Observers say Fleet Financial Group's $3.7 billion purchase of Shawmut National Corp. could signal the rejuvenation of the U.S. bank merger market.

"The game has begun," said Robert Bonelli of New York-based Ernst & Co., an institutional broker with a large stake in Shawmut.

Not only are trading multiples beginning to widen, facilitating acquisitions with stock, but the banking environment is toughening, prompting weaker players to reconsider whether they should remain independent.

Mix in interstate banking and the momentum of a major transaction, and you've got the makings of fresh merger wave.

"This is what banking needed to rekindle consolidation in the industry," said Mr. Bonelli, who contended numerous entities could fetch purchase prices ranging between 1.8 and 2.25 times book value.

Indeed, shares of regional banks such as Barnett Banks Inc., U.S. Bancorp, Bank South Corp., Midlantic Corp., and BayBanks Inc. increased Tuesday amid a general uptick in bank stocks that analysts attributed to merger speculation.

The merger market has been in the doldrums in recent months, hamstrung by a compression of bank stock trading multiples. That had prompted many major institutions to focus on internal development.

But since the beginning of the year, bank stocks on average have risen by more than 10%, with the lion's share of those increases occurring at several traditionally aggressive acquirers.

And the rate-driven earnings setbacks of the fourth quarter drove home the point that the banking environment remains unkind, especially for weaker players bent on independence.

Moreover, the strategy of regional "fill-in" acquisitions is giving way to a more powerful trend fueled by interstate banking.

Institutions vulnerable to takeover increasingly must worry about the potential moves of acquirers from many other regions of the country. That can enrich the field of bidders, but it also can increase the urgency to act.

In an interview with the American Banker, Shawmut chief executive Joel Alvord cited stiff competition and industry consolidation as reasons behind his decision to sell.

After coming to grips with the situation, Mr. Alvord said, Shawmut acted to place the franchise under New England ownership. He said he wished to avoid the fate of the Texas banking industry, which is dominated by out-of- state banks.

"Fleet is now a player in the national arena," said Mr. Alvord, who is a New England native. "That is important intellectually and emotionally," he added, as well as being "clearly good news for New England."

However, Mr. Alvord said he had not been paranoid about out-of-region acquirers. Last year, it is understood, San Francisco-based BankAmerica Corp. had discussions with Shawmut.

While investors were busy driving up the prices of potential buyout candidates, some investment bankers cautioned against reading too much into the Fleet deal.

Fleet's stock nosedived $3.25 to $30.375 on news of the merger. The price appeared too high, given Shawmut's poor performance in 1994, said John Duffy, director of corporate finance at Keefe, Bruyette & Woods Inc.

"There is risk in this deal," he said.

Fleet will face the inevitable runoff of customers that follows most mergers, and it will have to divest roughly $3 billion in deposits to meet federal antitrust guidelines, Mr. Duffy said.

Fleet just finished an arduous cost-cutting program, moreover, and the merged company will have to start the process anew, he said.

And it is not clear how many other chief executives would be willing pay the premium promised by Fleet chief executive Terry Murray, said Mr. Duffy.

Taking the opposite view, Sam Marchese, chief executive of SIFE Trust Fund, predicted the Fleet announcement would cause a cascade of deals.

"Boatmen's, Midlantic, and U.S. Bancorp will be looked at in a different light starting this morning," he said.

"Fleet's managers did this because they feel growth potential is going to be very weak without an acquisition and that the company therefore needs new sources of revenues," he said. Other banks will adopt the same logic, Mr. Marchese predicted.

Based on Tuesday trading, investors clearly are hopeful the Fleet announcement will cause other banks to reconsider their aggressive independence stances.

Midlantic shares rose $1.125 to $31, Boston's BayBanks $2.875 to $63, UJB Financial 75 cents to $27.375, Barnett 62.5 cents to $44, and Bank South $1.375 to $18.75.

Also, Boatmen's Bancshares rose 37.5 cents to $30.625, and U.S. Bancorp 62.5 cents to $25.25.

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