A turbulent market made it difficult to discern the impact on bank stocks of Tuesday's merger announcement by CoreStates Financial and Meridian Bancorp.
Normally, merger announcements provide a lift to other potential merger targets, but analysts saw little evidence of this as banks fell sharply then regained some ground in sympathy with broader markets.
"We're not getting the normal follow-through we've been getting" in the bank sector, said Sally Pope Davis, a bank analyst at Goldman Sachs & Co.
At the close of trading, the S&P bank index was off 0.11%, while the S&P 500 index dropped 0.25%.
Some analysts said the prices of takeover targets' shares may be approaching their peak and noted that several of the region's most likely mergers have already occurred.
"A lot of the candidates (in the region) that might otherwise have gone up, such as UJB and others, won't react because they've already done their deals," said Ms. Davis.
Stocks such as AmSouth Bancorp, Barnett Banks, and SunTrust Banks Inc., which have typically outperformed the market immediately after a merger announcement, didn't follow the trend on Tuesday. AmSouth Bancorp fell 12.5 cents to $38.625, Barnett fell 50 cents to $55.625, and SunTrust inched up 25 cents to $66.375.
Analysts said the prices of bank stocks have run up to the point where there is little prospect for an investor to make a killing once a deal is announced.
"Meridian right now is at $42 a share, and a couple of months ago, it was trading at $40," said Henry C. "Chip" Dickson, a bank analyst at Smith Barney. "If you were in it because you thought you'd get a great takeover premium, probably you haven't gotten the kind of return on a risk reward basis you wanted."
Thomas McCandless, a bank analyst at PaineWebber, said the market reaction to the merger is hard to read, in large part because the deal was one analysts had expected for some time.
Nonetheless, he said, the market comeback at the end of the day might indicate something of a continued search by some investors for the next big merger.
"The market still wants to believe Wells Fargo and First Interstate are involved," said Mr. McCandless.
Possibly offsetting any merger reaction Tuesday, however, Keefe, Bruyette & Woods Inc. analyst David Berry downgraded both First Interstate and Wells Fargo to "hold" from "attractive."
Both downgrades were based on price, said Mr. Berry.
Since Mr. Berry raised Wells Fargo to "attractive" a month ago, the bank has gained 7%, while the Keefe index has increased 1%. As a result, he has returned the stock to a "hold," without changing earnings estimates.
In trading Tuesday, Wells Fargo rose $3.25 to $204, while First Interstate fell $1.375 to $106.625.