It is suddenly quiet on the merger front.
After a year when multibillion-dollar deals seemed to be nearly a weekly occurrence in the banking sector, the flow of deals has slowed to a trickle in 1998.
Some big buyers may be on the sidelines while they complete last year's deals, but investment bankers say the primary reason for the slowdown is the reluctance of sellers. Most bank deals are paid for in stock, and given the recent weakness in big banks' share price, they say those who might have come to the altar in a stronger stock market are getting cold feet.
"In the last few weeks it's gotten a lot more difficult to make board presentations with the stock market moving all over the place," said John G. Duffy, director of corporate finance at Keefe, Bruyette & Woods Inc. "You have to persuade a seller that the buyer's currency trades at a reasonable multiple, and that's getting harder to do."
Some analysts think bank stocks will stabilize again once the trading losses reported in some big banks' fourth-quarter earnings are forgotten. If the Federal Reserve lowers interest rates, as more economists now anticipate, that could be helpful for bank earnings-and stocks-by steepening the Treasury yield curve.
"You don't need bank stocks moving up necessarily, but they have to be stable long enough so you can set an exchange ratio and do the deal," said Thomas H. Hanley, a veteran bank analyst at UBS Securities.
But for now, the havoc the market can play with bank mergers is being amply shown in the proposed merger between First American Corp. and Deposit Guaranty Corp.
Since the deal was announced Dec. 8, First American's share price has fallen 23.7%. That is because the bank is viewed as a less imminent takeover candidate then before, and also because some believe the Nashville bank overpaid.
First American outbid Union Planters Corp., Banc One Corp., and Regions Financial Corp. by agreeing to exchange 1.17 of its shares for each share of Deposit Guaranty, which is based in Jackson, Miss. Until it put itself up for auction, Deposit had been considered a good but unexceptional bank in an unalluring market.
At the time, that exchange meant Deposit Guaranty shareholders could swap a share, then priced at $52.375, for a First American share valued at $64.06. But if Deposit Guaranty stockholders were to trade in their shares for First American's now, they would get $52.50, according to last Friday's closing price, when Deposit's own shares closed at $52.375.
After a year in which buyers frequently paid whatever they felt necessary for acquisitions without market penalty, the sudden drop in First American's share price is sobering, investment bankers acknowledge. Bank executives and boards are reminded that investors' tolerance for pricey bank deals does have limits.
And that reminder has complicated the lives of dealmakers, who last year could bask in the glory of simply announcing that companies were for sale, and then fielding bids.
All that said, merger advisers hardly think they will be hurting for work.
The cost of updating technology to avert the year-2000 crisis is expected to compel many banks to sell. And investment bankers are encouraging those facing that dilemma-which is nearly everybody-to make a deal sooner rather than later, or risk being left out when the window closes.
"By 1999, banks will be reluctant to do a big deal and have to remedy two year-2000 situations," said Gail M. Rogers, managing director at J.P. Morgan & Co.'s financial institutions group.