Bank Mergers Won't End With Wells, but Don't Expect Premium Prices


For bank-stock investors, two things remain abundantly clear after the announcement of Wells Fargo's plan to merge with Norwest.

First, there are still plenty of bank deals yet to be done, despite the huge wave of consolidation that's already washed over the industry. And second, any bank investor expecting a huge payday from a merger is likely to be sorely disappointed.

Historically, investors who own shares of a bank that's being taken over--or any company, for that matter--have usually been paid what's known as a premium. That's the amount over and above their company's share price on the day before the deal was announced.

For example, say that shares of Bank A trade at $100 before a deal is announced. Bank B wants to buy Bank A and agrees to pay $110 a share in cash or the equivalent in stock. Bank A investors are getting a 10% premium. Premiums are paid, of course, to induce shareholders to sell their company to a rival.

In the flood of bank takeovers in the 1990s, it has been common for investors to get premiums of 20% to 30% and sometimes more. But lately, premiums in many deals have been meager to nonexistent.

Take Wells Fargo. Its stock closed Friday at $363.25. The deal calls for each Wells shareholder to receive 10 Norwest shares for every Wells share.


Based on Friday's closing prices of the two banks, Wells Fargo (ticker symbol: WFC) shareholders were set to receive a 9.3% premium. That's calculated by taking Norwest's $39.69 close on Friday and multiplying by 10 to get $396.90. That figure is 9.3% higher than the $363.25 at which Wells closed.

But Norwest's (NOB) stock fell $2.88 Monday to $36.81. Multiplying that number by 10 leaves $368.10. That's only a 1.3% premium over Wells' close on Friday. The actual premium will depend on the stock prices when the deal closes, expected in about four months.

Other recent deals, including Banc One's (ONE) bid for First Chicago (FCN), have had similarly small premiums. In some cases, in fact, banks have bought competitors for less than their market values. That means there is a discount rather than a premium, and investors who own the targets are actually losing money in the deals.

All that is dawning on investors. The Philadelphia Stock Exchange/Keefe, Bruyette & Woods bank-stock index rose a paltry 0.8% on Monday.

"They're up, but they didn't rocket," said James Schmidt, manager of the John Hancock Regional Bank fund.

Premiums have shriveled for several reasons, but the most obvious is that share prices of many would-be targets have been bid up to such heights that acquirers aren't willing to pay much more.

Rob Sharps, a bank-stock analyst for T. Rowe Price mutual funds, says several mid-size U.S. banks are likely takeover candidates. But they might not fetch the lofty premiums some investors are hoping for.

"There are a lot of pockets [in the country] that are relatively unconsolidated," Sharps said. "The problem is those companies are expensive."

Norwest's stock fell Monday in part because investors question how the two companies will work together. Their corporate cultures and operating styles are different, analysts say.


What's more, the deal doesn't call for a lot of cutbacks. In past mergers, especially when the two companies operated in the same region, the acquirer could promise extensive cost-cutting. That made it much easier for the merged company to meet its earnings projections. To satisfy estimates, Wells and Norwest must achieve the bigger challenge of increasing revenue. "There's a greater degree of uncertainty," Sharps said.

Now that Wells is out of the game, the focus of mergers among larger banks may shift away from California, some observers say.

John Hancock's Schmidt believes Summit Bancorp (SUB), Firstar (FSR), KeyCorp (KEY) and Mercantile (MTL) are potential takeover candidates. Though large, they aren't big enough to compete against the new behemoths, Schmidt said. They're also not so small as to be community banks, which aren't coveted by competitors.

"They're big enough to matter . . . yet not small enough to be survivors on their own," he said.

Schmidt also thinks Fleet Financial (FLT), BankBoston (BKB), Mellon (MEL) and Bank of New York (BK) could be taken over.

For the past several weeks, Wall Street was convinced that U.S. Bancorp (USB) would buy Wells. Now that it isn't, speculation rose Monday that the company and its high-profile chief executive, John F. Grundhofer, will make a deal with another company.

As for California, some analysts consider Beverly Hills-based City National (CYN) a prime takeover candidate. Seattle-based Washington Mutual (WAMU), which lately has gobbled up California thrifts Great Western and H.F. Ahmanson, may be coveted by a bank that's eager to enter California. However, its hefty $17.9-billion market capitalization makes Washington Mutual a less likely target.

Among smaller California banks, analysts expect the merger wave to roll on. Compared with other states, California still is relatively unconsolidated.

"I think we're still early on in California," Schmidt said. "There are so many banks in California [that] there are probably years of mergers ahead."

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