The muted market reaction to North Fork Bancorp. paying what one analyst called a "Neiman-Marcus price" for a traditional thrift shows just how much investors are disregarding traditional ways of measuring deals.
North Fork, based in Melville, N.Y., said Tuesday evening it would buy New York Bancorp. for $800 million-a whopping 4.8 times book value, more than any bank has ever paid for a thrift. In the not very distant past, such a price tag would have brought on an extreme case of sticker shock.
But the market apparently couldn't care less. Shares of North Fork slipped a bit Wednesday on a bad day for most financial stocks, closing down 87.50 cents, to $30.375.
"When you look at the price North Fork paid, there's no question that it's high," said bank and thrift analyst Gerard Cassidy of Tucker Anthony. "But book value just doesn't mean much anymore to most acquirers-it's not a factor in deciding whether to buy a company or not. Buyers want deals that will add to earnings, and that's all investors want to see."
North Fork chief executive John Adam Kanas said he was "keenly aware" of the high price/book multiple, but said the opportunity to boost earnings and expand his franchise into Brooklyn through the acquisition was too good to pass. He added that New York Bancorp's book value is inflated by its low capital ratio.
Three years ago, commercial banks were routinely selling for no more than twice their book value, or net worth, and most thrifts fetched significantly less.
But 13 months after Wall Street couldn't believe it when NationsBank Corp. agreed to pay a then-unheard-of 2.8 times book for Boatmen's Bancshares, St. Louis, the market has learned to accept such things. NationsBank's decision to pay an amazing 4.1 times book for Barnett Banks Inc., Jacksonville, Fla., caused barely a ripple.
Book value can become an issue in mergers accounted for as a purchase because of the goodwill involved, observed First Albany analyst Kevin Timmons. But in a pooling transaction like North Fork's, "book value really takes a backseat to what the company thinks it can earn from the deal."
Investment bankers and investors say that banks can afford to pay more because the market values their stocks more than before.
Shares of North Fork, for example, trade at 4.1 times its own book value, so paying 4.8 times someone else's book value is really not so much a stretch as it appears, they reason.
"Currencies everywhere are rich," said Stephen J. Paluszek, president of M.A. Schapiro & Co., a New York investment bank that specializes in financial services companies. "That helps companies make deals they couldn't otherwise."
Indeed, by standards other than book value, North Fork has agreed to a high but not exorbitant price.
The bank paid 19.9 times last year's earnings for New York Bancorp. Though that is surely high for a thrift, analysts say, it is not out of line with today's market. Associated Banc-Corp., Green Bay, Wis., for example, paid 20.7 times trailing earnings for thrift First Financial Corp., Stevens Point, Wis., earlier this year.
But more than anything else, investor acceptance of the prices currently being paid for mergers shows the faith they have in a handful of bank and thrift managements to make deals that add to company earnings.
NationsBank was able to pay such a huge price for Barnett in part because investors believe chief executive Hugh L. McColl Jr. will deliver on his promise to cut Barnett's costs by 55% and make the deal add to earnings quickly.
North Fork's Mr. Kanas, enjoys a similar reputation for making mergers benefit his company's shareholders. He says he will cut 50% from New York Bancorp.'s operating costs and close 13 of its 30 branches.
But still, he will face his biggest challenge yet in making New York Bancorp. a better machine than it already is, analysts say.
New York Bancorp., based in New York's borough of Queens, boasts a stellar 1.65% return-on-assets and its second-quarter return-on-equity was 32%, according to Keefe, Bruyette & Woods Inc. Moreover, it is a lower-cost operation than North Fork; its efficiency ratio is 34.4%, compared with North Fork's 37.9%.
At the very least, New York Bancorp's sale could radically realign investor expectations of how much a well-run thrift can sell for in today's merger-manic market.
"It's just like selling a house, everyone watches what everyone else is getting," Mr. Cassidy observed. "This deal will certainly impact prices on the upside."
Sandler O'Neill & Partners and Keefe, Bruyette & Woods co-advised North Fork. Goldman, Sachs & Co. advised New York Bancorp.