The dramatic rise in the share prices of banks likely to be takeover candidates has been one of the highlights of the industry this year.
Looking at which banks might be acquired, investors have jumped on board, expecting a quick profit for a short-term investment. And when two banks announce that they will have a merger of equals, as Bank of Boston and CoreStates did for a short time, investors are quick to denounce the plan as not in shareholders' interests.
This investor policy has long made sense, because whenever a bank has announced that it will acquire another, the acquiree's stock has soared, while the acquirer's has usually dropped.
But from the sidelines it often appears that something is out of kilter in this procedure. Why is a bank worth so much more dead than alive? Is merger bringing us something for nothing, or are we forgetting some basics?
If a merger or acquisition can bring the combined bank true cost savings that justify the premium paid in the deal, then all is to the good.
Curbing costs and expanding the acquiring bank's capital investment in technology and product development to the customer base of the acquiree frequently does justify the price paid. And while analysts have often scoffed at the premium paid for a bank, management has often had the last laugh, as earnings growth has paid for the deal and justified the premium expended in very little time.
Of course, the managers of acquired banks in these instances have recognized that one price of the deal has often been jobs lost in their organizations. This deters a number of community bankers from accepting lucrative deals: They feel they owe their "stakeholders" - their employees and their communities - as much as they owe their shareholders.
This is why some acquirers try to maintain reputations as "benign buyers," who promise to find a position for everyone who wishes to remain employed, even if it means that some people have to move or take less attractive jobs. Yet, most acquirers find this is impossible if the expected efficiencies that justified the merger are to be realized.
But what about banks that sell out at a premium when there are few efficiencies to be gained?
When two banks do not have overlapping territories or services and efficiencies are therefore not likely, then what justifies the premium paid?
The answer is often that the high multiple that has been placed on the acquirer's stock by the market makes it willing to do the acquisition anyway, as there is little or no cost in earnings dilution.
But here is where the smaller bank being wooed should be on guard.
If a community bank is offered an attractive deal in cash, all well and good. But most deals are not for cash.
Both to avoid tax consequences and to avoid impairing capital of the acquirer, most bank acquisitions are stock swaps. And in these, accepting today's market value of the acquirer's stock as a value to be counted on in the future is dangerous.
What good is selling your bank out for triple book, when the acquirer gives you stock valued at triple book? It is like the kid who tells his father he will sell his dog today for $1 million, only to report that evening that he did get $1 million for the dog, but instead of cash, he took two $500,000 cats.
There have been many instances of major shareholders selling their banks out for a nice premium, only to find soon after that the stock they took has dropped substantially and left them worse off financially than had they remained independent.
And those who have tried to handle the dilemma by selling their new stock at its current premium as soon as they get it usually find that this window of opportunity does not stay open long.
This, then, is the community banker's dilemma as he tries to do the best for both shareholders and stakeholders.
And the warning that the CEO and the board must keep in mind at all times is that if the merger makes economic sense, wonderful. But if it makes sense only because of the current whims of bank stock investors in the marketplace, this enthusiasm can die quickly, and with it will die the value of selling out.