This drop in acquisition activity has negative implications for bank stock valuations beyond what we’ve already seen in 2005, argues Schutz, and I agree with him. Perceived takeover value for a number of small and medium sized institutions has dropped in recent months as the price of acquisition currency used to buy those banks—the share prices of larger acquirers—has dropped significantly.

At the same time, unfortunately, the industry is "awash in 'pitch books,'" notes Schutz. ("Pitch books" are the documents prepared by investment bankers detailing the virtues, actual or projected, of their client institutions seeking to sell out.) My anecdotal observation matches Jim’s. Moreover, I see absolutely no evidence that seller expectations have gone down. Virtually every bank I talk to assume three times book is an accomplished fact if they want to sell; the only doubt is how much over three time book they can wrangle out of the buyer.

Sellers have gotten used to buyers easily (and in some cases indiscriminately) using ridiculously absurd assumptions to justify three times book value or more. If you’re an acquirer and your acquisition currency (share price) has been shaved by 15%-20%, it’s harder to justify those assumptions even if the Kool-Aid you’re drinking is 140 proof.

The combination of reduced values in acquisition currency and a bumper crop of potential sellers is a deadly combination for the m&a environment. Further, we haven’t even mentioned the fact that earnings for a number of acquirers in the first quarter were either short of expectations or of very low quality (to be charitable), causing reduced expectations for 2005 results. A tough earnings year will likely to cause many acquirers to have an inward focus for the time being.

The “time value of money” calculation for many bank stock holders looking for a takeout had gotten more adverse in recent months. Bank stock prices are beginning to reflect this fact. Wall Street is loath to freely admit it, however, and is unlikely to do so until the fact is so obvious it cannot be ignored.