Investors Warm to Acquirers' Stock

Here's a green shoot for a bank merger market that's fallen sallow in the past few years.

Buyers' shares have been more likely to outperform than underperform following announcements of major deals in recent months. Sometimes the shares have taken off on big rallies.

Investors' favorable reaction last month to Prosperity Bancshares Inc.'s $530 million deal to buy a Texas neighbor was only the latest example. Capital One Financial Corp.'s stock gained 2.4% the day it announced its purchase of ING Group NV's U.S. online banking business, outrunning the KBW bank index by 1.8 percentage points. On the fifth trading day after the announcement, the gap had grown to 5 percentage points. Capital One gave up its lead as the summer wore on, but jumped again when it landed a lending counterpart to ING's deposit platform in its August deal for HSBC Holding PLC's domestic credit card operation.

Shares of Provident New York Bancorp in Montebello, which has set out on an ambitious growth strategy under its new chief executive, Jack Kopnisky, outperformed the KBW bank index by almost 25 percentage points by the 20th trading day after announcing its deal to acquire Gotham Bank of New York in mid-January. (A strong earnings report during the period helped the stock's performance.)

The chart here covers deals announced since June last year that were valued at more than $25 million where the target was at least a tenth of the size of the buyer in terms of assets, and trading prices are available for the buyer's shares.

Buyer shares outperformed the KBW bank index in about two-thirds of the transactions as of the close on the day of announcement and five trading days later, and about half the time as of the close 20 trading days later.

A caveat: Even when deals are large relative to the buyer's size, it's hard to trace movements in stock prices directly to them. Old National Bancorp in Evansville, Ind., did not begin to underperform the KBW bank index until about 10 trading days after it announced its agreement to acquire Indiana Community Bancorp, and about five trading days after it published fourth-quarter results that beat analyst expectations.

Still, compare the run of decent sentiment for buyers' stock over the past nine months to the string of acquisitions that appeared to meet with sharp investor displeasure in late 2010 and early 2011, including Bank of Montreal's deal for Marshall & Ilsley Corp.

While green shoots have withered before, recent performance suggests that investors are shining favorably on acquirers' stock.