This summer's wave of bank mergers has drawn not only investors expecting stronger bank stock prices, but also those betting some banks' shares will weaken.
Short selling, typically a bet by investors that share prices will fall, increased 223% in the last month with PNC Bank Corp., for example, after the bank agreed to a $3 billion acquisition of Midlantic Corp.
In fact, short selling overall rose 2.8% among bank stocks in the 30 days ended Aug. 14, even as it was falling among stocks in general - by 1.9% on the New York Stock Exchange and 5.9% on the American Stock Exchange.
Mergers and acquisitions have been booming in banking this year; roughly $30 billion in deals have been announced, more than in any full year ever. Banks that have been acquirers or were thought to be eyeing deals have been particular targets of short players.
"Acquirers tend to lag the overall market for a period after they do a deal," said David Berry, director of research at Keefe, Bruyette & Woods Inc., New York. As a result, he said, short players are bulking up on those shares.
"And there are folks who make a living, for example, buying Midlantic and selling PNC and locking in the spread," he added, referring to investors specializing in arbitrage.
It works like this. Because PNC agreed to trade 2.05 of its shares for each Midlantic share at PNC's Monday close of $24.875, the final per-share deal price would be $51. But Midlantic closed Monday at $48.375, or 5.4% less.
Arbitragers and other investors are buying Midlantic, and shorting PNC, since PNC will have to issue more shares at its current price, thereby diluting its own stock and depressing its price.
"The only real risk is the deal falls apart," Mr. Berry said of investors' liability in shorting PNC.
Short-interest volume is particularly heavy in PNC. Given PNC's average daily volume, it would take investors 15.6 days to unload their short positions. Last month it would have taken 9.2 days.
In fact, more than 12 million PNC shares were sold short over the last month. That represented the largest amount in short interest of any company on the New York Stock Exchange.
It would take investors in Fleet Financial Group, which agreed to buy Shawmut National Corp. in February, nearly 46 days to unload their position of 20.6 million shares shorted.
Among banks, Fleet Financial currently has both the highest short interest - the total number of its shares sold short - and the highest short interest coverage ratio.
An investor who sells a stock short agrees to borrow a company's shares and then sells the borrowed stock. If the price falls, he or she can buy back the shares at a lower price, return them to the lender, and pocket the difference.
Investors are apparently beginning to wager that NationsBank Corp.'s stock price will weaken. While the North Carolina superregional has yet to make a major, expansionary deal this year, it is widely rumored to be eyeing many regions of the country.
The Charlotte-based banking company's short interest rose 84% in the past month. And whereas last month it would have taken only two days for investors to unloaded their short positions, today it would take almost four days.
NationsBank's hometown rival, First Union Corp., also has seen a rapid rise in short interest. Its agreement in late June to buy First Fidelity Bancorp. sparking a 42.8% run-up in short interest. And between mid-July and mid-August, short interest in First Union shares rose 125%, the sixth- highest increase among bank stocks on the New York or American exchanges.
At the same time, some banks saw a significant runoff in short-interest shares. Short interest in Chase Manhattan Corp., which has been rumored to be in merger discussions with Chemical Banking Corp., fell 42% in the last month.
First Chicago Corp. short interest fell 49%, an indicator that despite its announced merger of equals with NBD Bancorp, short sellers view NBD as the acquirer. NBD's short interest rose 93%, the ninth-greatest rise among banks.
Mr. Berry of Keefe Bruyette cautioned investors not to short banks simply because bank stocks are up nearly 30% this year, and thus would appear ready to give back some gains.
"Although banks have had a good run, based on our estimates they are still cheap compared to the overall market," he said.