1st Bank Buyback Ban No Policy Shift

When the Securities and Exchange Commission rejected First Bank System Inc.'s post-merger share repurchase plan, two of the bank industry's major trends seemed imperiled: consolidation and capital repurchases.

Many of 1995's blockbuster mergers, when completed, are expected to be followed by share repurchases, so the ruling was initially interpreted by some as potential disruption in the rapid consolidation of the industry.

But observers now say last month's SEC ruling did not depart from previous agency decisions and did not amount to a major policy shift.

Banking experts say First Bank was pushing the envelope with its plan to aggressively repurchase shares so soon after a major pooling merger - and compounded the problem by announcing its intentions.

"First Bank's scheme was a highly publicized departure from what had been generally thought to be permissible under pooling of interests accounting guidelines," said Edward Herlihy, a lawyer with Wachtell, Lipton, Rosen & Katz.

Mark McDade, a managing director at Price Waterhouse, added that by going public, it forced the attention of the SEC staff on the bank's intentions.

First Bank had based its deal on the pooling accounting structure, which is governed by strict Financial Accounting Standard Board guidelines.

Among those guidelines are restrictions on buying back shares soon after a pooling, which essentially is a combination of two companies balance sheets.

The rule is intended to deter an indirect cash purchase. If a company issues stock to buy a company, but then buys those shares back after a merger, it would be like a cash transaction, which is accounted for as a purchase.

Purchase transactions are not inhibited by the same guidelines as pooling, but instead create goodwill that must be paid through a series of annual amortization charges. Wells Fargo's deal will be accounted for as a purchase.

In most cases, acquirers planning a pooled transaction have not been compelled to announce their share repurchase plans - and banks have resumed repurchases within three months after the completion of a merger.

The bidding war for First Interstate put First Bank between a rock and a hard place, however. To sell its proposal to First Interstate to investors, First Bank had to do something to counter the perception that Wells' proposal would generate greater cost savings because its territory overlapped First Interstate's. First Bank's strategy was to boast that its massive share repurchases would increase its deal's accretion per share.

Much to the surprise of First Bank officials, the SEC shot down the plan. And in short order, First Interstate bowed out of its two-month-old agreement to merge with First Bank System and agreed to Wells Fargo & Co.'s hostile deal.

"The planned purchase of treasury stock is a pooling violation, and therefore any registrant that plans to purchase Treasury stock as part of the acquisition, would be considered by the staff to be violating the pooling rules," said Stephen Swad, the SEC's deputy chief accountant.

The SEC decision sent shivers through the banking world, because pooling is the predominant type of merger in the industry. In fact, a few weeks before the decision, one Wall Street analyst, Norman Jaffe of Fox-Pitt Kelton, predicted the SEC would crack down on poolings.

Chase Manhattan Corp.'s merger with Chemical Banking Corp., CoreStates Financial Corp. acquisition of Meridian Bancorp., and the merger of equals between First Chicago Corp, and NBD Bancorp all could be affected, he warned, because share repurchases are planned or could follow them.

Chemical, for example, declared one month before announcing a merger with Chase that it would buy back $1.2 billion of its shares. The bank would not comment on the impact of the SEC ruling.

Although it may not be a significant impediment to new deals, the SEC decision is seen as a warning to banks not to announce their intent on share repurchases.

"Clearly there can be no preconceived plan or intention to engage in substantial post-merger buybacks, and communications must be closely tailored to avoid misimpressions," Mr. Herlihy said.

Or as one investment banker put it: "In effect what this is saying is you can't do a pooling with a wink and nod and say it is really not a pooling after all."

Nevertheless, most bankers said the SEC ruling should only be read within the context of First Bank's gambit to win First Interstate.

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