Even in a rotten market, takeover speculation can still move a stock -- especially if it's a stock that's been beaten down as much as FleetBoston Financial ( FBF).

At one point this week, shares of the nation's seventh-largest bank rose nearly 24% on speculation that a bidding war was about to break out for the Boston-based lender. But by week's end, the stock gave back about half of those gains as some industry experts threw cold water on the speculation and investors began fretting about the possibility of a double-dip recession.

"Clearly investors are speculating," says Christopher Mutascio, a Legg Mason bank analyst. "But I don't see anything happening in the next couple of quarters."

Making Sense

This is not to say that there aren't some things about Fleet that make it an attractive takeover target, especially for some foreign or domestic bank looking to bolster its retail presence in the New England area. By shuttering its money-losing investment banking arm, Robertson Stephens, and taking some $2 billion in charges to write off loans it made in Argentina, Fleet is taking steps to spiff up its balance sheet.

But with the stocks of many potential buyers also getting pummeled in recent weeks, most banks simply lack the currency or will to pull off a deal now, says Mutascio.

And with fears growing that consumers are starting to put away their wallets, some potential domestic acquires, such as Citigroup ( C), Bank of America ( BAC) and Wells Fargo ( WFC), might be especially skittish about doing a deal. That's because it's been consumer borrowing that's propped up bank earnings this year, and a dreaded double-dip recession not only would mean even more businesses defaulting on loans but also a surge in consumer defaults.

Chilly

All in all, it's not the kind of environment that seems conducive to making a major acquisition. Fleet, even with the 37% drop in its stock price this year, has a market capitalization of just over $22 billion. A Fleet spokesman couldn't be reached for comment on the sale speculation.

Indeed, on Friday, speculation about a big bank merger seemed to be the last thing on the minds of investors in financial services stocks. In late tradingon Friday, shares of Fleet had fallen 50 cents, or 2.42%, to $20.95. Citigroup's stock dropped $1.56, or just under 5%, to $30.74, while J.P. Morgan Chase ( JPM) plunged $1.20, or almost 5%, to $23.82. The Philadelphia KBW Bank Index was off 3.19%.

Bank stocks fell even in the face of renewed chatter on Wall Street that the Federal Reserve might be tempted to cut interest rates once again when it meets later this month. A drop in interest rates is normally good news for bank stocks, because it reduces the borrowing costs for banks and makes their loans more profitable.

But with interest rates already awfully low, the bigger concerns to bank investors appear to be the threat of another recession, a rise in loan defaults and reduced borrowing by both consumers and businesses.

"We've turned rather pessimistic about how strong the consumer will be for the rest of the year," says Harold Schroeder, a money manager with Carlson Capital, a hedge fund that specializes in financial services stocks.

Distant Suitors

With a potentially gloomy outlook for domestic banks, it seems the most likely buyer for Fleet would have to be some overseas bank looking to increase its footprint in the U.S. In fact, the speculation about Fleet was prompted by a Barron's story that suggested that British-based HSBC ( HBC), which bought New York's Marine Midland Bank a few years ago, might be interested in Fleet. In addition to its New England stronghold, Fleet also has a strong presence in New York and New Jersey, following its purchase of New Jersey-based Summit Bank last year.

Yet the paucity of potential suitors also would seem to argue against a sale happening anytime soon, since it leaves Fleet's management with little leverage to bargain for a substantial premium. Fleet's shares trade at a price/earnings multiple of 13.7 based on actual earnings for the first half of the year and analyst estimates for the second half, according to Thomson Financial/First Call. The bank's shares historically have traded in a mid- to high-teen P/E range.

Mutascio says the main focus of Fleet's management isn't looking for a sale but taking further steps to put its own house in order. And on Friday it appears the bank took another step in that direction by ousting some top executives in its risk-management division.

In addition to the Argentina problem, Fleet has suffered hefty losses the past two years on commercial loans it made to failing telecommunications companies. Some on Wall Street have now begun to worry about the credit quality of Fleet's loan portfolio to Brazil, another Latin American country with economic problems.

But sale or not, Mustascio figures Fleet shareholders only stand to benefit in the long run from the bank's effort to clean up its act. If management is successful, the stock will rise as earnings improve, and that should make Fleet an even more attractive acquisition target.

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