rger and more diversified set of mergers may be forthcoming if Congress passes the bill sponsored by Senator Alphonse D'Amato. This bill would authorize mergers between banks and nonbanking financial institutions, insurance companies and even industrial organizations.
Recent bank mergers have been largely friendly (negotiated) deals. Typically, such acquisitions begin with the public announcement of the agreed-upon terms of the transaction, which is followed by government approvals (which take approximately six months). This is followed by approval by the shareholders for both corporations, and then a closing. Most deals take the form of mergers and may involve an exchange of stock; this qualifies them as poolings of interests for accounting purposes. Under poolings the acquiring company can amortize the goodwill represented by the premium paid for the stock of the acquired company over 40 years, and can immediately consolidate its earnings.
Bank stocks have typically sold at seven to eight times earnings in recent years. Deal prices involved the payment of a premium to book value of twice book or more, and have run at 30 to 50 percent of quoted market prices. Shareholders in the acquired company benefit the most from this arrangement as opposed to the shareholders of the company making the acquisition. This is because the stock of the target company begins to rise in the 30-day period prior to the public announcement, a reflection of the tightly-knit nature of the banking business. Stock prices of the acquiring company, on the other hand, generally react negatively to acquisition announcements, dropping on the average between 5 and 15 percent. In some cases, the acquisition is so small as to be immaterial, in which case there is no effect on the price. IN other cases, investors adopt a cautious attitude and wait to see whether the merger will have the expected result of higher earnings relative to the per share earni...