Michael Price, the activist shareholder credited with triggering two of the largest bank mergers of the year, has drastically reduced his bank holdings, he told American Banker last week.
Bank stocks have surged so high on takeover speculation that there is little value left in the sector, said Mr. Price, whose surprise investment in Chase Manhattan Corp. this year helped push it toward its $10 billion deal merger with Chemical Banking Corp.
Mr. Price said the four mutual funds controlled by Heine Securities, of which he is the president, have liquidated nearly all their regional bank holdings.
In all, banks now account for between 11% and 12% of Heine's portfolio, down from 20% last year, Mr. Price said. And excluding the stakes in Chemical and Chase, which account for 6.5% of Heine's holdings, banks are barely more than 4.5% of the $12 billion of investments by the fund group.
The news should come as a relief to bankers who have worried about becoming the targets of Mr. Price's fiery brand of shareholder activism. Still, some may find it troubling that a prescient investor like Mr. Price has decided the industry's stocks have reached a plateau.
"The risk/reward (ratio) in bank stocks today is poor, except for extraordinary situations, which include the new Chase-Chemical," he said.
Unlike his Michigan National Corp. holding, which he sold in February after winning a bitter campaign for the bank to be sold, Mr. Price plans to hold onto his Chemical and Chase stakes, which he valued at close to $1 billion.
Recently he dumped holdings in Mellon Bank Corp., Comerica Inc., and Signet Banking Corp., which he had held since the early 1990s.
Heine does not own stock in most banks touted as takeover candidates by sell-side brokerage firms, because such investments would not produce a profit without a merger within 12 months, said Ray Garea, Mr. Price's top adviser on banks.
As merger mania swept the industry, bank stocks rose sharply this year. The American Banker index of 225 banks is up 36%.
One of Mr. Price's peers predicted banks could rise still higher, but said Heine's actions were unsurprising.
"The way I look at it is bank stocks were very undervalued at the beginning of the year, and now they are moderately undervalued," said James Schmidt, manager of the John Hancock Regional Bank Fund. "They are still attractive, but there is not as wide a disparity with other stocks, and if you are sensitive to that, I can see the logic behind that move."
Mr. Price first made a splash in banking in his native Oklahoma in 1981, when he took a stake in Sooner Federal Savings and Loan. He joined three fellow holders of 10% stakes in pushing the thrift to sell.
It looked like they would make a killing when H.F. Ahmanson & Co. agreed to buy Sooner Federal, but the deal was later scuttled.
That transaction began a slow but steady push into banking for Mr. Price.
In 1991, he hired Mr. Garea from Cates Consulting Analysts, a Washington bank advisory group. Mr. Garea "educated me about how to look at banks in the '90s," Mr. Price said.
Mr. Garea's first major recommendation was to invest in First Chicago Corp. at $19 a share. Heine sold the stock for around $50 a share last year.
"The approach to First Chicago was so similar to the approach to Chase, in that it had very visible, valuable businesses hidden within the banking umbrella: venture capital, middle-market lending, a branch network, and credit cards," Mr. Price said.
It was this theme that showed up in the 13D filing Mr. Price made in April to disclose his 6.1% stake in Chase Manhattan, the nation's sixth- largest bank.
In the document, he called for the bank to either sell itself or shed businesses such as credit cards, which he said would be worth more on their own than as part of a financial conglomerate.
This thinking is evident in Mr. Price's decision to hold shares in Capital One Corp., while dumping shares of Signet, the Richmond bank that created Capital One in a spinoff of its credit card business last year.
Capital One is now one of Heine's largest bank holdings.
Mr. Price and Mr. Garea are content with an even larger financial conglomerate, and appear ready to sit back and let the Chase-Chemical merger proceed.
"We are not going to get into that argument anymore," Mr. Price said, when asked to elaborate on his statements that financial conglomerates are worth more in pieces. By bringing together the best of both organizations, the new company could succeed where Chase could not on its own, Mr. Garea said.
Had Chase decided to go it alone, and resist entreaties by Heine and others to sell, the outcome would have been a bitter one, Mr. Price said. "If they did nothing, and ignored what was going on in the world, and came to 1996 having done nothing after all the marriages in the industry, and their stock had been languishing, it would not have been good."
Mr. Price scoffed at the prevailing view of him as a cutthroat takeover artist, saying that he did not push the Chemical merger and had no knowledge of it until the announcement.
Indeed, Mr. Price said there were only three times in his long history with bank investments when he was aggressive toward management.
Others may see him as a "vulture investor" and even corporate raider. He prefers to describe himself as the classic value investor who buys cheap and sells long.
Mr. Price is also a significant purchaser of nonperforming assets from banks, and a major investor in thrift recapitalizations.
Mr. Price is cagey about where he is looking next for values.
"We are the kind of investors who don't have a grand scheme, but come into the office every day, read the newspaper, and then say hey, isn't this interesting, whether it is banks or HMOs," he said.
Mr. Price, who on paper earned about $84 million on Chase stock the day the deal was announced, did not slow down to celebrate. A visit to the U.S. Open Tennis Championships was his one pleasure since the deal was announced, and even then, work followed him: Chase co-sponsored the event.
"It was no great victory," he said of the Chase-Chemical merger. "We bought a cheap stock, they did a merger and we think it makes sense and we are going to keep it because we think it is still cheap."
Mr. Garea interrupted and asked why they should take a break - since work has suddenly become so much more amusing.
"We have to keep coming in because we now keep getting all these calls speculating about who our next target is and what we are going to do with this bank and that bank," he said. "We wouldn't want to miss that for anything."