Do share repurchases signal more M&A activity?

Share repurchases has been a classic tool used by banks to return excess capital to shareholders. The recent uptick in repurchase activity in the bank and thrift space could be a signal that banks are viewing their stock as being relatively undervalued. Or it could be a side effect of a frothy

There have been signals of potential issues in the quality of loans. So the idea that banks are being conservative with their capital is not that far fetched. Returning capital through share repurchases also has the side benefit of supporting stock prices in an uncertain market.

Putting that aside, an interesting correlation can be drawn between repurchases and another phenomenon that ties into the relative valuation of bank stocks-merger and acquisition activity. As can been seen in the chart, there is a reasonable connection between the dollar value of share repurchases and the aggregate dollar value of acquisitions in the banking space over the last few years; with up-ticks in both generally aligning themselves.

Testing the connection, there were 54 deals announced in the second quarter of 2007, down from 86 in both the prior and the year-ago quarters. Given the relative down-tick in M&A activity, it remains to be seen if the uptick in share repurchases will in turn fuel an uptick in deal making, or be a symptom of a troubled market.

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--John McCune, SNL Financial jmccune@snl.com