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 (NAS: FMER) were slumping today, falling as much as 12% in intraday trading after the bank announced plans to acquire Citizens Republic Bancorp (NAS: 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.

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The article Why FirstMerit Shares Plunged originally appeared on Fool.com.

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