One of the most common reasons bankers and analysts have given for the slowdown in mergers and acquisitions is what they call sellers' unrealistic expectations for the price they can get.
But first-quarter M&A data suggests the opposite.
Deal values, as tabulated by Alex Sheshunoff & Co. Investment Banking LP, were near 10-year highs by several measures. Scarcity value, which observers have cited for a recent spate of deals involving asset swaps, was one factor, according to the Austin company, which released the research Monday to American Banker.
John W. Blaylock, an associate director of Alex Sheshunoff, which serves community banks, said Monday in an interview that price-related figures have escalated as the scarcity value of sellers in desirable markets has increased.
Meanwhile, lower interest rates have made cash deals cheaper, and rising price/earnings multiples have made it cheaper to issue stock to pay for acquisitions, he said.
Intense competition, regulatory burdens, and other costs are also forcing more small banks to consider a sale - not to mention the attractive prices they could get, Mr. Blaylock said.
Sellers are seeing this pricing as "the high end of a cycle, and they're making the decision that this would be a good time to exit the market," he said. "The competition is getting so intense that it's harder and harder to make the kinds of returns on their interest spread that they did before." In addition, rising costs are limiting profitability levels.
According to quarterly research issued by Alex Sheshunoff & Co., the median price banks got for deals signed in the first quarter was 2.3 times book value, up from 2.2 times in the first quarter in 2005 and 2004. The median price/earnings multiple rose to 26.5, from 23.2 last year. The price/deposits ratio rose to 28.5%, from 25.5% in the first quarter of 2005 and 21.9% in the same period a year earlier.
In the first quarter 52 bank and thrift acquisitions were announced. The number involving banking companies rose 16% from a year earlier but fell 14% from first quarter of 2004, to 44. Alex Sheshunoff expects 220 to 240 bank deals to be signed this year, Mr. Blaylock said.
There have been some blips in pricing over the last 10 years, he said. Price multiples fell in 2001, in part because a regulatory change ended the practice of pooled accounting, which tended to boost deal prices in favor of purchase accounting.
Mr. Blaylock also cited the 2000 bursting of the technology bubble and the economic downturn wrought by the Sept. 11 attacks.
"We really didn't think they were ever going to recover from that level in '98-'99, But on the whole, we are well above that on a price-to-earnings basis, and we're back to almost that level on a price-to-book basis," he said. "These are arguably some of the highest multiples on almost any metric that we have seen in 10 years."
The median price/earnings multiple fell to 23.2 last year, from 24 in 2004. Mr. Blaylock said the drop may be attributable to the fact that some big deals were announced in 2004.
Mercantile Bankshares Corp.'s $142.9 million deal for James Monroe Bancorp Inc. of Arlington, Va., announced March 27, is one that observers have called pricey.
The $16 billion-asset Baltimore company would pay 333.7% of James Monroe's tangible book value, or 25 times its earnings estimate for this year. Buying the $530 million-asset James Monroe would help Mercantile expand in northern Virginia.
Edward "Ned" J. Kelly 3d, Mercantile's chairman, president, and chief executive, conceded that the deal is pricey on the day it was announced, but he called James Monroe "a high-quality franchise in a footprint that is strategic for us," as well as "a compelling opportunity."
Brian Sterling, the co-head of investment banking at Sandler O'Neill & Partners LP in New York, said prices seem high because most of the recent deals have been among small and midsize companies. Multiples are lower for deals worth $1 billion or more, he said.
Mr. Sterling agreed with Mr. Blaylock that M&A activity will likely stay strong among small and midsize companies for the rest of the year. "All the operating drivers for M&A are still there," he said. "We are in a very tough operating environment."
