Bank merger mania has a perverse-and perhaps risky-consequence on Wall Street. As investors buy on weakness, assuming that less stellar companies will be taken over at rich premiums, they are driving up share prices.
Analysts say potential targets Mercantile Bancorp, Firstar Corp., and First Commerce Corp. have surged more on the stock market than their performance might justify.
In the latest and most striking example, CoreStates Financial Corp. shares rose to a new high after analysts lowered their earnings estimates last week.
"It's classic," said analyst David Berry of Keefe, Bruyette & Woods. "Good news is good news, bad news is good news, so all news is good news."
But there is a dark side. While some investors may make a killing, others will inevitably lose by buying at higher prices than acquirers are willing to pay.
"There have been cases where investors have paid too much for potential takeout targets, as evidenced by the decline in price on the day of the announcement," said Elizabeth Summers of Ryan, Beck & Co., Livingston, N.J.
"A strategy of buying the stocks of banks that are underperforming by some standard is not going to be profitable in the long run," said Dale F. Jacobs, president of New York-based Financial Investor Inc.
Shares of CoreStates closed Tuesday at $67, up $2.50. They had been at $63.875 last Wednesday.
The $45 billion-asset Philadelphia company has been plagued by sluggish earnings since it acquired Meridian Bancorp of Reading, Pa., in 1995.
Last Thursday, bank analyst Frank Barkocy of Josephthal, Lyon & Ross Inc. lowered his CoreStates rating to "hold/O.K. to sell" from "hold." He cut the 1997 earnings estimate to $3.90 a share from $4.00, and reduced the 1998 estimate to $4.20 from $4.40.
Analysts Michael L. Mayo of Credit Suisse First Boston and Thomas McCandless of Natwest Securities also cut their estimates Thursday for similar reasons.
"We don't think they are ready to give in but we think the market will increasingly view them as vulnerable given their lack of progress on the (economic) side of the house," said Mr. McCandless.
He wrote in a report Friday that "something here is amiss and it does not pass the 'smell test."'
Rumors that CoresStates was about to be acquired have cropped up several times this year.
The stock surged the day before NationsBank Corp. announced it was acquiring Barnett Banks Inc. in late August. Investors reacted to vague rumors by putting their money on the wrong target.
CoreStates' price also rose earlier in August when investors read into the resignation announcement of president Rosemarie B. Greco that the company was likely to be sold.
Market experts say the company has basic market share strengths and several strong lines of business. First Union Corp., among others, might see CoreStates as a way to shore up several of its markets.
"CoreStates dominates the Philadelphia market and this is one of the reasons it would a good acquisition candidate," said Ms. Summers of Ryan Beck. "When a company is struggling with its quarterly earnings, you will have takeover talk."
But skeptics think speculators may be waiting a long time for a CoreStates deal.
One critic who declined to be identified said Pennsylvania and New Jersey-CoreStates' key areas-are not booming demographically or economically.
"Their market is not as dynamic as in the Southeast or recovering like California or stable like the Midwest," said the analyst. "The population growth is very nominal. If I were a powerful company like First Union, PNC or Mellon Bank looking for high growth areas, I would have to ask, do I really want CoreStates' market?"
Another skeptic noted that Ms. Greco recently cashed in all of her options. "If they were selling the company, why would she cash out like that?"
But some see investment potential, no matter what.
"Heads you win, tails you win," said Mr. Mayo. "The threat of takeover will encourage management to continue to buy back stock, shed the least profitable business, and move efficiencies to a new level. If they can't fix the initiatives, then they will be more vulnerable to takeover."