Two Probes of Republic N.Y. Could Hinder HSBC Deal

A federal probe into allegations of misconduct at Republic New York Corp. may sour its agreement to be purchased by HSBC Holdings Inc.

In an announcement late Wednesday, HSBC of London said that its $10.3 billion deal for Republic would at least be delayed as a result of multiple investigations. The deal, announced in May, was expected to close in October.

The announcement came after a statement by Republic late Wednesday that U.S. and Japanese regulators were investigating it. Sources allege that Republic inflated the value of an investment fund in which Japanese investors may have placed more than $1 billion.

The banking company also said it had suspended James E. Sweeney, head of the securities division, and replaced the head of that unit's futures team. Officials at both banking companies declined to comment further Thursday.

HSBC also said it was reserving "all its rights under the merger agreement," indicating to analysts that HSBC could scrap the deal if the allegations prove true or if more egregious offenses come to light.

"It's not a deal-killer," said a source familiar with the merger agreement. "It would have to play out in a pretty dramatic fashion."

That would include new information that the alleged practices were systemic at the bank and consented to by senior management, the source said. As the agreement stands, the deal could be torpedoed only by "material" events, a threshold that participants feel has not yet been crossed.

"The deal will proceed, as we do not believe that HSBC wants to walk away," said Lehman Brothers analyst Dianne Glossman in a report released Thursday. The HSBC-Republic transaction "was originally based on HSBC's interest in Republic's private banking and New York depository business, which are not implicated" in this probe or in the money-laundering investigation also involving Bank of New York Co.

Marni Pont O'Doherty, an analyst with Keefe, Bruyette & Woods Inc., urged a little more caution, saying that the biggest hurdle for the deal would be Republic's potential liability if the allegations prove true.

Nevertheless, she said, "I think this deal still closes" at the promised $72 a share price. "And remember, Republic Securities was already in wind-down mode. It's not like an earnings stream was integral."

Analysts pointed out that the inquiry is aimed at one of Republic's smaller business lines. The global markets division where Mr. Sweeney worked produced net income of $20.4 million in 1998 and produced only 7.1% return on equity for the bank the second-lowest from Republic's five major business lines.

"Private banking is what HSBC is looking for in this deal," said one analyst. "Earnings aren't a problem here even if the bank ends up guilty of something. There would likely be just a fine, and that's something HSBC can easily absorb."

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