By agreeing to pay for McDonald & Co. with stock, not cash, KeyCorp is unusual among bank acquirers of securities firms.
The Cleveland banking company last week said it would pay $653 million in stock for McDonald, a brokerage firm also based in Cleveland. Aside from helping McDonald shareholders avoid capital gains taxes, the stock deal is a good indication of how positively the brokerage views its buyer, analysts said.
"All else being equal, it shows some vote of confidence in KeyCorp stock by the McDonald owners," said Michael Mayo, a bank equity analyst at Credit Suisse First Boston.
"The tax considerations are not unique to McDonald. But generally larger mergers of equals are done mostly with stock, while brokerage acquisitions have been paid for mostly in cash."
That is partly because many banks that have bought brokerages over the last year have acquired private firms, such as BankAmerica Corp.'s $470 million cash purchase of Robertson Stephens & Co. and NationsBank Corp.'s $1.2 billion deal for Montgomery Securities. NationsBank agreed to pay 70% up-front in cash and 30% in stock over three years.
But McDonald is publicly held. Though some of the partners in private firms might have been looking to cash out, McDonald stockholders already held liquid assets.
"They certainly didn't have a take-the-money-and-run attitude," Mr. Mayo said.
Brokerage deals that have included stock have tended to be larger transactions, such as Bankers Trust Corp.'s $1.7 billion stock swap with Alex. Brown & Sons, Baltimore. A transaction of that size "would have created an abnormal amount of goodwill if it had been done in cash," Mr. Mayo said.
Analysts estimated that KeyCorp is paying 3.8 times book value for McDonald-roughly in line with other recent brokerage deals. But McDonald shareholders would not have to pay capital gains taxes until they sell their KeyCorp stock.
McDonald shareholders could reap other benefits as well. KeyCorp, itself the product of a merger of equals four years ago, is usually included in speculation about potential big bank merger partners.
"If KeyCorp ever sells or merges with another franchise, McDonald shareholders would do a little double-dipping," said Diana Yates, an equity analyst at A.G. Edwards & Sons in St. Louis.
Under terms of the KeyCorp agreement, the banking company is to issue $35 worth of new common shares for each common share of McDonald, subject to adjustments if KeyCorp's stock dips below $33 or rises above $44.50 before the transaction closes. The deal is expected to close in the fourth quarter.
At Friday midday KeyCorp stock was trading around $35.
Executives at KeyCorp, the 13th-largest U.S. banking company with $73.7 billion of assets, said last week that they planned to buy back half of the new issue to avoid dilution of the company's stock.
William B. Summers Jr., McDonald's chief executive, said the tax advantages of a stock swap were an important part of the negotiations. But he said the tax benefits were not the only important consideration.
"By taking stock, we clearly showed that we have a great deal of confidence in KeyCorp as an entity and in our combination with them," Mr. Summers said.
He said the two companies are just down the street from each other and their executives have worked together for years, creating a high degree of comfort between the merger partners.
"We don't have to make any guesses about them," he said.
Mr. Summers is to become chairman of the brokerage subsidiary, McDonald- Key Investments, that would be created by the merger. He would also become a member of KeyCorp's executive management committee.
The $653 million price tag for McDonald does not include a $68 million retention pool for its top employees. That is scheduled to be paid out to about 200 employees over the next three years, half in cash and half in KeyCorp stock options.
