That explains why bank merger activity is down and expected to stay down.

Potential acquirees are demanding prices based on last year's substantially higher stock values. And acquirers are reluctant to meet those demands, which would require paying out more shares for acquisitions, diluting the investments of existing shareholders.

Price expectations of sellers are slower to adjust than those of buyers, said David A. Budd, managing director at McConnell, Budd & Downes Inc. in Morristown, N.J. Once a bank's board has a price in mind, it is non-negotiable, he said. Even if acquirers offer the same exchange ratio in terms of the current stock price, most potential acquirees remain hesitant to sell because they are set on the stock's previous value, he added.

The issue can be seen in terms of price-to-earnings ratios. The higher the ratio, the fewer shares an acquiring bank must pay for a bank. The numerator, price, has been falling as bank stocks decline, while earnings have been rising as profits rise. The result is lower price-earnings multiples, and recently, p-e ratios have slumped badly.

The multiples have definitely stalled consolidation activity, said Carla D'Arista, bank analyst at Friedman, Billings, Ramsey & Co., Arlington, Va. The slowdown has been exacerbated by the fact that aggressive acquirers, such as U.S. Bancorp, Wachovia, and SunTrust have been kept in the penalty box on a price basis for over a year.

Shares of Minneapolis-based U.S. Bancorp have declined 11.6 % since yearend, to $31.375 from $35.50; Winston-Salem, N.C.-based Wachovia Corp. has fallen 10.2%, to $78.50 from $87.4375, and Atlanta-based SunTrust is off 17.7% to $62.9375 from $76.50.

With p-e ratios down, mergers are off as well. In the first eight months of 1998, there were 296 mergers, worth $237.3 billion, according to Thomson Financial's Securities Data Co., an American Banker affiliate. So far this year, there have been 198 deals, valued at $59.2 billion.

This is not the way it was supposed to be. Earlier in the year, investment bankers and analysts predicted a flood of mergers, mainly because they thought deals would be rushed before the elimination of merger-friendly accounting rules next year. But now many analysts have changed their tune, saying today's low price-earnings ratios have put a chill on deal making.

Keefe, Bruyette & Woods' index of 24 large-bank price-earnings ratios stood at 12.9 times projected 2000 earnings on Aug. 9, down from 13.9 times projected 1999 earnings on Aug. 7, 1998. Bank-stock p-e ratios now are 51% of the p-e ratio of the Standard & Poor's 500 index, down from 65% on Aug. 7 of last year. Banks' p-e ratios are not likely to rebound anytime soon, investment bankers and analysts said. One reason is that the markets are gripped by an anti-deal sentiment, said Marni Pont O'Doherty, a bank analyst at Keefe, Bruyette & Woods.

The market is focusing on deals that have not worked out well and not giving credit to the ones that did, she said. Investors are even worrying about deals -- such as Norwest's merger with Wells Fargo and SunTrust's acquisition of Crestar -- that are working well.

Such sentiment has kept downward pressure on bank stock prices, and thus p-e multiples, said Ms. O'Doherty.

The market also thinks some banks have lost their takeover appeal. Some banks don't have viable buyers, said Sanjiv Sobti, an investment banker at J.P. Morgan & Co.

Investment bankers cite several banking companies that had been touted as takeover candidates before the drop in p-e ratios. They include $81 billion-asset KeyCorp of Cleveland, and two Pittsburgh banking companies, $49.1 billion-asset Mellon Bank Corp. and $75.6 billion-asset PNC Bank Corp.

Such takeover talk has dried up, though.

KeyCorp, Mellon, and PNC are like forgotten souls, said one investment banker who requested anonymity. No one is sure who will buy them. Shares of KeyCorp are down 7.6% from yearend, to $29.5625 from $32; Mellon is off 7.8%, to $31.6875 from $34.375; and PNC has fallen 5.7%, to $50.9375 from $54.

To an extent, dropping p-e ratios become a vicious cycle. When a banking company becomes less likely to be acquired, it loses its takeover premium. As examples, investment bankers point to banks such as Summit Bancorp, the $35 billion-asset banking company in Princeton, N.J., and Granite State Bankshares Inc., the largest independent banking company in New Hampshire.

Shares of Summit have fallen 19.6% since yearend, to $35.125 from $43.6875, and Granite State is off 1.1%, to $23.25 from $23.50.

Some analysts take a contrarian view. Christopher Quackenbush, an investment banker at Sandler O'Neill & Partners L.P., described the current situation as a pause.

Acquirers and sellers are really plotting for a rash of takeovers, he said.

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