For every nickel spent, there had better be a nickel saved.

Wall Street is rigorously enforcing that rule on major bank and thrift mergers, and, the many dealmakers running afoul of it are getting cold receptions to their transactions.

The degree of investor skittishness about high-profile bank mergers is illustrated in an SNL Securities study of 22 takeovers or mergers announced since January 1991 (see chart). Each deal has a market value of at least $500 million.

In 17 of these 22 transactions, stocks of acquiring or majority partners fell on deal announcements -- even after taking into account any concurrent broad slides in bank stocks. The mid-point, or median, decline stands at a chilly 4.3%.

Eye on Cost Savings

That's hardly the reaction one might expect in an industry where consolidation is widely recognized as a positive trend. But it speaks to an investor mind-set about bank mergers.

Understandably, investors are cloudy in the early going about potential synergies and revenue gains. So they focus almost exclusively on cost savings in evaluating newly announced deals.

Given that investors repeatedly recoil after using this rule of thumb, it appears that acquirers are acting in defiance of the pattern, not in ignorance of it.

But even bankers who know the odds may not be aware of the stakes: In the early going, more often than not, acquirers are taking significant hits to their stocks after announcing deals.

Broader Trends Ignored

One source of confusion about investor reaction is a tendency of many parties to track stock price movements in isolation, ignoring broad trends in trading values of bank equities.

On the surface, for example, it appears the market had only a modestly negative reaction when Banc One Corp. agreed to buy Valley National Corp. Banc One's stock fell 2.14%.

But this drop came at a time when the bank stock market rose 5.16%. Taking into account the overall movement, Banc One's stock took a massive hit of 7.9%.

The measurement period for the SNL study begins four trading days before each deal announcement, and it ends one trading day after each announcement. Starting the study period a few days beforehand helps cleanse the analysis of interim price changes sparked by leaks and rumors.

Keycorp, Society Scorned

The latest banks incurring the market's ire are Albany, N.Y.-based Keycorp and Cleveland, Ohio-based Society Corp., partners in a proposed merger of equals.

The $4 billion deal was announced on Oct. 4, and the market dropped a hammer on it immediately. During the six-day period ending the day after the announcement, Keycorp's stock dropped by a market-adjusted 6.6%, and Society's stock declined 4.55%.

Less than a month earlier, investors crumpled Marshall & Ilsley's stock by a market-adjusted 9.9% after it agreed to an $873 million buyout of a Wisconsin rival, Valley Bancorp., Appleton.

Earlier episodes are even more gruesome. Cleveland-based National City Corp., for example, saw its stock nosedive by a market-adjusted 11% after a 1991 accord to buy Merchants National Corp., Indianapolis.

Investor concern about potential earnings dilution apparently is behind the market's skepticism about major bank mergers and acquisitions.

In stock swap deals, dilution occurs when the earning power of assets gained in exchange for each newly issued share is less than the earnings power of premerger assets supporting each of the acquirer's existing shares.

A rough analysis of the 22 transactions shows most of these deals (at least when cost savings and earnings enhancement projections are excluded) have suffered from earnings dilution.

Of the 22 deals, in fact, 18 carried some earnings dilution. And the market, true to form, pushed the acquirer's stock down in 15 of these 18 instances.

Strong Correlation

Significantly, the degree of hostility the market demonstrates strongly correlates with the level of earnings dilution associated with the deal. The higher the level of threatened earnings dilution, the more hostile the market's reaction.

Notable exceptions to this phenomenon were the merger announcements of BankAmerica Corp. and Security Pacific Corp., Chemical Banking Corp. and Manufacturers Hanover Corp., and Comerica Inc. and Manufacturers National Corp.

In these three in-market deals, each portrayed as a merger of equals, potential cost savings bonanzas apparently overcame the specter of earnings dilution. There was no perception that the surviving charter overpaid for the acquired charter.

The most recent merger of equals, that of Keycorp and Society, didn't fare as well as its predecessors. There is no overlap between the two companies' branch networks and less potential for cost cutting.

Punishment for Overpaying

Even in-market transactions can backfire, however, when Wall Street believes an acquirer overpaid. In such cases, investors invariably snub the acquirer's stock, regardless of the scope of promised savings.

Society's stock, for example, slid 9% on the market-adjusted scale after announcing its buyout of Ameritrust Corp. Barnett Banks Inc., Jacksonville, took a market-adjusted hit of 10% following its 1992 accord to buy First Florida Banks, Tampa Bay.

The market has been much kinder to public-sector transactions in which the acquirer purchases a failed bank or thrift with government assistance. Prices are often low, and federal guarantees on bad loans help minimize risk.

Since January 1991, 13 publicly traded acquirers have announced government-assisted acquisitions involving more than $2 billion in deposits. In all but three instances, the acquirer's stock climbed on the market-adjusted scale.

Garnering the strongest positive reactions were two ground-breaking deals involving FDIC assistance: Fleet Financial Grroup's acquisition of Bank of New England Corp., and First Union Corp.'s acquisition of Southeast Banking Corp.

Fleet's stock rose a market-adjusted 22.8% after it won the Bank of New England bidding war, while First Union's stock climbed by a market-adjusted 13.8% when the company landed Southeast.

Bargain pricing helped fuel the positive reactions. Fleet paid a premium equaling 0.83% of deposits for Bank of New England, while First Union paid a 1% premium. That compares with a weighted average of 1.35% in the more than. 150 failed-bank auctions conducted by the FDIC since 1981.

Of course, the rebound of the banking and thrift industries has cut the supply of failed units available at federal auction. And this paucity probably will persist for the near term.

That means acquisitive banks and thrifts must select their targets from the private sector.

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