In an echo of the merger-and-acquisition heyday of the mid- to late 1990s, banks seem more willing to make dilutive deals - those that temporarily reduce per-share earnings - than they had been in the past few years.
Most investors and analysts dislike such deals, but John Blaylock, a senior associate with Alex Sheshunoff Management Services Inc. in Austin, Tex., said confidence in the economy is making them more common.
"Banks have grown a lot more confident," he said. "They're trying to capture the front wave" of the emerging prosperity "so they can build better franchises in the markets they want to be in."
Mr. Blaylock and Curtis Carpenter, Sheshunoff's managing director, found that buyers in eight deals announced from Jan. 1 to Aug. 15 acknowledged that they would dilute earnings in the first 12 months. Only two buyers in deals announced during the same period in 2003 acknowledged that they would be dilutive, the Sheshunoff researchers found.
The difference is noteworthy, Mr. Carpenter said. "It demonstrates that the industry is more confident. People are willing to stretch a little further. … Clearly this is a trend toward expanding markets and taking greater risks. The perception out there is, 'Now is the time.' "
Kevin T. Timmons, an analyst with C.L. King & Associates in Albany, N.Y., has another explanation. "Price levels have been pushed higher this year, and that means deals are going to be less accretive," he said.
This year through Wednesday, the average price-to-book ratio for the 180 deals involving the acquisition of a banking or thrift company was 2.14. The figure was just 1.97 last year and 1.82 in 2003; it was 2.41 in 1998.
More than eight of this year's deals are probably dilutive, Mr. Carpenter and Mr. Blaylock said; they tallied only those in which the buyer publicized that aspect.
Five of the eight openly dilutive deals were engineered by money-center or regional banking companies. J.P. Morgan Chase & Co.'s purchase of Bank One Corp. has closed.
The four others in this group are pending: SunTrust Banks Inc.'s deal for National Commerce Financial Corp., Wachovia Corp.'s for SouthTrust Corp., PNC Financial Services Group Inc.'s for Riggs National Corp., and Fifth Third Bancorp's for First National Bankshares of Florida.
Community banks were involved in the other three deals that Sheshunoff tallied. Alabama National Bancorp. in Birmingham bought the $225 million-asset Coquina Bank in Ormond Beach, Fla., in July. Peoples Holding Co. of Tupelo, Miss., announced two dilutive deals: for the $540 million-asset Heritage Financial Holding Corp. in Decatur, Ala., on July 15 and for the $226 million-asset Renasant Bancshares Inc. in Germantown, Tenn., on Feb. 17.
Mr. Carpenter and Mr. Blaylock predicted more dilutive deals this year, and there seems to have been at least one since they compiled their research. On Sept. 1 the $205 million-asset Blue River Bancshares in Shelbyville, Ind., said it would pay about $19.1 million in stock for Heartland Bancshares Inc., a $180 million company headquartered in Franklin, Ind.
The 3.4 million shares that Blue River plans to issue to finance the deal would almost certainly dilute its book value, said Theodore P. Kovaleff, an analyst with Sky Capital Markets LLC in New York who owns stock in both Blue River and Heartland. (Blue River lost money in the second quarter and last year, so an analysis based on its earnings per share is not applicable.)
Mr. Kovaleff said a proliferation of dilutive deals is not surprising. Merger and acquisition activity "tends to speed up when the economy turns upward," he said. "You begin seeing higher prices paid, and that can lead to earnings dilution."
