Slack Economy Mars Outlook For Megamerger Stock Offerings

With some big banks planning record stock offerings in 1992, experts are divided about how investors will respond.

The list of announced and potential stock issuers is mainly the result of megamergers that reshaped the banking industry earlier this year.

The new Chemical Banking Corp., for example, has already announced that it will issue $1.3 billion in equity upon completion of the merger with Manufacturers Hanover Trust. Other candidates are NCNB Corp., BankAmerica Corp., and Bank of Boston Corp.

Performance Could Drag

Short of scotching a megamerger, a poor reception for new stock issues could weigh down a merged bank's performance for years. By diluting shares, an ill-timed offering could depress stock prices and trip up severance benefits to employees.

Chemical executives sound confident. "We believe there will be a good response," a spokesman said. But factors like a sagging economy, lingering real estate problems, and sluggish progress in promised cost cuts could dash the high hopes.

Bankers planning stock issues are counting on investor bullishness, which took off early this year after a prolonged spell in the doldrums.

What's Needed in Boston

NCNB plans to raise $250 million in the wake of its merger with C&S/Sovran, and analysts anticipate that BankAmerica may tap the market for as much as $400 million.

Analysts foresee a need for $625 million in new stock if Bank of Boston and Shawmut National come to terms on a merger and regulators approve.

"These deals can sell stock," said one investment banker. "People perceive them to be institutions that are growing and have opportunities for profits in the future."

So far this year, banks have had success in boosting capital, particularly compared with 1990. Back then, only a dozen banks issued stock, raising $821 million. This year, stock prices have rebounded considerably, an average of 50% for money-center banks and big regionals.

Thus far in 1991, 24 banks have sold stock, raising more than $2.5 billion, according to Securities Data Corp.

"If conditions are the same next year as in the first half of this year, banks won't have any problem at all raising equity," said Mark Alpert, an analyst with Bear, Stearns & Co. "There will be plenty of people willing to buy."

The big unknown is the economy, which is still dragging itself out from under a recession. A shaky economy may make investors squeamish about bank stocks. Even though no one doubts that stock offerings will come to the market, the per-share price could be affected.

"If the economy doesn't recover, banks that do stock offerings will get them accomplished, but at a share price of 10% to 15% less," said Mr. Alpert.

Banks also may suffer from their somewhat tarnished image among investors. Although third-quarter earnings at the biggest banks were higher than analysts expected, credit problems continue, with nonperforming loans at high levels.

Mergers Under Microscope

Investors will also be watching to see how well these merging banks succeed in integrating their operations. If they show progress, it should facilitate the equity offering. But if merging banks get hung up on issues peripheral to their main business, investors may shy away.

In view of the enormous sum it is planning to raise, the new Chemical Banking Corp. is the most vulnerable to potential hitches.

But most observers are sanguine about Chemical's chances of raising capital.

"If the acquisition was well accepted by the marketplace, the equity offering will be, too," said Kenneth Puglisi, an analyst with Keefe, Bruyette & Woods Inc. in New York.

BankAmerica, too, may avoid trouble. It is well capitalized and its stock trades above book value.

NCNB has already raised $300 million through a recent debt offering, so investors appear eager to get on board.

Bank of Boston, however, may find investors more skeptical. The stock price of the bank and of Shawmut fell after the announcement, an indication that investors don't back the merger.

Investment bankers said they question the financial stability of the combined institution. Unless the management of the combined banks can present a clear plan for integration and profitability to investors, they may have trouble raising equity. [Graph Omitted]

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