsBank, and Standard & Poor's moved the bank to a positive credit watch, a shorter term perspective, from a positive outlook.
"The main issue with NationsBank is the power of the franchise," said Nicholas Krasno, a vice president and senior analyst at Moody's. "The market will increasingly favor large institutions which can make major investments in new technology, which is an area in which they excel."
Banks that are "investing heavily in marketing prowess" could, if effective, boost their earnings at least 50% from consumer and small-business "franchise banking," said James M. McCormick, president of First Manhattan Consulting Group.
"You have a dynamic here where some bankers are saying, 'I'm not going to put down strong earnings per-share growth,' and others are saying, I can now start to see the way to making a lot more money in retail," Mr. McCormick said. "That is the recipe for another round of merger activity.
"This notion of, 'I'm going to do it with electronics and not acquire customers from someone else' is, in our view, a niche play at best, not a recipe for moving toward nationwide banking on a major scale."
Mr. Theurkauf of Keefe Bruyette said banks have historically run into problems because of a lack of concentration in a particular area or product. "This merger provides immediate diversification," he said.
The talk, however, inevitably returned to price.
"There's a message the market is sending today," Mr. Theurkauf said. "You can only take the pricing so far."