KeyCorp Skid May Derail Purchase of Ohio Broker

KeyCorp's sliding share price has put its deal to buy McDonald & Co. in jeopardy, the Cleveland banking company will tell shareholders this week.

The deal, seen as a way to give a significant boost to KeyCorp's fee income, may now have to be renegotiated or scuttled, the companies will state in mailings to investors.

Filed with securities regulators on Friday, the letters to shareholders blame "substantial volatility" in the market, and say there is no way of knowing what the outcome of the merger deal will be. The messages supplement information shareholders received last month in advance of their planned Sept. 15 vote on the merger.

The possible unraveling of the deal is the most dramatic consequence to date of the recent declines in bank share prices.

Acquisition agreements already struck may experience difficulties and plans for new deals may be shelved "until the market settles down," said Lawrence W. Cohn, research director at Ryan Beck & Co., Livingston, N.J.

Officials of both KeyCorp and McDonald maintain that their companies will ultimately come together. "The combination of our companies is moving full steam ahead," a KeyCorp spokesman said.

KeyCorp executives said the merger will give the banking company another solid platform from which to sell its mutual funds and other investment services to consumers and big investors. KeyCorp plans to boost its mutual funds under management to $50 billion within five years, up from $11.5 billion now, said Richard Buoncore, president of Key Asset Management.

Spokesmen for both companies termed "premature" any discussion of how the transaction might be restructured and whether McDonald would demand more money.

But the regulatory filings say that unless KeyCorp's stock recovers in time for the deal's planned closing in October, the company faces putting up more shares, or McDonald could walk away.

KeyCorp stock was trading at $27.1875 when the market closed Friday. If the average closing price is below $29 for the 10 days before the business week that the deal is expected to close, McDonald could abandon the merger.

KeyCorp shares were at $36 when the deal was announced June 15. If McDonald does threaten to back out, KeyCorp could come back with an offer of at least $30.76 per McDonald share or let the deal fizzle.

McDonald shares closed trading Friday at $27.50, off from $32.9375 when the deal was announced.

Before making any moves, the board of McDonald, which unanimously approved the merger as originally structured, would consult with the company's attorneys and financial advisers, its filing states.

Some analysts said KeyCorp would do well to let the deal expire, because the company initially agreed to pay too much and the agreement is dilutive and expensive to shareholders.

"I would not expect Key to renegotiate," said Mr. Cohn of Ryan Beck. "The deal was not wildly applauded initially and a higher price would aggravate shareholders."

At the very least McDonald would have a fiduciary responsibility to shareholders to seek more money, said Michael Flanagan, chief researcher with Financial Service Analytics.

If KeyCorp shares continue to languish, McDonald management "can't just sit and take the deal as initially structured," Mr. Flanagan said.

But McDonald might not demand such a steep increase, because its own industry-brokerages-is being trounced in the volatile market, Mr. Flannigan said. "Bank stocks have gotten hit, but brokerages are really being hammered."

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