Prices paid in bank mergers look rich, but by some measures these are bargain days.
"Well-executed mergers can create more value than in recent years or in the 1980s," said analyst Carole S. Berger of Salomon Brothers Inc. She said expansion-minded bankers should "shop 'til they drop" while their own stock prices remain high.
In absolute terms, prices are indeed high and rising. The $15.5 billion price tag on NationsBank Corp.'s planned acquisition of Barnett Banks Inc. seems dizzying at more than four times Barnett's book value.
But Ms. Berger noted that the long rally in bank stocks, including the 30% rally this year, has pushed average price-to-book ratios of bank stocks followed by Salomon to more than three times book value.
"It is these extraordinary, record valuations which allow banks to acquire other banks on an economically viable basis," she said. Meanwhile, the big stock rally has sharply reduced the internal rate of return of alternative uses of capital, such as share repurchases.
"In fact, the evidence suggests that acquisitions may be among the best uses of capital today," Ms. Berger said.
Deals are now less dilutive to buyers' shareholders than historically, she noted. Less new revenue and fewer expense reductions are required to overcome dilution than during the past 16 years.
At the same time, however, advances in computing capacity and telecommunications allow for more cost savings.
The Barnett sale has led some analysts to take a broad look at where industry consolidation may be going from here.
The deal, the largest ever in price terms, may be a defining event in banking history, according to veteran analyst George M. Salem of Gerard Klauer Mattison & Co.
"We could be seeing signs that other very large regionals, like Barnett, will decide to sell because they do not possess the scale, technology, or product breadth to cope in a fiercely competitive financial services world," he said.
That means the top acquiring banks-such as NationsBank, Banc One Corp., Norwest Corp., U.S. Bancorp., BankAmerica Corp., and a handful of others- will probably outgrow the industry over the longer term and their stocks will carry premium valuations.
And it means they will clearly be able to afford the recent prices for plum franchises like Barnett and Virginia's Signet Banking Corp., which agreed this summer to sell to First Union Corp.
A study of deals by Ms. Berger and other Salomon analysts showed that three big midwestern superregionals with strong currencies have consistently paid less in bank mergers. They are Banc One Corp., Norwest Corp., and First Bank System, now U.S. Bancorp.
Matching the stock price-to-book ratio of the acquirer to the price-to- book of the seller shows that NationsBank has done some of the most expensive deals in banking.
But the Bank South Corp. acquisition, for example, and now Barnett were in-market deals with large cost savings available.
Notably, by this measuring device, the acquisition of Signet Banking by First Union, announced in July, does not rank among the 10 most expensive deals in banking despite its 3.5-times-book-value price tag.
As for cost savings, still the biggest factor the market considers in deals, some old benchmarks are no longer valid, Ms. Berger said.
"The rapid changes in technology have moved benchmark cost savings up dramatically," the Salomon analyst said. "In the 1980s, the rule of thumb was that in out-of-market mergers, cost savings would range from 5 to 10% and in-market might approach 20%.
"Today we fully expect out-of-market mergers to produce 15 to 20% cost savings, and in-market acquisitions are expected to produce expense savings of 30 to 50% and sometimes as high as 60% to 70%."
NationsBank said it will realize $900 million of cost savings in acquiring Barnett. Mr. Salem noted that in 17 acquisitions during the past 10 years, NationsBank has always met or exceeded its cost saving targets.
Meanwhile, as superregional banks have grown, many more mergers are in- market deals. Market-extension mergers accounted for only 29% of all deals in the past four years, analysts noted.
Besides NationsBank's big deal, several other significant transactions were announced in August.
Union Planters Corp., Memphis, said it will acquire Florida's Capital Bancorp. for $359 million. Wachovia Corp. is also buying a Florida bank, First United Bancorp., for $221 million.
And banks continued to move into the investment banking arena. In the sixth deal of its kind recently, First Union Corp. said it would buy Wheat First Butcher Singer Inc., Richmond, Va.