Personal Business: INVESTING
INVESTING IN A BANK-EAT-BANK WORLD
Betting on takeovers, the smart money headed out to Portland, Ore., and Chicago this spring. Investors bid up the Northwest's No.1 bank, U.S. Bancorp, 23% from January to early May, to above $27. But they got a rude shock on May 8, when the Portland-based company opted instead to buy Boise-based West One Bancorp, a move that sent U.S. Bancorp's shares below $26. Likewise, First Chicago seemed to be a prime target, with its stock galloping from less than $43 last Oct. 5 to more than $60 by mid-July. But on July 12, when Detroit-based NBD Bancorp announced its $5.3 billion merger plan, First Chicago's stock crept up less than $1. Why? The stock swap failed to value First Chicago at a premium.
So much for the smart money. With such disappointments in mind, investors trolling for bargains in bank-takeover plays might want to take a deep breath before diving. Bank stocks have surged on rampant speculation, so quick killings are getting tougher to come by. "It's a dangerous game, trying to buy for takeovers," warns Douglas Pratt, manager of Denver-based Invesco Strategic Financial Services Fund.
To be sure, banks are heavy into an early summer mating frenzy. Pittsburgh-based PNC Bank announced a merger with Midlantic of Edison, N.J., for $2.9 billion, on July 10. Three weeks earlier, First Union in Charlotte, N.C., agreed to pay $5.1 billion for First Fidelity Bancorp, based in Newark, N.J. Securities Data, a merger-tracking firm also in Newark, has logged 213 bank deals worth some $24 billion so far this year--almost equaling 1991's record-setting full-year tally. And an additional 200 or so alliances could yet be made if last year's pace keeps up--and for far more money.
For some lucky investors, the pairings have been matches made in heaven. First Fidelity shareholders had stakes that were worth less than $49 a share in mid-June, so they'll profit nicely from a stock swap with First Union that's valued at about $65 a share. The deal is especially sweet because First Fidelity's stock had traded as low as $40 a share in the past year.
But lately, investors have built high expectations into many bank stocks. The Standard & Poor's indexes for money-center banks and savings and loans, both up 37% since the beginning of the year, are outpacing the broader S&P 500-stock index, up a hefty 22% itself. The S&P major-regional-bank index has jumped 26% this year. And for particular banks that figure prominently in takeover speculation, recent gains have been jaw-droppers: UJB Financial in West Windsor, N.J., the last midsize independent in New Jersey, saw its stock rise from a 52-week low of just above $22 in December to more than $36 on July 10, and it's now lingering above $33.
PATIENCE. So, caution and careful stock selection are in order. Investment advisers urge buyers to seek out respectable performers, not necessarily stars that might end up being acquirers instead of targets. But investors should steer clear of weak banks that other banks may shun. "People need to take a longer-term view rather than guessing whether the next one you buy will be taken out," says James Schmidt, portfolio manager of the Boston-based John Hancock Regional Bank Fund. "You may be living with it for a while."
At this stage of the game, even large big-city banks are drawing buyout rumors. For months, analysts have been pushing New York's Chase Manhattan as takeover bait--especially since maverick investor Michael Price has complained about the company's performance. Some market watchers are suggesting a match with Chemical Bank, its crosstown rival (though Chase CEO Thomas Labrecque has made it clear he intends to keep his bank independent). Banks in much-coveted Boston, too, such as Bank of Boston and BayBanks, make most analysts' lists.
But better buys might be found in neglected spots such as Nashville, where portfolio manager Schmidt finds First American intriguing, or Kansas City, Mo., home of family-controlled Commerce Bancshares. Such banks may prove to be acquisition candidates--but even if they're not, investors won't be hurt, he says.
Running with the herd, these managers argue, is likely to be disappointing. For instance, in the wake of the NBD-First Chicago deal, investors have been flocking to other banks in Michigan. But there's little reason to believe that's where the next big deal will take place. Better to cast about in less-noticed turf, where investors haven't overly boosted the stocks of likely targets.
One rule of thumb some Wall Streeters are using is to seek out prominent regional banks. "There's got to be a franchise there. It's got to be of value to someone," says David Berry, research director at Keefe, Bruyette & Woods. One of his picks is AmSouth Bancorp, a major player in Alabama whose eight-year acquisition spree in fast-growing Florida has left it with a seductive network and digestive difficulties that make for some easy savings by a would-be acquirer. Another is Great Western Financial, the California thrift that also boasts a big presence in Florida and a national home-lending business.
Rarely do bankers hang out a for-sale sign, so their public statements may offer little guidance to takeover-minded investors. But since most deals in the cyclical, heavily leveraged banking industry remain friendly, investors should "stay away from managements that ever say, `We're never going to sell,"' says UBS Securities Managing Director Gerard Smith.
Advisers also caution that playing takeovers is a bit like venture-capital investing: For every couple of successful investments, four or five don't pay off well. So a portfolio strategy is wise. Indeed, mutual funds such as Hancock Regional Bank Fund, with a total return of about 28% so far this year, allow investors to spread risk. The $1.1 billion Hancock fund holds stakes in some 280 banks and savings and loan associations nationwide, betting on long-term appreciation and merger prospects.
A prime pick: First Tennessee National, which, like First American, is located in economically healthy Tennessee.
CLEAR PATH. Still, even with the current surge in bank-stock prices, the long-term risk is probably small. Banking experts say the nation's 10,200 banks may consolidate into as few as 4,000 ever the next 10 to 15 years --a process that will be expedited by formal legal clearance for full interstate banking this September. Odds are high that at some point, even many of today's acquirers, whose stocks typically slide after a deal is announced, could themselves become targets. H. Rodgin Cohen, a merger lawyer with expertise in major bank deals, says that "consolidation in this industry has become an economic imperative."
For those with the savvy--and the time--to look past today's fevered headlines, a carefully chosen hand of bank stocks could make for some smart wagers.Joseph Weber EDITED BY AMY DUNKIN