First Union Corp.'s recent deal to buy Signet Banking Corp. turned heads not only for its $3.25 billion price, but also because that's 3.5 times book value-for an unremarkable banking company.

How was it possible, some investors asked, that a regional bank like Signet could sell for such a price, when just two years ago a Fleet Financial Group could get a bank like Shawmut National Corp. for only two times book?

Count on the Wall Street dealmakers to come up with a reason. What Signet is worth is not the point, they say; what matters is the money burning a hole in First Union's pocket.

In mid-1995, they point out, First Union was trading at 1.5 times book value. These days the North Carolina giant is going for 2.6 times book.

First Union is hardly alone. A report by Salomon Brothers shows that on July 31, near the peak of the market, the 50 largest banks were trading at 3.09 times book on average, up from only 1.65 in mid-1995.

And since the price-to-book values of target banks have also risen, paying pay three times book is less of a leap than it used to be.

Herbert A. Lurie, head of the financial institutions group at Merrill Lynch & Co., used this reasoning in the spring to convince investors that his client, First Bank System Inc., was not paying an unreasonable price for Portland, Ore.-based U.S. Bancorp.

First Bank paid a stratospheric $8.4 billion, or 3.47 times book. Considering that NationsBank Corp. paid only 2.8 times book for Boatmen's Bancshares, investors wondered whether First Bank hadn't overpaid.

But Merrill Lynch told investors that First Bank actually paid less than other banks had for their blockbusters. First Bank's stock was trading at 3.4 times book value, the same ratio as U.S. Bancorp, Merrill pointed out. Looked at that way, the deal seemed pricey but not excessively so.

For the sake of comparison, Merrill cited BankBoston Corp.'s 1995 deal for BayBanks Inc. BankBoston paid 2.9 times book value, but Merrill said that deal was actually more expensive than this suggested, because BayBanks was trading at 2.39 times book but BankBoston at only 1.63.

Whether or not investors appreciated this numbers game (they did like First Bank's reputation for cutting costs), they eagerly embraced the most expensive bank merger up to that time.

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