Magazine article American Banker

PNC-Midlantic Spurs Worries about Soaring Deal Prices

Magazine article American Banker

PNC-Midlantic Spurs Worries about Soaring Deal Prices

Article excerpt

PNC Corp.'s deal to buy Midlantic Corp. has analysts worrying that bank acquisition prices may be spinning out of control.

The deal, announced Monday, was the latest in a flurry of deals in which buyers agreed to pay more than twice tangible book value. Some analysts think these buyers may have trouble recouping their investments.

"These are transactions that are highly dilutive," said Frank DeSantis, a bank analyst with Donaldson, Lufkin & Jenrette. "Management is trying to convince everyone they will earn the dilution back in one year, but I doubt that very much," .

"In the last few deals, there was clearly some permanent earnings dilution," he said.

First Union Corp. agreed to buy First Fidelity Bancorp. for nearly 275% of the bank's tangible book value three weeks ago. On Monday, PNC agreed to buy Midlantic for a hefty 227% of the bank's tangible book value.

In the week following First Union's announcement, its stock fell 5%, while other bank stocks soared. PNC stock has fallen $2.125 to $24.75, or 8%, since its deal was announced Monday.

Price-to-book multiples for all deals have risen 8% this year to 1.83 times book value. But for the four major multibillion-dollar stock transactions announced this year, the average multiple is 194% of book value, and a bulky 227% of tangible book value.

"History suggests that it would be very hard to make adequate returns when you are paying these huge multiples of tangible book," one investment banker said.

Faced by sliding revenues and a need to spend on technology, and with few cost-cutting opportunities left after years of downsizing, banks are either selling or trying to survive by buying asset mass. …

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