The miserable stock performance that came after several major bank merger announcements this year may be hindering deal activity right now, a prominent investment banker says.
Bank merger activity all but evaporated by midsummer, with the blame alternately attributed to volatile and fearful financial markets, year-2000 computer-related concerns, and the traditional "digestion period" after a spasm of dealmaking.
While most bank stocks have done poorly this year, shares of banks that have completed or announced big acquisitions have fared worse than those of their peers, more often than not.
Michael E. Martin, managing director and co-chief of merger advisory at Credit Suisse First Boston, citing his firm's analysis of the situation, suggested that top managers-whose compensation hinges in part on share performance-may be discouraged, at least for the moment, from cutting deals.
After July 20, when SunTrust Banks Inc. of Atlanta agreed to buy Crestar Financial Corp., Richmond, Va., the record flow of high-profile, multibillion-dollar deals ceased.
Mr. Martin, whose comments were offered last Wednesday in New York at a forum on bank consolidation, said he thinks dealmaking will eventually resume. But scrutiny of 11 of the year's deals shows that shares of seven acquirers have underperformed the Standard & Poor's regional bank index.
The survey is not comprehensive-it omits such deals as First Nationwide Holdings Inc.'s purchase of Golden State Bancorp and Regions Financial Corp.'s acquisition of First Commercial Corp. The stocks of the buyers in these deals, too, have slipped this year.
But the study does give an indication of how stocks in large and midsize banks perform after mergers, at least in the short term. And the numbers suggest that investors might want to think twice when it comes to embracing merger hype.
Several blockbuster deals have been poorly received this year because managements seen as inexperienced in handling big deals agreed to them, to the surprise of their shareholders.
First American Corp., Nashville, whose stock is down 23.4% for the year, and Regions Financial, Birmingham, Ala., down 6.2%, are two such examples.
In the case of SunTrust, whose stock has done fairly well compared to the S&P regional bank index but is off 19.1% from its midsummer peak, investors did not expect management to sell but were shocked when the company agreed to buy Crestar, its first big purchase in 12 years.
The fact that stocks of acquiring banks are underperforming their peers is likely to be discouraging deal-minded bankers from pursuing opportunities.
Many CEOs are major shareholders of their companies and possess big stock-option arrangements that tie their compensation to the company's stock performance. If a CEO is worried about stock market turmoil reducing his personal fortune, the CS First Boston survey suggests, agreeing to buy another company could cost him even more.
Though the dramatic turmoil in financial markets has surely been felt, it should not be blamed for the dearth of deals, many market watchers insisted, however. Indeed, people who have studied the history of corporate mergers say this year's poor performances for acquirers' shares are not unusual at all.
When one company pays a big premium to buy another-in other words, agrees to pay more than anyone else thinks the second company is worth-its stock usually falls and shareholders suffer, according to Mark L. Sirower, who teaches at New York University's Stern School of Business and last year wrote a book titled "The Synergy Trap."
The history of corporate mergers since the 1980s, he said in a telephone interview, shows that companies are seldom able to boost the stock of the merged company enough to offset the hit shareholders took when a big premium was paid to strike the deal. The performance of bank stocks this year "is not an anomaly by any means," he said.
Yet the big-premium phenomenon fails to explain the poor performances this year of several companies involved in mergers of equals, in which little or no premium was paid to either company's shareholders.
Mr. Martin laid these poor results to investor anxiety over the foreign exposure of these companies, and the difficulty managements have had merging mammoth operations. "The market really wants clarity of management structure," he said.
It has not seen such clarity from Citigroup Inc., for instance, whose president abruptly departed.
In contrast, Norwest Corp., now called Wells Fargo & Co., has outperformed its peers since buying the San Francisco banking company. From the beginning, it was clearly spelled out that Norwest chief executive officer Richard M. Kovacevich would run the enterprise.
In addition to market turmoil and hostile investor reaction to many deals, year-2000 concerns are forcing many CEOs to avoid deals for the time being. Bank managements take little comfort from the latest Federal Deposit Insurance Corp. data suggesting that fewer than 1% of banks are failing to comply with year-2000 regulatory standards, merger advisers say.
Though some believe regulators might force noncompliant companies to sell, dealmakers say there will be little or no interest, even at fire-sale prices, in companies with dire technology problems.
"Just because a company has a 'satisfactory' compliance rating ... from regulators doesn't mean a thing," said H. Rodgin Cohen, a partner in the New York law firm of Sullivan & Cromwell. "No price is worth that risk."
Meanwhile, Mr. Martin's optimism about a resumption of dealmaking was echoed at last week's conference by a host of others, including Goldman, Sachs & Co. managing director Milton Berlinski, and such leading M&A attorneys as Edward Herlihy of Wach- tell, Lipton, Rosen & Katz, Lee Meyerson of Simpson, Thacher & Bartlett, and Mr. Cohen.
The conference was sponsored by Glasser Legalworks, a publishing company. "The fact there were no cancellations tells you what's going on-or not going on-in M&A," a panelist said, meaning that when consolidation is active, busy dealmakers tend to send their regrets.
Sean J. Ryan, a bank analyst at Bear, Stearns & Co., compared the current situation to late 1994. The market for bank stocks did not fall as dramatically then as it did this year, he said, but there was a merger hiatus until February 1995.
Then Michigan National Corp. broke the silence by agreeing to sell to National Australia Bank Ltd. for $1.6 billion. Two weeks later Fleet Financial Group agreed to buy Shawmut National Corp., and the race was on again.