More than $22 billion of merger deals were announced in the banking and thrift industries in the first three months of 1997, making it the strongest quarter for mergers since 1995.
Although the number of deals slipped to 88, from 95 in the fourth quarter, the value of the deals more than doubled.
One factor that helped push up the deals' dollar volume to the highest level since the third quarter of 1995, when more than $24 billion of deals were announced, was that buyers were willing to pay more. The average price paid approached twice book value, and at least two prominent deals exceeded three-times book.
A pair of blockbuster deals also helped drive up the total. They were First Bank System Inc.'s $9 billion purchase of U.S. Bancorp and H.F. Ahmanson & Co.'s $6.7 billion hostile bid for Great Western Financial Corp.
If completed, the U.S. Bancorp deal would be the third-largest ever, and the deal for Great Western-either by Ahmanson or the white knight, Washington Mutual Inc., whose $6.6 billion has been accepted-would rank fourth.
Analysts expect dealmaking to continue and said that the recent selloff in the stock market would dampen activity only slightly.
"There's a certain degree of caution" now that acquirers' stock prices have slipped from their record highs, said David Berry, director of research at Keefe, Bruyette & Woods Inc.
Sheshunoff Information Services, which compiled data for the American Banker's first-quarter M&A Review, said the average price-to-book value paid for banks and thrifts rose to 1.98, from 1.93 in the fourth quarter. The First Bank-U.S. Bancorp deal had the highest price tag, at 3.19 times book value.
In a smaller deal, CCB Financial also agreed to pay more than three times book; its $132 million purchase of American Federal Bank amounted to 3.13-times book value.
The activity marked a continuation of last year's trends. The number of deals per quarter has declined steadily since peaking at 129 in the second quarter of 1996, even as the average price paid has continued to rise.
Mr. Berry said his bullish view about bank mergers has been only slightly tempered by the banking sector's 15% drop in the stock market.
Although big banks may not be as bullish about dealmaking now that their stock prices have fallen back, Mr. Berry said many smaller banks still are likely to choose to sell, rather than make the investment in new technology needed to survive independently.
The looming problem of system conversion to enable computers to recognize the year 2000 will hasten the process, he said. "If you suspect you are going to sell in a couple years, its better to sell sooner," and allow the acquirer to worry about system conversion.
But Lawrence W. Cohn, banking analyst at PaineWebber Inc., said the decline in the number of deals shows that "Management is having a harder and harder time justifying the high prices."
Mr. Cohn said prices will either have to drop or the number of deals will continue to decline.
It will slow dealmaking and lower prices even more, he said, if the Financial Accounting Standards Board goes through with a plan to ban "pooling of interest" accounting. That would force buyers to "face the reality of what they paid" when reporting earnings, Mr. Cohn said.
Purchase accounting results in an intangible asset known as goodwill, representing the premium over book value paid, that has to be amortized over time.
Mr. Cohn estimated that Wells Fargo, which used purchase accounting in its acquisition of First Interstate Bancorp, has since seen its return on equity slip from 26% to about 13%.
Analysts were divided on whether prices will remain as high in upcoming quarters. "It's going to be a while before you see 3.2-times-book again," Mr. Berry said.
George Salem, of Gerard Klauer Mattison & Co. said he wouldn't rule it out. "I've been saying the prices had to come down for a couple years, and I've been wrong," he said.
Technology has enabled banks to become ever more aggressive in their cost-cutting and revenue-enhancing plans, which has enabled them to pay higher multiples of earnings, Mr. Salem said.
Mr. Salem, however, suggested bank acquisitions of banks could suffer if banks start to follow Bankers Trust New York Corp.'s lead by cutting deals with investment banks and brokerages.
Bankers will ask themselves, "Why drive a Chevy, when you can buy a Jaguar?" Mr. Salem said.
Major Wall Street firms continued to dominate the ranking of financial advisers in the deals announced in the quarter.
Merrill Lynch, which had roles in each of the four largest deals, led the pack. It advised in seven deals with a total deal value of $2.2 billion.
Goldman, Sachs & Co., placed second with three deals worth $2.2 billion, followed by Credit Suisse First Boston (thee deals worth $1.6 billion; Montgomery Securities (two deals, $6.8 billion); and Lehman Brothers (one deal, $6.6 billion).
The top legal adviser, according to Sheshunoff, was Skadden Arps, Slate, Meagher & Flom LLP. which represented parties in five deals with a total value of $14.7 billion.
Fried, Frank Harris Shriver & Jacobsen was a close second, taking a role in three deals worth $13.7 billion.
Cleary, Gottlieb, Steen & Hamilton ranked third among law firms; Wachtel, Lipton, Rosen & Katz, fourth; and Simpson Thacher & Bartlett, fifth.