It ain't over till it's over, as Yogi Berra would've said.
The merger bug that bit two titans in the banking industry last week - Chase Manhattan Corp. and Chemical Banking Corp. - won't stop there, money managers with a yen for bank stocks say.
With only six money center banks left in the country, however, the action almost certainly is going to be among regional banks making pre-emptive strikes to acquire others before they themselves get swallowed, and superregional banks trying to elbow into the big banks club. This is despite periodic rumors on Wall Street of a good fit between BankAmerica Corp., San Francisco, and NationsBank Corp., Charlotte, N.C.
"You are unlikely to see another megamerger. BankAmerica and Citicorp are not going to be buying each other out," Gurudutt Baliga, a portfolio manager at IDS Advisory Group, Minneapolis, noted dryly. IDS, as First Chicago Corp.'s largest shareholder, with 10.8% of its 91.9 million outstanding shares, emerged a big winner in the Chicago banking company's marriage with NBD Bancorp., Detroit. IDS also has sizable holdings in BankAmerica, Citicorp, NationsBank and Bank of Boston.
Mr. Baliga, who manages about $1.2 billion in institutional money, started the year with more than 18% of his portfolio in banks and then trimmed his holdings some months ago. He since has rebuilt his position to be overweighted by a few percentage points. "My goal is to keep building it," he said. Banks comprise about 12% of the Standard & Poor's 500 Stock Index.
Mr. Baliga suggests regional and superregional banks can't afford to sit idly by because of their need to leverage huge investments in technology over a larger asset base, and a larger array of product offerings.
David Dreman of Dreman Value Management, New York, concurs.
"The major pressure is on the small to midsized banks," he notes. Mr. Dreman credits the stellar performance of his High Returns Fund, which has produced returns more than 200 basis points above the market this year, to its overexposure to bank stocks - four times that of their share in the S&P index. The Dreman Contrarian Fund and Dreman's pension fund portfolios have about one-third of their total investments in bank and financial services stocks, he said.
Value investors who buy undervalued stocks with upside potential have been loading up on bank stocks since the beginning of the year because they are trading at a substantial discount to the market, despite their recent runup in prices.
The Standard & Poor's Money Center Bank Index soared 41.9% through Aug. 23, while the S&P Major Regional Bank Index climbed 29.2%, compared to a 21.3% increase in the benchmark S&P 500. The banks in the S&P money center index are BankAmerica, Chase Manhattan, Citicorp, First Chicago, Bankers Trust Co. Inc., J.P. Morgan & Co. Inc., and Chemical. Chemical will be removed once the merger with Chase Manhattan is completed.
Even so, money center banks are trading at only 8.9 times projected 1996 earnings, while regional banks are trading at 9.4 times next year's earnings, according to Stephen Biggar, the banking industry analyst at Standard & Poor's Corp., New York. Meanwhile, the S&P 500 is trading at more than 15 times projected 1996 earnings.
Despite the windfall many value investors have collected from the recent merger mania, they sound a note of caution. Buy bank companies because they have good fundamentals, they say, not in hopes of making a quick buck from potential acquisition targets.
"I don't go out and deliberately find banks that someone else will acquire," said James P. Barrow, principal of Barrow, Hanley, Mewhinney & Strauss Inc., Dallas. He manages the Vanguard/Windsor II fund, the single biggest holder of both Chemical and Chase shares, with 5.3 million shares of Chemical and 5.4 million shares of Chase. Mr. Barrow also holds more than 3% of the outstanding shares of First Chicago.
Ted Wolff, an investment officer and banking analyst at the Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York, holds five banking stocks. He said the urge to merge among banks is going to continue "because no one wants to be left at the dance without a partner, and the choice of partners is decreasing."
One obvious candidate is Bank of Boston, which has been looking for a partner for more than a year and recently rejected an overture from Banc One Corp., Columbus, Ohio, Mr. Wolff said after angry investors stymied its efforts to merge with CoreStates Financial Corp., Philadelphia.
CoreStates Financial is more likely to be a buyer than a target because its stock price - 10.7 times projected 1995 earnings or 2.35 times book value - makes it too expensive to take over, said Rob Arnold, portfolio manager and banking analyst at Delaware Management Co., Philadelphia.
Bank mergers seldom occur at more than two times book value, analysts say. In fact, Chemical and Chase were trading well below that range when they announced their merger.
"In this round I definitely see (CoreStates) as a survivor. That's not to say five years from now, even three years from now, they won't become part of a larger organization," said Mr. Arnold.
According to government filings as of March 31, Delaware Management held about 1.9 million shares of Chemical, 3.8 million shares of Chase and 2.5 million shares of Integra Financial Corp, Pittsburgh, which is being acquired by National City Corp., Cleveland.
It's logical for CoreStates, one of the few remaining independent regional banking companies in the mid-Atlantic area, to use its appreciated stock as acquisition currency to round off its holdings in the region by buying smaller banks such as Meridian Bancorp., Reading, Pa., or UJB Financial Corp., Princeton, N.J., Mr. Arnold said.
Two other banking companies with an acquisitive appetite - NationsBank and Banc One - have been held back from joining the merger trend because of their lackluster stock prices.
"Their managements must be incredibly frustrated," Mr. Wolff said.
But, NationsBank is known to be hungry for an acquisition. And hometown rival First Union Corp.'s proposed acquisition of First Fidelity Bancorp., Lawrenceville, N.J., increases the pressure on Hugh McColl, NationsBank's chief executive, to make a move. NationsBank may continue making small acquisitions in its backyard, but is likely to stay away from bigger deals for now, analysts say.
Banc One, too, is probably going to stick to kicking the tires of smaller, regional banking companies in its own turf, analysts say.
Other potential acquisition targets include SunTrust Banks in Atlanta; Wachovia Corp., Winston-Salem, N.C.; and Barnett Banks Inc., Jacksonville, Fla.
Barnett is frequently mentioned as a target because it operates only in Georgia and Florida and is not too big to be swallowed. Mr. Dreman bought Barnett when it was trading around $16, it traded around $57.25 recently.
Mr. Baliga says First Chicago may not want to sit still for too long (after it consolidates its operations with NBD) for fear of losing out on acquisition opportunities in the Midwestern region.
