NEW YORK - Comerica Bancorp the 18th largest bank in the United States by assets announced their Q4 results with a special surprise. The company said that in Q4 it recorded a profit of $95 million or 53 cents a share. It also announced that is will buy out Sterling Bancshares.
The acquisition is puzzling for a number of reasons. The first being that the acquisition values Sterling at $9.9 a share or $1 billion. Sterling's stock from 2005 to 2007 traded from about $9 to $14. Even if we take the high point of Sterling's range and multiply it by their number of shares the deal would say that Comerica only saved $400 million. According to the stock price their is little value in the deal. This would add approximately $2 a share to Comerica's value.
The second factor is that Comerica will give Sterling shareholders 0.2365 shares for each Comerica share. Comerica traded between $50 and $60 on average between 2005 and 2007. This means that at $60 a share Comerica would value Sterling at $14.19 or above its all time high. Meaning that even under perfect conditions the bank may never receive much value for its investment. Though of course over a long period of time it will receive value but in the immediate term, Comerica shareholders are certainly poorer.
The last issue is that Comerica is issuing stock when Sterling is very well capitalized. This will give Comerica an over 11% common equity ratio which is extremely high. The company could have made the acquisition with cash and by using their shares they limit the ability to increase the value in their purchase. This is because as Comerica shares go up it means they issues the shares to cheaply hence diluting their existing shareholder base at to cheap a price.
This makes the price Comerica is paying as being dramatic and this news has sent the stock lower. Comerica also dropped 10% when it released its Q3 results. This drop in Q3 was puzzling; today Comerica's actions are the ones that are puzzling.
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