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Markets & Stocks
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Bank merger mania is back
Wall Street bids up perennial takeover targets following the BofA-Fleet deal. Should investors bite?
October 27, 2003: 4:08 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Bank investors are partying like it's 1998.

Bank of America's announcement of a $47 billion acquisition of FleetBoston Financial Monday sparked a new round of bank takeover speculation, reminding many on Wall Street of the merger mania that swept through the sector five years ago.

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Bank of America agreed to buy FleetBoston Financial for $47 billion in stock. CNNfn's Darby Mullany reports.

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"For big banks that want to remain major players, this move is going to force them to make strategic mergers, just like 1998," said Gerard Cassidy, an analyst with RBC Capital Markets.

In April of 1998, three enormous deals were announced: Citicorp and Travelers merged to form Citigroup, Bank One acquired First Chicago NBD, and Bank of America and NationsBank got hitched. Two months later, Wells Fargo and Norwest agreed to a deal.

It appears that Wall Street is now lining up for tickets to the bank merger sequel.

"The market has been waiting for a major announcement like this to be a catalyst for more deals. There could be a domino effect," said Frank Barkocy, an analyst with Keefe Managers, a hedge fund firm that specializes in bank stocks.

So who's likely to go shopping? Analysts say that probable bank buyers include Citigroup (C: Research, Estimates), Wachovia (WB: Research, Estimates), Bank One (ONE: Research, Estimates) and Wells Fargo (WFC: Research, Estimates). Not surprisingly, these stocks were trading lower Monday.

Takeover targets mentioned by analysts and fund managers were KeyCorp (KEY: Research, Estimates), National City (NCC: Research, Estimates), Comerica (CMA: Research, Estimates), SunTrust (STI: Research, Estimates), PNC Financial (PNC: Research, Estimates) and U.S. Bancorp (USB: Research, Estimates). And lo and behold, these stocks were all substantially higher Monday.

Still, many of these companies have ridden the merger rumor merry-go-round for several years now because they have not performed as well as other banks.

"Many of the bank stocks that have been mentioned as takeover targets are underperformers that don't meet earnings expectations. We would not be chasing them," said Chris Perry, manager of the Turner Financial Services fund.

Values won't return to '98 levels

Investors need to be wary of playing the "Who's Next" game.

Fred Cummings, an analyst with McDonald Investments, says that while there probably will be several more bank deals announced within the next six to nine months, investors should not expect bank stocks to get as frothy as they were during the height of merger mania in 1998.

Back then, many banks were trading at close to 18 times earnings estimates for the next year. Now, banks are trading in a range of about 12 to 13 times estimates. "The 1998 levels are way too high. Bank stocks won't return to those kind of P/E ratios," Cummings said.

Next to fall?
These six bank stocks traded higher following BofA's purchase of Fleet.
Company% change on 10/272004 P/E
Comerica6.3%12.8
KeyCorp4.5%12.3
National City2.3%11
PNC Financial 4.9%12.7
SunTrust6.2%13.4
U.S. Bancorp1.6%12.1
* based on prices as of midday 10/27
Source:First Call

What's more, Cummings is not expecting any bank to pay as large a premium for a target as Bank of America (BAC: Research, Estimates) did for Fleet (FBF: Research, Estimates). Based on Friday's closing prices, Bank of America was valuing Fleet at about $45.46 a share, a 43 percent premium. That works out to about 16.5 times analysts' 2004 earnings estimates for Fleet. (Following a 10 percent drop in Bank of America's stock Monday, however, the value is closer to 15 times earnings estimates.)

Cummings said Bank of America might have been willing to pay this much for Fleet because Citigroup or Wachovia also was probably interested. In addition, Fleet's scarcity value, being one of the few large independent banks left in the Northeast, drove up its price.

But that's a unique situation that probably won't occur with other targets, many of which are located in the Midwest. Cummings thinks that a peak multiple of about 14 times earnings estimates makes more sense for most of the takeover targets. That doesn't leave a lot of room to run.

What if banks don't get bought?

There's another risk for investors to consider. Not all of the rumored takeover targets will get bought up. To that end, Anthony Polini, an analyst with FTN Midwest Research, doesn't think another big wave of mergers is imminent, simply because there already has been a fair amount of consolidation. He does concede that the whiff of merger rumors is a plus.

"This is good for the sector. People will think more about takeovers," Polini said.

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And what happens when takeover talk fades? Christopher Bingaman, manager of the Diamond Hill Bank & Financial fund, said earnings estimates for 2004 are probably reasonable right now. The only way he sees major upside for earnings and the stocks is if the economy continues to show stronger-than-expected growth, which in turn could increase demand for commercial lending.

"It comes back to the fundamentals of the industry," Bingaman said. "If the economy slows down a bit, then the stock prices are pretty full." Bingaman owns Citigroup, Wells Fargo, Comerica and PNC in his fund.

Keefe's Barkocy agrees that investors shouldn't go overboard with takeover speculation since the fundamentals for bank stocks are not that appealing.

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"Without the Bank of America-Fleet announcement today, we'd be looking at a much more sluggish performance for bank stocks in the near term. There are still a number of questions about the economy," Barkocy said.

In other words, don't buy a bank stock just because you think it will be the next Fleet.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with these companies.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.