Prices of bank acquisitions are a growing worry on Wall Street, and the concern may cool merger activity for the rest of the year.
The two largest deals announced in the quarter - Banc One Corp.'s acquisition of Valley National Corp. and Barnett Bank Inc.'s purchase of First Florida Banks - came of hefty premiums. Valley is being acquired for 2.2 times book value; First Florida, for 2.4 times book value.
And some analysts think those prices defy economic sense.
Nervousness on Prices
Alison A. Deans and Kristina E. Andersson of Smith Barney, Harris Upham & Co. said in a report that the high premiums make them nervous, "given the banking industry's checkered track record in . . . integrating acquisitions and earning back dilution."
In particular, they said, cost-saving goals are often unmet and revenue projections too optimistic.
To be sure, the average premium in bank merger agreements fell in the second quarter - to 1.75 times book value, from 1.83 in the first quarter, according to an American Banker survey.
But the average was distorted by a large number of bank acquisitions of thrifts. These deals command lower premiums than purchases of banks.
Concern about merger costs may be affecting stock prices of the active buyers. For example, the share price of Banc One Corp., which announced two deals in the period, fell 1.6% in the quarter. American Banker's bank stock index rose 7.23% in the quarter.
Acquirers' Prices Fall
And depressed share prices for acquisitive bank companies may, in turn, temper bank merger activity till next year.
"Given that stock prices of buyers generally have stalled out, plus the digestion period needed to assimilate recently announced mergers by some large acquirers, we expect overall activity to slow in the near term," the Smith Barney analysts said.
The aggregate value of mergers announced in the second quarter was $4.2 billion, compared to $2.5 billion in the same period last year ad $4 billion in the first quarter of this year.
In the West, "there are simply not enough sizable banks to accommodate the demand," noted Donald K. Crowley of Keefe, Bruyette & Woods Inc.
The result is what he called a "last-chance saloon" attitude, in which buyers feel they must act now and prices may have risen to "potentially uneconomic terms."
Mr. Crowley cited the Valley National deal, as well as the acquisitions of Puget Sound Bancorp, Tacoma, Wash.; Sun West Financial Services, Albuquerque; and Valley Capital Corp., Las Vegas.
Puget Sound is being bought for two times book value by KeyCorp, Albany, N.Y., and SunWest is being acquired by Boatmen's Bancshares, St. Louis, for 1.5 times book. Both deals were announced in the first quarter.
BankAmerica Corp. closed its acquisition of Valley Capital in the first quarter. The price was $400 million, or 1.9 times book value.
With prices for banks at rich levels, banks are increasingly turning to healthy thrift institutions to expand their franchises. Eight such deals were announced in the second quarter.
Big Thrift Acquisitions
The largest was First Bank System's purchase on Western Capital Corp., parent of Bank Western, Denver, a federal savings bank with $2.4 billion in assets.
The Minneapolis superregional is paying $150 million, a modest 1.2 times book value. Yet the move will make it the second-largest player in Colorado.
The second-largest bank acquisition of a thrift was the deal for DF Southeastern Inc., Decatur, Ga., negotiated by First Union Corp., Charlotte, N.C., for $150 million, or 1.1 times book value.
While thrifts are definitely cheaper than banks, and often have desirable market shares, they offer bigger problems and challenges.
Bank Western lost money in 1989 and 1990. It earned $8.2 million last year but produced an anemic 0.31% return on average assets. Problem assets in the first quarter were 6% of total loans.
DF Southeastern, parent of Decatur Federal Savings and Loan Association, has harvested mediocre earnings the past few years and returned a weak 0.13% on assets last year. But it will help boost First Union's share of deposits in the Atlanta market to 11.3% from 4.4%.
It is still commercial banks, however, that draw the most attention of potential acquirers, and that leaves analysts fretful.
"Given our general belief that earnings momentum will slow significantly in 1993, we caution that less disciplined managements will be tempted to pay too much for acquisitions in 1993," said Smith Barney's Ms. Deans and Ms. Andersson.
They expect the bulk of near-term merger activity to happen on a same-state or contiguous-state basis," given the significant cost-cutting opportunities inherent in such combinations."
A Ripe Region
The Middle Atlantic region is ripest for action, they said. The reasons:
* The regional economy is bottoming out after a severe two-year slump.
* Many institutions, with assets ranging from $2 billion to $20 billion, especially in New Jersey, Pennsylvania, and Virginia, are trading at an average price-to-book ratio of 135%.
* Half a dozen large banks in the region - and some from outside the area that likely find the Middle Atlantic desirable - have the capacity to buy other banks.
Some activity is also possible in the Southeast, they said, although the highest-quality banks likely to be acquisitions targets are trading at 170% of book value.
Midwest: A Future Target
The West and Southwest are the mostly highly concentrated regions, and thrift acquisitions may offer less costly expansion opportunities for acquirers than the few remaining banks.
The Midwest remains the least concentrated banking market and the one where the Smith Barney analysts expect "significant activity in coming years."
But in the near term, they note, most buyers are digesting their previously announced deals, and many "target" stocks trade at 165% of book value.
The Northeast "is more likely to experience in-market consolidation through government-assisted resolution of weak banks and thrifts." Meanwhile, "concerns about the magnitude of an economic rebound also persists."