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Why FirstMerit Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ohio-based bank FirstMerit (Nasdaq: FMER  ) were slumping today, falling as much as 12% in intraday trading after the bank announced plans to acquire Citizens Republic Bancorp (Nasdaq: CRBC  ) .

So what: This doesn't look like a bad deal for FirstMerit. Citizens Republic had a rough go of it through the recession and financial crisis, but it appears to have recovered relatively well and worked down the bad loans on its balance sheet. At the announcement, the $23.51 per share that FirstMerit is paying looks fairly reasonable -- it's a discount to Citizens Republic's book value and a modest premium to tangible book value. The deal will give FirstMerit a larger footprint and builds its presence in parts of Ohio as well as Michigan and Wisconsin.

Now what: What we're likely seeing with FirstMerit's stock today is the concern over the fact that this is being done as a 100% stock deal. All-stock deals can be dicey because the quality of the deal price depends not only on the valuation paid for the target, but also on the current valuation of the acquirer. That is, if the acquirer's stock is undervalued, the currency being used for the acquisition gives the sellers more value than the deal price suggests. At the same time, using all stock for the deal sends a signal to investors that management thinks the stock is either fairly priced or even overpriced.

Want to keep up to date on FirstMerit? Add it to your watchlist.

The Motley Fool owns shares of FirstMerit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

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Related Tickers

12/31/1969 7:00 PM
FMER $0.00 Down +0.00 +0.00%
FirstMerit CAPS Rating: ***
CRBC.DL $0.00 Down +0.00 +0.00%
Citizens Republic… CAPS Rating: ****