Buyer's Market Yesterday, Seller's Market Today

Trading in acquirers' stock shortly after deal announcements forms a kind of tracking poll of investor sentiment on merger valuations.

Through much of the crisis and its aftermath, buyer shares jumped on news of acquisitions (see chart, at right or below), reflecting fire-sale prices as a chain of wounded institutions encountered tepid interest at auction. As recently as November, Richard Davis, U.S. Bancorp's chief executive, said, "It's a buyer's market like I've never seen before."

But in three of the largest deals recently, investors have hammered buyer shares, perhaps indicating a rapid shift in favor of sellers at the bargaining table.

To be sure, mergers alone do not drive trading, and relatively small acquisitions are less likely to cause significant moves in stock prices. (The fair value of assets acquired in each of the U.S. Bancorp deals shown here represented about 7% of its total assets at the time.)

Still, the shares of JPMorgan Chase & Co., Wells Fargo & Co. and PNC Financial Services Group Inc. significantly outperformed the KBW Bank Index after the major deals they struck during the height of the financial crisis in late 2008. (For charts further detailing investor reaction to each deal, see this slide show.)

Reaction to East West Bancorp Inc.'s deal with the Federal Deposit Insurance Corp. for the failed United Commercial Bank in late 2009 was particularly giddy. Shares in the Chinese-American lender jumped by about 60% in the days after announcement compared with a roughly flat KBW index. East West recorded a pretax bargain-purchase gain of about $500 million from the transaction — or about 5% of the fair value of the assets it acquired — and answered doubts about whether regulators would award it with the takeover because of its own credit problems.

In December of last year, however, markets jeered Bank of Montreal's agreement to acquire Marshall & Ilsley Corp. at about the target's tangible book value, according to SNL Financial, driving its shares down about 8% in trading after announcement, compared with a rising KBW index. Similarly, Comerica Inc.'s stock dropped sharply after its deal for Sterling Bancshares Inc. of Houston. At Sept. 30, Sterling was only about a tenth the size of Comerica by assets, but Comerica reckoned the purchase price represented about 370% of tangible book after writing down Sterling's loans to fair value.

In a note in February, analysts with KBW Inc.'s Keefe, Bruyette & Woods Inc. wrote that "the economics have recently been shifting from the buyers to the sellers" more quickly than they had expected, with an improving economy and buyers' "need to deploy excess capital" acting to support valuations.

They concluded that stock trading could be "signaling that the buyers are being overly generous … this early in the cycle."

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