Many banks succeed in acquiring other banks and produce higher profits by slashing costs. Far fewer have been able to spur revenues through a merger.
Two of these unusually successful acquirers announced deals on Wednesday. In California, Greater Bay Bancorp said it would buy Coast Bancorp in a deal valued at about $125 million in stock, a 6.2% premium to Wednesday's trading price. And Winston-Salem, N.C.-based BB&T Corp. said it would buy First Banking Company of Southeast Georgia for $124.2 million in stock, a 2% discount from what the stock had been selling at before the announcement. First Banking's stock had run up in anticipation of a merger announcement, analysts said. (See related stories on page 1.)
"It's less common to see both cost saving and revenue growth in acquisitions," said Joe Morford, an analyst for Dain Rauscher Wessels in San Francisco. "At the end of the day, investors are rewarding those companies with higher P/Es - companies that can consistently deliver above-average earnings growth primarily driven by revenue gains."
Mr. Morford said Greater Bay has been able to boost its earnings by buying community banks, then bolstering revenues at the new subsidiaries by offering a wider array of financial products. Acquired banks keep their names, and Greater Bay assumes the target bank's back office operations.
"While their pace of revenue growth is not sustainable, we look for Greater Bay to deliver above-average revenue growth for the next year," Mr. Morford said.
Though both BB&T and Greater Bay have been aggressive acquirers, most of their quarry have been relatively small and easy-to-digest banks. BB&T has made five acquisition deals in Georgia this year, and Greater Bay agreed to two other deals in recent months.
Some larger acquirers also have been successful. One is $17.6 billion-asset Old Kent Financial Corp. of Grand Rapids, Mich., which has consistently increased revenues as the result of acquisitions.
This year Old Kent has carved out market share in the Chicago region by buying relatively small banks in suburban towns. Its P/E stands at about 19.5 times this year's expected earnings. The bank's third-quarter per-share earnings increased to 59 cents, up 18% from a year earlier.
Similarly, BB&T and Greater Bay have fared well with their acquisitive strategies. Third-quarter earnings at $42 billion-asset BB&T Corp. increased to 50 cents a share, up 13.6% from the third quarter of 1998.
At $2.3 billion-asset Greater Bay, third-quarter per-share earnings rose to 63 cents from last year's third quarter, or 44%. Greater Bay is trading at 19 times 1999 earnings, and BB&T at 16, high for a bank its size.
In contrast, the P/Es of larger aggressive acquirers, as well as their earnings, have been badly hurt. Minneapolis-based U.S. Bancorp's P/E is about 11.3; Chicago-based Bank One Corp.'s is about 11.2, and Charlotte, N.C.'s First Union Corp.'s, 10.2.
Jacqueline Reeves, an analyst who covers BB&T for Putnam, Lovell, de Guardiola & Thornton Inc. in New York, attributed much of BB&T's success to adhering to a clearly articulated acquisition strategy.
"The reason these companies have relatively high P/Es is because they are doing things very prudently," Ms. Reeves said. "They are not allowing the market to tell them what to buy or how to buy it."
Greater Bay's stock fell 4.6% on Wednesday, and BB&T's rose 1.3%, while the American Banker Index of the top 225 banks fell 0.7%.
